Precipio, Inc.

Welcome to the Percipio First Quarter 2026 Shareholder Update Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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 risk 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 other words, or terms of similar meaning. Risk 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 ANMOR report on Form 10-K for the year ended December 31, 2025, which is on file with the Securities and Exchange Commission. as well as other risks details in our subsequent filings with the Securities and Exchange Commission. These reports are available at www.sac.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 Elon Danielli, Precipio CEO.

Good afternoon, everyone, and thank you for joining us today for Precipio's Q1 2026 Shareholder Update Call. On today's call, we'll walk through our financial results, provide an update on our operations and commercial progress, and then for the first time and following requests from several of our shareholders, we're going to open it up for a live Q&A from the audience. At the end of my remarks, the operator is going to take over and provide instructions for those who want to ask a question. Before reviewing the quarterly financials for Q1, I'd like to take a moment to step back and discuss where we believe the company is in the execution of its strategy. Our mission at Precipio is centered around advancing cancer diagnostics by delivering faster, more accessible, and more actionable testing solutions to laboratories and clinicians. What makes our model unique is that we're not only developing products in isolation. By operating our own clinical laboratory, we identify real-world diagnostic challenges firsthand, validate solutions rapidly in a clinical environment, and then, once our products have demonstrated their clinical, operational, and financial value, We commercialize them to the broader market. Over the past several quarters, we've continued to strengthen both sides of that model. Our pathology business continues to provide a stable and growing operational foundation while generating cash flow to the company. And our products business and expanding commercial infrastructure are positioning the company for scalable long-term growth, margin increase, and cash generation. Before we get to the numbers, I'd like to take a moment to discuss a topic that several people have raised, and that is the variability and predictability of the company's revenues. Let's break it down by division, starting with pathology services. Generally speaking, the pathology services business is relatively predictable. Once we win a customer, they usually have a consistent number of patients coming in. There's a relatively consistent percentage of patients that will require some sort of biopsy, which is sent to our lab. Testing modalities are pretty standard. We control costs extremely well, so there isn't much variance there. The same goes for revenue build, reimbursement, and cash collected, all quite predictable. There are two elements that are outside of our control and can cause fluctuations in the division performance. The first is customer transition. For example, a physician may retire or their practice may get acquired by a large hospital network that internalizes testing. In those situations, The patient sample flow from that customer will stop. The second element, which we experienced this quarter, is a change to reimbursement. Each year, usually in January, CMS comes out with its new fee schedule. As a government organization, there's no negotiations, so the new fee schedule basically becomes our new pricing. As you can imagine, there are very few rate increases, and usually it goes the other way. In early Q1 of this year, the new 2026 CMS fee schedule was released, and it included a reduction of 8% in the fee for one of our most frequently used tests, flow cytometry. Subsequently, we had to write down revenue this quarter to the tune of approximately half a million dollars, creating a significant swing in net income from the prior quarter. So while there was no change to our customer base or patient sample volume, the new fee schedule introduced by CMS impacted our revenue, net income, and gross margins. We've been working on several projects to reduce our operating costs and bring back up that margin, essentially reversing the impact of the fee schedule. And as you saw, our cash flow for operations was still positive. So that essentially covers the drivers of variability in the pathology services business. On the product side, generally speaking, once a customer is live and operating, revenues are quite stable and predictable. This quarter we saw an $80,000 decline of revenue from the prior quarter, and this was due to one of our main customers shifting the date of their order from the end of March to early April. So while nothing changed from a customer perspective, following the principles of revenue recognition, of course, this order will be part of Q2 revenue. This is one relatively small factor that can cause fluctuations within the product's business. The second and more challenging variable is the onboarding process for customers. We've discussed this in the past and shared stories ranging from IT roadblocks to machine downtime during validations. I know many of you have inquired about guidance and forecasting, and I do think that as we grow the customer base and gain more experience, we will be able to better predict our future growth. Also, with a new commercial team building a broader pipeline, that will help us gain better insight into future growth as well. I'll add more on the pipeline later in this call. Even within the product business, those fluctuations are mostly related to initial setup of the customer. And once the customer is live, there are far fewer fluctuations and revenue is more predictable. So as we grow our customer base and get more experience under our belt, I do think we will eventually reach the point where we can begin to become more comfortable in predicting revenue growth. In summary, as with any business, we have to deal with fluctuations both internal, but in our situation, more from external factors that are largely outside of our control. However, they are more prevalent in the pathology services business than the products business, which is yet another reason why the products business is our growth focus. With that, let's turn to a review of our financial results for the quarter. Total revenue for Q1 remained flat quarter over quarter at $6.71 million and up over 30% from the same quarter last year. Pathology revenue increased a little, over $6 million this quarter from $5.9 million the previous quarter, and up 36% from $4.4 in Q1 of last year. Product revenue decreased by $80,000 from $740,000 to $660,000 this quarter, impacted by the timing of our customer shipment originally expected later in the quarter that moved into Q2. From an accounting standpoint, that revenue shifts quarter, but from a business standpoint, nothing really has changed. More importantly, the quarter reflects continued progress in areas we believe are the strongest indicators of future growth, particularly commercial expansion, distributor engagement, and pipeline development, marking a foundational quarter for our extended commercial strategy. I'd like to take a few moments to discuss those results. As we mentioned, we recently invested in hiring a dedicated commercial team focused on accelerating adoption of our proprietary product portfolio through distributor relationships and direct customer engagement. Given the onboarding and sales cycle associated with molecular diagnostic products, the team's initial focus has been on building relationships and educating our distribution partners, identifying qualified