Precipio, Inc. Stock

Welcome to the Precipio Q2 2026 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 the Risk Factors in our annual 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 detailed in our subsequent filings with the Securities and Exchange Commission.

These reports are 1vailable at www.sec.gov. Statements and information, including forward-looking statements, speak only to the date they are provided, 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, everyone, and thank you for joining us for Precipio's Second Quarter 2026 Shareholder Update Call. On the call today, I'm going to walk through our second quarter results, provide some additional context around what drove the quarter, discuss what we're seeing across our pathology and product businesses and then talk about what we can expect as we move into the second half of the year.

After our prepared remarks, we'll open the call for questions. I'd like to start by putting this quarter's results into perspective. Three months ago, when we discussed Q1, we explained that despite relatively flat revenue and a small cash burn, we believe the underlying business remains strong.

We talked about the timing of shipping orders to customers and how that impacted quarterly revenue numbers. We also talked about the normal seasonality in the early part of the calendar year in terms of cash collections. And most importantly, we talked about the commercial pipeline we're building and our expectations that the numbers will demonstrate that the business continues its momentum as we move through the year.

I think our Q2 numbers did exactly that. For the first time in Precipio's history, quarterly revenue surpassed $7 million. We returned to positive adjusted EBITDA. We generated approximately $700,000 in operating cash flow, and we ended the quarter with more than $3 million cash in the bank with an increase of $0.5 million in cash in just this quarter.

What I think is particularly important is we achieved that cash position organically without raising capital. So when I look at Q2, I don't simply see a good quarter. I see another important validation of the operating model we spent years building.

Before we review the quarterly numbers, I'd like to take a moment to discuss our key strategic advantage in the market as we've described Precipio in the past as having a unique flywheel. Our laboratory enables us to identify problems in the processes of diagnosing cancer.

We then develop solutions, validate them in the real-world clinical laboratory and then commercialize those solutions to other laboratories. The Pathology division generates revenue while providing us direct exposure to real-world diagnostic problems. This is a significant competitive advantage.

One I'd like to explain why this is an advantage is that most diagnostic companies develop a product and then try to recreate the use of the product in the clinical laboratory. They come up with a scientific concept and then try to apply that concept to create a product they believe will have demand in the market.

And that doesn't always happen for various reasons ranging from clinical utility to workflow to regulatory or due to billing or economic hurdles. Our model is different. Our clinical experience drives product development because we already have the clinical laboratory. We experience the problems firsthand. We then develop solutions to those problems. We use those solutions ourselves in our labs to improve outcomes for the patient samples that arrive to our lab daily while demonstrating clinical, operational and economic value.

And when all the boxes are checked, we begin the process of taking those products outside of our 4 walls. The products are often -- are then offered to other laboratories, our customers, which results in them delivering an impact on patients far beyond Precipio's own laboratory footprint.

The lab division isn't simply a service business and the product division isn't simply a manufacturing business. They reinforce one another, and that is our flywheel. That expands our addressable market without requiring us to build another Precipio laboratory every time we want to enter a new geography or reach another customer.

And as our product grow, it creates a more scalable revenue stream alongside our core pathology operations. Q2 is a good example of our unique model where both divisions are working together simultaneously. A great example of where this model is particularly relevant is AML or acute myeloid leukemia. Our approach has always been to identify diagnostic problems where we can create a solution that can have a meaningful impact on patient care.

AML is a great example because treatment decisions can be extremely time critical. The A in AML stands for acute, which indeed AML patients are at immediate risk of dying, sometimes within 48 hours. In reality, where time-critical molecular laboratory results are delivered on average in 10 to 14 days, the diagnostic market systematically fails the clinical need of these patients.

Our rapid AML delivers that critical information in one day, ensuring that the patient is placed on the appropriate therapy in a time frame that aligns with the urgent clinical situation the patient faces. This is not a theoretical exercise either.

Every week, we receive several patient samples that are diagnosed with AML in our lab, and we've observed firsthand the impact of our lab delivering those results the same day in a speed that meets the clinicians' needs to take care of their patients. Our ability to develop and clinically validate solutions within our own laboratory gives us an advantage in bringing products to market that address true clinical problems faced by laboratories and clinicians.

And just as important, once we validated those solutions internally, the product business gives us the opportunity to scale them beyond the patients who come through Precipio's own laboratories. That's how we think about the relationship between innovation, patient impact, scaling the business and shareholder value.

This assay in particular, has garnered quite a bit of interest within numerous customers, both domestically and internationally. In addition to actual sales, we're working on several substantial marketing collaborations as well as clinical study initiatives that will both call attention to the problem as well as put our solution front and center.

