Precision Therapeutics Inc. (AIPT) CEO Dr. Carl Schwartz on Q4 2018 Results - Earnings Call Transcript

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Precision Therapeutics Inc. (AIPT) Q4 2018 Earnings Conference Call April 1, 2019 4:30 PM ET

Company Participants

Scott Gordon - IR, CORE IR

Dr. Carl Schwartz - President and CEO

Bob Myers - CFO

Jerry Vardzel - CEO, Helomics Corp

Richard Gabriel - Board Member

Conference Call Participants

Operator

Good afternoon and welcome to the Precision Therapeutics Earnings Conference Call for the year-ended December 31, 2018. All participants will be in a listen-only mode. [Operator Instructions]. Participants of this call are advised that the audio of this conference call is being broadcast live over the internet and is also being recorded for playback purposes. A replay of the call will be available approximately one hour after the end of the call through July 31, 2019. I would now like to turn the conference call over to Scott Gordon, President of CORE IR, the company's investor through an investor relations firm. Sir, please go ahead.

Scott Gordon

Thank you Jamie and thank you all for joining today's conference call to discuss Precision Therapeutics corporate developments and financial results for the year-ended December 31, 2018. With us today are Dr. Carl Schwartz, the company's Chief Executive Officer of Precision Therapeutics; and Bob Myers, the company's Chief Financial Officer. After the close of the markets today Precision Therapeutics will release financial results for the quarter and year-ended December 31, 2018. If you have not received Precision Therapeutics earnings release please visit the Investors page at www.precisiontherapeutics.com.

During the course of this conference call the company will be making forward-looking statements. The company cautions you that any statement that is not a statement of historical facts is a forward-looking statement. This includes any projections of earnings, revenues, cash, or other statements relating to the company's future financial results. Any statements about plans, strategies, or objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding anticipated new relationships or agreements, any statements regarding expectations for the success of the company's products and services in the U.S. and international markets, any statements regarding future economic conditions or performance, statements of belief and any statements of assumptions underlying any of the foregoing.

These statements are based on expectations and assumptions as of the date of this conference call and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Some of these risks are described in the section of today's press release titled cautionary note on forward-looking statements and in the public periodic reports the company files with the Securities and Exchange Commission. Investors or potential investors should read these risks. Precision Therapeutics assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes and does not intend to do so. It is now my pleasure to turn the call over to Dr. Carl Schwartz, CEO of Precision Therapeutics. Dr. Schwartz.

Dr. Carl Schwartz

Thank you very much Scott. Good afternoon and welcome. This is, I think a really exciting time for Precision Therapeutics. We now have four divisions under or soon to under our control, so to our shareholders we’ve got a lot to talk about. First is Skyline Medical that now has both a domestic and foreign division of its own and has been very active in 2018. As such it was a pivotal year. Here are some highlights; we continue to expand our sales efforts not only nationally but worldwide. We hired a new Head of Domestic Sales, expanded our sales force with more experienced personnel, established a European office, and hired a Director of Sales.

I want to point out that although we did not hit our projections in 2018, we still had sales of machines and disposables that set new records for Skyline. We signed independent distributors in Canada, several European countries, many in the Middle East, India, Pakistan, Australia, Taiwan just to name a few, and we now have machines in five of the world's seven continents and our efforts continue unabated into 2019. In addition, we formed the TumorGenesis division in 2018 to develop the use of biomarkers to test ovarian tumors and to replace lab rats and mice which are more expensive to use, take longer to get results, and these results are less reliable. We also purchased 25% of Helomics, a bioinformatics company specializing in ovarian cancer. We have been moving along smartly on the development of our new Generation 3 machine, which will be smaller, more compact with fewer moving parts. In addition, this new machine will have a separate attachable backing pump available for purchase to help hospitals with limited vacuum.

2019 has also gotten off to a great start. We will finalize our purchase of Helomics and in the next couple of days we will own 100% of this exciting corporation. We have continued to expand Skyline by widening our sales force to cover more of the world, improved our marketing and our training of hospital personnel to maintain our machines. Our new Generation 3 machine will be out for testing in May and will be available shortly thereafter.

Now, let's talk about TumorGenesis. Richard Gabriel, Head of TumorGenesis has not let any grass grow under his feet. TumorGenesis was formed to develop a new, rapid approach for growing and testing ovarian tumors in the laboratory using biomarkers which essentially fools the cancer cells into thinking they're still growing inside the patient and replace the use of lab rats and mice. TumorGenesis has continued to move rapidly signing contracts with developers and suppliers of these biomarkers. These suppliers have built the first biomarker screening kits and sent them to a large U.S. university for evaluations on 14 of the 25 ovarian cancer cell types on behalf of TumorGenesis.

In addition, these proprietary media screening kits will be offered commercially worldwide, so that other researchers may grow the ovarian cancer cell themselves and they will want to purchase the TumorGenesis biomarker discovery kits to screen their own samples. Following up on the work done at this university, TumorGenesis will then take these biomarkers found in the first screening and mount them on supports to search for new cancer cell preparation. This protocol will result in the production of the TumorGenesis capture kit. This will bring us one step closer to building tumors outside of the body which will in reality match the patient's own tumor. It's really a groundbreaking research if I do say so myself.