target accounts, and developing a scalable pipeline. This takes place via a process that begins primarily with our distributors. As we've described in the past, our team has to first form relationships with the distributor reps and familiarize them with our company, with our value proposition, and with our product offering. Once that occurs, they can begin to review with each rep their territory and identify qualified potential leads. The way we qualify leads is through a pretty straightforward process. First, we ensure that the customer has existing cancer diagnostic operations and is either running some of the tests our products will replace in-house, or most likely sending them to an outside lab. This establishes the customer as an appropriate target lab. Once we've established that, we learn which products they're interested in and their annual volumes to assess and assign an estimated annual dollar revenue potential based on their existing testing volume for our panels. With an annual revenue potential number, this account now becomes a qualified lead and we begin the work together with the distributor rep of arranging an introductory meeting to start the sales process. That work started with the hire of the commercial team at the start of the year and is already beginning to produce measurable results. During Q1, the commercial team established relationships with approximately 20 new distributor reps, identified 10 new qualified customer opportunities, and added approximately 3 million of annualized revenue potential to the pipeline. Combined with existing opportunities, our current commercial pipeline now represents approximately $10 million in annualized revenue potential. Now, as a reminder, this does not translate into a forecast of $10 million for this year, because the X factor we don't know is when each customer will go live. But we do feel that this represents a thorough and responsible process for targeting customers and generating a sales funnel and future pipeline. We believe this is particularly encouraging given that the sales team only joined at the start of the year and initially underwent extensive training on our technology, product portfolio, market dynamics, and competitive positioning. Many of these early results validate both the market opportunity as well as our commercial strategy. As the team continues expanding distributive relationships, and converting qualified opportunities into active customers, we expect the pipeline to continue to grow as well as also increase converting into recurring revenue. Now let's turn to profitability and margins. Adjusted EBITDA for the quarter was negative 200,000 compared with positive 960,000 in Q4 of 2025, a relatively large swing I'd like to take a few moments to discuss. Importantly, the majority of that sequential change was driven by a combination of timing-related items, non-recurring accounting impacts, and investments were waking to support future growth. There were four primary factors impacting Q over Q EBITDA change. First, as discussed, this quarter we experienced a reimbursement-related impact tied to the change in certain CMS pathology billing codes, which reduced our gross profit by approximately $125,000. Second, the hiring of our commercial team resulted in an increase of approximately $250,000 for the quarter. This includes payroll, travel, and business development expenses, as well as marketing activities. As we shared, we've already seen commercial benefits from this hiring in terms of the pipeline growth. Importantly, we view this not only as incremental overhead, but as a strategic investment in building the commercial platform necessary to scale our products business over the coming years. In other words, once this team begins to generate increased revenue of, let's say, a million dollars per quarter, the investment of a quarter million dollars per quarter will certainly have paid off. Third, in Q4 2025, we benefited from a one-time non-recurring accounting adjustment related to previously accrued bonus compensation, which created an approximately $360,000 positive swing in adjusted EBITDA compared to the current quarter. And lastly, We saw a $280,000 reduction in product gross profit related to the delivery timing shift from late Q1 to early Q2 and reduced production volumes. From business activity perspective, this revenue was not lost. It simply moved across reporting periods. The combination of these factors caused a $1 million swing in EBITDA. But as you can see, a significant dollar amount of these are one-time changes that are unrelated to the company operations. Moving now to discuss gross margins. Company gross margin for the quarter was 40% compared to 47 in Q4. As with EBITDA, we believe it's important to distinguish between structural margin pressure and temporary or investment-driven impacts. The margin compression this quarter was primarily associated with the same factors we just discussed, revenue timing, reimbursement changes, and investments in commercial capacity that are now largely in place. Also, Q4 margins were somewhat inflated due to overproduction of products in Q4 relative to Q1 due to the expected equipment downtime for maintenance as we stated previously. Resumption of regular production volume and continued growth will bring a return to higher margins which are inherent in the underlying economics of this business. What gives us confidence going forward is that many of these costs are relatively fixed in nature. So as revenue grows, particularly in the product segment, we believe the business has the potential to generate meaningful operational leverage. Overall for the business, we would expect company margins to not only recover as product revenue scales, but over time potentially improve beyond historical levels as the revenue mix increasingly shifts to our proprietary products and product-driven services. Turning briefly to cash flow, Total cash flow for the quarter was negative approximately $40,000, while cash flow from operations remained positive at approximately $60,000. This pattern is generally consistent with what we historically see in the first quarter of the year, driven primarily by the combination of start of the year annual expense resets, along with slower collections associated with patient insurance deductible cycles. Importantly, We don't view the quarter's cash flow performance as a negative of any structural change in the business, but rather normal seasonality that we expect to normalize as the year progresses. So looking ahead, a couple of points I'd like to make. First, we expect continued expansion of our commercial pipeline and increased conversion of that pipeline into revenue during the second half of the year. Second, we expect margins to improve as recent commercial investments begin contributing more meaningfully to revenue growth and we scale up production. And finally, overall, we expect stronger operational performance as we move through the balance of 2026. While quarterly results may fluctuate at times due to reimbursement dynamics, shipment timing, or seasonality, we do believe the broader trajectory of the business remains very positive. We're continuing to grow our commercial reach, expand our pipeline, strengthen our product platform, and invest in the infrastructure we believe necessary to build a substantially larger and more scalable business over time. And with that, I'm going to hand it over to the operator to open up the call for questions. Operator, please go ahead. Thank you.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. To join the question queue, you may press star, then 1 on your touchtone phone. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then the number 2. We'll pause for a moment to compile the Q&A roster.