Supplementing the sales effort with these marketing initiatives is a crucial element within the biotech world. In the past, we've not had the resources to drive these initiatives, but we do now, and I'm looking forward to sharing some of those initiatives in the near future.

Now let's look at the numbers, starting with revenue. Revenue for Q2 exceeded $7 million compared with approximately $6.7 million in Q1. Perhaps more importantly, revenue increased approximately 22% year-over-year from $5.7 million in the same quarter of 2025. So we're seeing both sequential quarter and year-over-year growth.

Breaking down those numbers, our pathology business generated approximately $6.1 million in revenue compared with $6 million in Q1. This is a modest increase, but keep in mind that as we said before, our resources are focused on the commercial growth of our products.

And indeed, our product business generated approximately $900,000 compared with approximately $660,000 in the prior quarter, up 35%. Now that's an important number. Our previous quarter record for products revenue was approximately $750,000, which happened in Q4 of last year or 2 quarters ago.

So Q2 was approximately 21% above our previous record. And I want to take a moment to connect this back to something we discussed last quarter. In Q1, we explained that one of our larger customers had moved the shipment that was expected at the end of March into early April. We emphasized back then that this was a timing issue, not a loss of a customer and not a change in any underlying demand.

Q2 gives us an opportunity to see that distinction more clearly. Intuitively, we all know that a business is an ongoing breathing entity and that the division into quarters is an arbitrary cutoff, a mark in the sand that doesn't always coincide with the organic movement of the business.

Quarter-to-quarter timing will always create some variability, particularly in our product business. That's why I believe it's important to look beyond any individual quarter and focus on the positive trajectory of the business.

I'd like to spend a few moments on products because I think this is a more important development of the quarter. Alongside the '21 growth from our previous record high, what is equally encouraging is the continued growth of our pipeline.

During Q2, our commercial team added approximately 10 new distributor reps to the team they are working with. This opens the door to more territories and more potential customers. We've also identified over 25 new qualified customers and have over 30 meetings either being scheduled or already completed during the second quarter with those new customers.

All that builds into a further increase to our pipeline. One of the challenges we've discussed in the past is figuring out the recipe of how to work with each of these distributors. We have distribution partnerships with Thermo Fisher, McKesson, Medline and Cardinal, which basically covers the entire targeted market.

Many investors have asked why this business has taken so long to ramp up and why for a period of time, revenue was relatively flat. We discussed the hiring of a new commercial team that started at the beginning of this year, and that's a key factor in having a capable team that can go out and sell.

But the other factor is developing the working relationships with our distributors. We know that with these 4 distributors, we have total coverage of the market. But each of these are huge organizations that operate very differently.

Their sales team are structured differently, their ways of interacting with vendors are different and their incentives vary from one organization to the other. It's not a one size fits all. I give kudos to our commercial team who are making progress in figuring out those unique recipes for each distributor and the results show a significant increase to our pipeline.

In the second half of the year, I expect to see a start of moving those accounts from pipeline to active with corresponding revenue making significant contributions to our growth. Moving to our Pathology division. Revenue increased to approximately to $6.1 million from $6 million in Q1.

While this sequential increase is modest, it's important to remember the goals for this division as we briefly described it as a critical part of Precipio's flywheel. The main purpose is the generation of recurring revenue and cash flow, but more importantly, the provision of the clinical infrastructure behind our product development strategy.

We, therefore, believe that this division will continue to grow organically and continue to fill its purpose for the overall business. Turning to profitability. Adjusted EBITDA was approximately $400,000 in Q2 compared to negative $200,000 in Q1. That's an approximate $600,000 swing from quarter-to-quarter.

There are 2 primary items that contributed to that change. First, revenue increased by approximately $300,000; and second, stock-based compensation expense decreased by approximately $200,000. But I think the broader takeaway is more important than any individual expense line item.

As revenue grows, we have the opportunity to leverage the infrastructure we've already built. Q2 provides another example of that operating leverage. There's a meaningful difference between buying growth through significant spending and scaling up using the infrastructure we've already built.

We spent years building the laboratory, developing our products, establishing the commercial infrastructure and putting the people and systems in place. And we grow revenue on that platform, we expect more of the incremental revenue to make its way through down to the P&L.

And that brings me to perhaps the most important number in this quarter's results, cash. We generated approximately $700,000 in cash from operations during Q2, which is 10% of quarterly top line number. That's an impressive achievement, particularly at our modest revenue numbers in our size. Total cash increased approximately $0.5 million, and we ended Q2 with more than $3 million cash in the bank.

For comparison, our cash balance at the end of Q2 of last year was approximately $1.1 million. I want to emphasize something important here. That increase didn't come from a financing event. It came from business operations. For a company at our stage and in our sector, that's an important distinction.