Now we come to Precision Therapeutics latest acquisition, Helomics Corporation. As I stated earlier we will own 100% of Helomics in a couple of days. Its corporate mission as stated by our VP of Innovation, Mark Collins, machine learning can discover drugs and make people better and with that single-minded purpose we intend to become the leading artificial intelligence company dedicated to women's cancer. Over the past 20 years, over $200 million was invested in Helomics to build one of the largest databases of ovarian, breast, and brain cancers in the country. By applying our deep learning software to these cancers, we will bring realistic hope to thousands of women with these cancers. Over the next several months, we have already and will continue to enter into collaborations with data sharing agreements with other companies in the field to expand our database on these three cancers. Our deep learning software will help to determine what drug combinations will be most effective for each cancer subtype and help pharmaceutical companies to develop them.

To achieve our goals, we have assembled a world class -- really world class Advisory Board consisting of these strategic luminaries; Dr. Bob Murphy, Professor of Biological Sciences, Biomedical Engineering, and Machine Learning at Carnegie Mellon University. Amelia Warner recently built and sold two entrepreneurial companies, prior to that she served as Head of Clinical Pharmacogenomics for Merck Research Laboratories overseeing all pharmacogenomics projects. Marc Malandro, VP of Operations for Science at the Chan Zuckerberg Initiative established and owned by Facebook founder Mark Zuckerberg and his wife Priscilla Chan. And finally Dr. Paul Kornblith, a world renowned Neurosurgeon, Clinician, and Clinical Cancer Researcher. Investors can watch our progress like following our collaboration with business leaders to validate our approach and increase the number of tumors available to Helomics to perform genomics sequencing on.

One of our goals is to secure a partner similar to how Foundation Medicine did with Roche in 2016. At that time Foundation had information on 18,000 tumors. We have over 150,000 tumors in our data bank and our job is to mind them as Foundation did. Again really, really exciting stuff. And with that I will pass the call to Bob Myers, our CFO who will now discuss our financial results for the fiscal year-ended December 31, 2018. And then we will open the call for questions. Bob.

Bob Myers

Thank you Carl. I will now discuss the financial results for the full year of 2018. Revenue, our revenue for 2018 was $1,412,000 compared with $655,000 for 2017. This represents a 116% increase year-over-year. Our revenue included the sale of 41 STREAMWAY systems and increased disposable supplies. The revenue in 2017 included the sale of 10 STREAMWAY systems as well as disposable supplies to operate the product. Our revenues and product sales increased in 2018 due to our increased sales force and the full initiation of brand awareness. We also sold our first STREAMWAY unit internationally.

Cost of sales, our cost of sales was $416,000 in 2018 compared to $148,000 in 2017. Please note that as our revenues increased through system sales we expect costs to decline as a percentage of our revenue due to our volume discount purchasing agreement with our suppliers. Gross profit margin, our gross profit margin decreased slightly to 71% in 2018 compared to 77% in 2017. In 2017 we experienced a higher gross profit percentage than in 2018 as the company began assisting some customers with the installation cost. In turn this added a value cost to our customers resulting in a higher sales.

Operating expenses, our operating expenses for the year-ended December 31, 2018 were $8,900,000 compared with $6,600,000 in 2017. The $2,300,000 increase in operating expenses in 2018 contained numerous extraordinary expenses including acquisition cost, forbearance expenses, and start up expenses for TumorGenesis and Skyline Europe. Thank you Carl and I'd like to turn this call back to you for your closing remarks.

Dr. Carl Schwartz

Thanks Bob. I guess I've covered a lot of territory this afternoon as you might have already heard. It is an exciting time for our company, things have never looked better. We want to thank our loyal shareholders for their continued support and will now turn this over to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question today comes from Dan Peter [ph]. Please go ahead with your question

Unidentified Analyst

Yeah, I was interested in the original 1 million shares that were placed in Escrow was dependent on I think $8 million worth of earnings by Helomics annually and looking at the merger report for nine months ending September 2018, total income appears to be 425,065, how are you addressing that shortfall?

Dr. Carl Schwartz

Well, I would tell you that yes, we were disappointed in the beginning but we're off to a good start this year and we're looking at the collaboration that have really accelerated with Helomics and the cooperation of other companies to build this database and to help other companies to develop theirs. So we expect that income level to rise dramatically over the course of the year. They got off to a kind of a rocky start but I think we've corrected that and they are on their way.

Operator

Our next question comes from Steve Puchaki [ph]. Please go ahead with your question.

Unidentified Analyst

Hey guys, so you just made a comment about the database and kind of comparing it to the Foundation database and Roche acquiring it, what kind of shape is our database in currently, how rich is the data, and how close are we to being able to monetize if you will?

