Precipio, Inc. (PRPO) Earnings

Management highlights

- Strategic Model Overview * Percipio's unique dual model combines an in-house clinical laboratory that identifies real-world diagnostic challenges and rapidly validates solutions, followed by commercialization of proven products to the broader market. * Pathology Services provides a stable, cash-generating operational foundation, while the Products business is the company's primary focus for scalable long-term growth and margin expansion. - Revenue Variability Explanation * Pathology Services revenue is largely predictable, with two external sources of fluctuation: customer transitions (e.g., physician retirement, practice acquisition that internalizes testing) and annual CMS fee schedule changes. In Q1 2026, CMS cut the fee for high-volume flow cytometry testing by 8%, leading to a $0.5 million revenue write-down that reduced gross profit by ~$125,000 and impacted net income and margins. * Product revenue is predictable after customer onboarding; Q1's sequential revenue decline came entirely from a single large customer order shifted from late March to early April, a timing change that does not impact overall business performance. The main source of Product revenue fluctuation is extended, unpredictable customer onboarding timelines, with common delays from IT issues or customer-side scheduling bottlenecks. - Commercial Progress * A new dedicated commercial team hired at the start of 2026 focused on building distributor relationships, qualifying target accounts, and developing a sales pipeline. In Q1, the team established relationships with 20 new distributor reps, identified 10 new qualified customer opportunities, and added $3 million in annualized revenue potential to the pipeline. * Total current commercial pipeline now stands at $10 million in annualized revenue potential. This pipeline does not represent a 2026 revenue forecast due to uncertain onboarding timelines, but early results validate the company's commercial and market strategy.

Guidance

- Management expects continued commercial pipeline expansion and increased conversion of pipeline to revenue in the second half of 2026 - Gross margins are expected to improve as recent commercial investments drive revenue growth and production volumes scale back to normal levels; long-term margins are expected to improve beyond historical levels as revenue mix shifts to higher-margin proprietary products - Overall stronger operational performance is expected throughout the remainder of 2026, with the broader business trajectory remaining positive despite expected ongoing quarterly fluctuations from external factors - Management expects to reach a point of more reliable revenue forecasting as the product customer base grows and the commercial team gains more market experience

Segment performance

Total Q1 2026 revenue was flat quarter-over-quarter at $6.71 million, representing a 30% year-over-year increase. The Pathology Services segment generated $6.0 million in revenue, up $0.1 million quarter-over-quarter and 36% year-over-year, accounting for approximately 89.4% of total Q1 revenue. The Product segment generated $0.66 million in revenue, down $0.08 million quarter-over-quarter, accounting for approximately 10.6% of total Q1 revenue. Company-wide gross margin was 40% in Q1 2026, down from 47% in Q4 2025. Adjusted EBITDA for Q1 was negative $200,000, down from positive $960,000 in Q4 2025. Total cash flow for Q1 was negative $40,000, while operating cash flow remained positive at $60,000.

Risks & headwinds

- External reimbursement risk: Annual CMS fee schedule changes can lead to unexpected revenue reductions and margin compression, and the company cannot negotiate government-mandated pricing changes. While large-scale payment elimination for existing tests is considered unlikely, incremental rate cuts are common and require ongoing cost cutting to maintain margins - Uncertain onboarding timelines for new product customers: Customer-side delays (e.g., IT roadblocks, internal scheduling, organizational approvals) create unpredictable revenue conversion from the sales pipeline, making near-term forecasting difficult - Revenue variability from non-core external factors: Order timing shifts, customer transitions, and seasonal cash flow fluctuations (e.g., annual insurance deductible cycles) can create quarter-over-quarter swings in financial results that do not reflect underlying business performance

Analyst Q&A

• Q: How much additional revenue can Percipio's existing laboratory support before needing significant capital expenditure?

  A: The lab is currently operating at an annualized $24 million in pathology revenue. It has unused capacity to support between $45 million and $50 million in annual lab revenue before any significant CapEx or additional hiring is required, depending on case mix.

• Q: Does Percipio have a roadmap to expand its technology into new adjacent markets, and how much additional spending and financing would that require?

  A: The company's near-term primary focus is scaling its existing product portfolio within its current addressable market, where it still has very low market penetration. The underlying platform has long-term potential for expansion into new diagnostic areas beyond the current hematology focus, but any expansion will be disciplined: the company will first scale existing revenue, strengthen cash flow, and leverage its existing commercial infrastructure before entering new markets, and expects to do so with lower development risk and higher capital efficiency than traditional diagnostic firms.

• Q: Will Percipio need to open new laboratory facilities in other U.S. regions to support growth?

  A: No, there is no need for additional facilities. Existing logistics networks deliver patient samples from across the U.S. to the Connecticut lab within acceptable timeframes. When additional capacity is needed, the company will simply expand the existing New Haven facility, primarily through incremental equipment CapEx, which is a very efficient process.

• Q: What insurance/reimbursement risk does Percipio face similar to what companies like Interpace experienced with novel diagnostic tests?

  A: Unlike novel tests that lack established coding, all of Percipio's tests use long-established CPT codes that are backed by extensive clinical validation data, so full elimination of insurance coverage is very unlikely. Small rate fluctuations like the 8% Q1 cut are expected, and the company responds by improving operational efficiency to preserve margins. Major unexpected coverage cuts are not considered a high probability risk for the business.