Emerging growth companies and particularly in diagnostics and biotech typically need to repeatedly return to the capital markets to fund their growth. Our approach is different. We've worked hard to build a business that can fund an increasing portion of its growth through its own operations. Generating $700,000 of operating cash while simultaneously growing the business is an important indication of what this model can potentially produce as we continue to scale.

Moving to the second half of 2026. What should shareholders be watching for as we move into the second half? First, we expect continued revenue growth. We've now crossed the $7 million quarterly threshold. Our focus is on building from here on.

Second, product revenue growth. Reaching approximately $900,000 in quarterly product revenue is an important achievement, and we'll continue working to expand the customer base and commercial reach of that business.

Third, commercial pipeline conversion. We've invested and will continue to invest in expanding our sales capacity as we expect opportunities generated through those investments to increasingly translate into revenue. Fourth, operating leverage. As revenue grows, we'll continue focusing on translating that growth into adjusted EBITDA and ultimately cash generation.

I'll end with this. Three months ago, we asked shareholders to look beyond a relatively flat Q1 and focus on what was happening beneath the headline numbers. Q2 shows why. Quarterly revenue and specifically product revenue reached a company record while the business generated solid adjusted EBITDA and cash flow.

Those are meaningful financial milestones that are a result of a strong business and commercial operations. But we're not looking at them as an endpoint. We view them as evidence that the model we've built is beginning to demonstrate the operating leverage and cash generation potential we've been working towards.

Our focus now is execution. We need to continue to both build and convert the product's commercial pipeline. We need to continue to innovate, creating new products that create -- that deliver better patient care and provide better value to our customers.

And we need to demonstrate the continued translation of revenue growth into EBITDA and cash flow, which ultimately drives shareholder value. I think we're entering the second half of 2026 in a stronger position than we've ever been in, and we're excited about the opportunities ahead.

Thank you again for your continued support and for joining us today. And with that, we'll open the call to questions.

[Operator Instructions] Your first question comes from the line of Adam Hutt from Leviticus Partners.

Congratulations on a fine quarter. My question is, can you guys offer any commentary at all on the unusually high trading last month when you traded about 800,000 shares in a 2-day period, where those shares came from? How on earth did it do that? Are you guys on top of that at all? Or...

Yes. Adam, thanks for the call. Honestly, I wish there was more transparency from our end into that. You probably with the Bloomberg Terminal see more than we do. So it's as surprising to me as it is to you. I think we're starting to see the fruits of some of the more IR activities that we're doing, participating in investment conferences.

We had a great event at the MicroCap Conference in Vegas in -- when was this in June, I think. So I think word is starting to spread just like we had planned after we came out at the beginning of the year, I think there's more and more attention that's being caught by us.

The other factor, of course, as you know, is computer algo trading, which is very hard to trace and very hard to explain.

[Operator Instructions] No further questions at this time. Mr. Danieli, please proceed.

Yes. I just want to thank everyone for joining and your continued support. Have a nice evening, everyone. Thank you.

This concludes today's call. Thank you for participating. You may all disconnect.

Welcome to the Precipio First Quarter 2026 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, 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, 2025, 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, 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 and 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 the 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 2 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 the practice may get acquired by a large hospital network that internalizes testing. In those situations, the patient's 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 $0.5 million 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 from operations was still positive. So that essentially covers drivers of variability in the pathology services business.

On the product side, generally speaking, once the customer is live and operating, revenues are quite stable and predictable. This quarter, we saw an $80,000 decline in 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 products business.

The second and more challenging variable is the onboarding process for customers. We've discussed this in the past and shift -- 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 products business, those fluctuations are mostly related to initial setup of the customer. And once the customer is live, there are far few 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 get -- begin to become more comfortable in predicting revenue growth.

In summary, as with any business, which deals 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 business -- pathology services business in 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 in the previous quarter and up 36% from $4.4 million 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 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 expanded 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 test, our products can 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. The annual revenue potential number, this account now becomes a qualified lead and we begin to 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 2 -- sorry, 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 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 distributor 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, nonrecurring accounting impacts and investments we're making to support future growth.

There were 4 primary factors impacting Q-over-Q EBITDA change. First, as discussed, this quarter, we experienced reimbursement-related impact tied to the change in certain CMS pathology billing codes which reduced our gross profit -- 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're already -- 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, $1 million per quarter, the investment of $0.25 million per quarter will certainly have paid off.

Third, in Q4 2025, we benefited from a onetime nonrecurring 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 a 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 to these are onetime 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 seen in the first quarter of the year, driven primarily by a 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 an indicative 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 want -- 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.

[Operator Instructions].

Thank you, Chloe. Meanwhile, as we build this roster, there's a couple of questions that were sent in, in advance of the call. So I'm going to go through those and then we can go to the live Q&A.