Dr. Carl Schwartz

Well, first of all, our tumors are in great shape and we have a lot of information. What we don't have is the sequencing which Foundation did with theirs, and we're in the process of setting it up to do that now. So it would be a long process. Not meaning years but certainly months and relatively expensive to get that done. But we will get it done and then we really have one of the most valuable troughs of information in the country by any measure. And so we are -- and plus that database continues to grow we get new tumors daily to be sequenced and checked out and we're now developing a process again to sequence the tumors we already have. So, that's the difference between Foundation and ourselves, among other differences, but that's the main one.

Unidentified Analyst

Okay, and would you say that's like 3, 6, 9, 12 month process, I would say over estimate just to kind of…?

Dr. Carl Schwartz

I would think we’d at least be probably a good year we get all this done, but maybe a year, maybe a little bit late but it would be at least that.

Unidentified Analyst

Okay, and then cash flow wise, how much cash do we have currently and what's our burn rate, when are we going to have to raise again?

Dr. Carl Schwartz

Bob?

Dr. Carl Schwartz

Oh, hey Steve. Right now we are sitting with about $1 million in the account. Our burn rate for Skyline Medical runs at about $440,000 a month. We are at a higher rate due to the fact that we're churning out the Generation 3 model supporting TumorGenesis and supporting Skyline Europe. And then Helomics is running in the area of about $300,000 a month. We do expect to need to go out to the public again. We have an available baby shelf on an S3 that we could do that with. And we have some other offerings in mind that we will present to the shareholder community in the future.

Unidentified Analyst

Okay, now on previous calls, we've talked about Helomics and cash flowing, it was real close. For some reason I recall we expected a Q1 breakeven point. Are we ways off of that yet?

Bob Myers

Well we're slowing than we anticipated. What happened basically is that Helomics was a little behind than where they thought they were. In working with the artificial intelligence chip they've made huge strides since then and that involving themselves directly and that slowed our performance in terms of the diagnostic medication which is the business that we don't want to be in any way. We're doing that successfully with testing results but to also receive tumors every day that enhance our database. So I think that we would be closer to a breakeven on the Helomics side of things as we near year-end this year.

Unidentified Analyst

Okay, what about TumorGenesis, where does that fit as far as monetizing it and what's the burn rate on TumorGenesis?

Dr. Carl Schwartz

The burn rate in TumorGenesis is very low. Actually, we had a COO that has paid a consulting fee. We pay out quarterly fees at $15,000 to our associated companies, and now we're getting involved with the university that will be running some of our processes in partnership. That will cost us over the next nine months approximately -- I'm sorry over the next three months approximately $100,000. The future will bring some additional costs to TumorGenesis, but I think we're going to look to partner up on that and find a way to allay a lot of those costs. But in the meantime, Richard has already begun the process of monetizing, he's got his kit built. We have presented it and we're looking to find out just how well that's going to sell in the very, very near future.

Unidentified Analyst

Okay, is there an expected date that we anticipate the Board to kind of start bringing value if you will and maybe some of the relationships that they have creating some more revenue and relationships and kind of help us move forward?

Dr. Carl Schwartz

Say it again if you could.

Unidentified Analyst

I was just asking about the Board and when we are going to kind of see some of the relationships that they had previously built to help us out and move us forward?

Dr. Carl Schwartz

You're talking about now TumorGenesis or Helomics or both?

Unidentified Analyst

I guess that's Helomics Board.

Dr. Carl Schwartz

Yes, well we -- we are the Helomics Board now and we expect to see them in the 20 days begin to bring -- to put things up pretty good. We've got a number of things to be announced that we're excited about and I think we will begin to see -- we will begin to move rather rapidly with this company.

Bob Myers

And Carl if I may add I think to the Advisory Board Member.

Dr. Carl Schwartz

Yes, yes exactly.

Bob Myers

Yes, I think that's what we are -- and I think -- go ahead Carl, you can…

Dr. Carl Schwartz

No, go ahead Bob because I misunderstood the question, I apologize.

Bob Myers

No problem, we actually expect a lot to happen from our Advisory Board Members now that the merger will be completed in the next few days. These are people that have been helping us along the way. Amelia Warner has helped us along the way, Marc Malandro. I mean they're not, they haven't been invisible to us by any way, shape, or form but there was just so much that could be done until we put the merger together. And now that that is virtually complete I expect that over the next three to six months that the shareholders would see some good progress made and a lot of it will come from those people directly.

Unidentified Analyst

Okay, and the stock price and the dollar, when do we have to have the extension in and we can put in for six month extension, is that correct?

Dr. Carl Schwartz

You're right on target. We have to -- we have until May 15th for the stock to recover on its own. That still gives us approximately a month and a half. We released the stock under normal NASDAQ rules has to remain $1 or more at the selling bid price when it closes for tenth consecutive trading days. The NASDAQ does have the right to increase that to a 20 day period if they so desire. They haven't indicated that but I just have to alert you to it. If we do that then the notification from NASDAQ goes away and we're back in compliance. If not on May 15th we will submit to NASDAQ a plan of how we will get our stock above the dollar mark and we have six months in order to do that and we will present a plan that will happen favorably and hopefully as reasonable to the shareholders as possible well before then.

Unidentified Analyst

Okay, that's fun. Thank you, appreciate it guys.

Operator

And ladies and gentlemen with that we will conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.

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