So the first question was, can you elaborate on the utilization rate of your labs? Or in other words, how much more revenue can your current laboratories generate without significant CapEx?

We're currently operating pathology services business at approximately $24 million on an annualized basis. We believe that, and this depends on the case mix. We have between $45 million to $50 million in laboratory capacity before we need to make any changes that involve any significant CapEx or hiring.

Second question, in your recent corporate deck, there's a slide that mentions the expansion potential of your technology into broader multimillion dollar markets. Is there a specific road map for these expansion plans? And if yes, how much additional CapEx and R&D expenses is foreseen with which kind of financing?

So that's a really important question, and it really gets to the core of how we think about the long-term evolution of Precipio. Today, our primary focus remains execution within our existing product portfolio and the markets we already serve. Even within our current addressable market, we're still at the very early stages of market penetration. So to put that in perspective, our products business generated just under $3 million in revenue last year. And this is within an annual TAM of about $0.5 billion in the U.S. So we see a very significant runway for growth with the products we already have in place.

That said, one of the reasons we referenced broad market opportunities in our corporate materials is because we believe the underlying platform would be built has applications well beyond our current hematology-focused offerings.

What's unique about Precipio is not any single product, it's the model itself, the combination of a real-world clinical laboratory environment for diagnostic workflows, operational validation capabilities and commercial distribution infrastructure. We believe that over time, this model can be applied to additional areas diagnostics.

Having said that, we intend to approach expansion in a disciplined manner. Our philosophy is to continue scaling the existing product business, expand recurring revenue, strengthening cash flow generation and leverage the commercial infrastructure we're building today. As the company grows and becomes increasingly well capitalized, we believe we'll be in a strong position to selectively expand into adjacent markets without necessarily requiring the kind of large-scale R&D spending and associated capital typically associated with traditional diagnostic companies.

And I think that's a really important distinction because our development model is tightly integrated with our clinical operations, and we think we've potentially enter new markets with a lower development risk, shorter validation cycles and significantly more capital efficiency than many traditional life sciences.

So in summary, while we're not announcing any specific expansion initiatives today, we do believe the long-term opportunity for the platform extends meaningfully before the markets we currently serve.

All right. With that, Chloe, let's go to our first question.

We have a question from Adam Hutt from Leviticus Partners.

It's really just a continuation of what you've been -- the questions you've kind of already answered, but would you be likely in at all to open up, for instance, a facility in the Midwest or the West. Would the logistics preclude that? Or is transportation so efficient that you'll never need another facility elsewhere?

Thanks, Adam, good to hear for you. Good question. I don't think so. Logistics are, for the most part, quite good. And there really isn't a significant need to spend that kind of money to duplicate the facility. I can tell you, for example, as you know, our lab is in Connecticut. Even from New Jersey, samples get picked up by FedEx and they fly through Memphis and arrive next morning at 9 or 10 in the morning. So there really isn't much advantage even from an adjacent state. There isn't much logistic advantage to having something on the West Coast.

So I think if anything, if we get to that point, we'll expand capacity, which for a large part is mostly on the CapEx kind of equipment side and at those revenue levels, it's a very efficient process.

So New Haven would expand, no Los Angeles facility, okay.

No, no. No, there's no need for that.

Thank you.

All right. Chloe, it seems like that's the only question.

As there are no questions at this time. Thank you for attending today's presentation -- oh, we have one from [ Thomas Duxbury ].

Ilan, congrats on the continued ramping and cash flow management of the company. I guess could you give us a little bit more color on the ramp, especially on the product side from Q2 onward through the rest of the year? I assume with that order shifting into Q2 into April that Q2 will obviously be up from Q1. And hopefully, with the commercial team that you have now in place, that we will see even better loaded back half of the year?

Yes. Tom, good to hear for you. And yes, I hope so too. I think -- the commercial team has probably had already a better-than-expected impact in Q1, as I mentioned, keep in mind, the only those 4 months and I would say at least half of that time has been for training. So to add about $3 million of pipeline is great, and I think that, that's only increase over time.

Of course, the X factor is how long does it take to translate that $3 million of pipeline into $3 millions of revenue. And this is where it gets really difficult because a lot of those factors are out of our control. So as an example, we had a customer -- I just spoke with a customer this morning, who has completed the validation and is ready to go live from a technical standpoint, what they're now waiting for is to set up a meeting with all the physicians to teach them how to order the new test of the system.

It sounds mind-numbingly ridiculous, quite frankly, but those are things they face. And this is a huge organization, so they have these meetings once a quarter, and that hasn't been scheduled yet. So this meeting could happen next week, and the customer goes live. This meeting could happen in July and then the customer goes live. So it's really hard to kind of figure out what is the time line for these customers to transition from readiness to go live and when that translates into revenue. I think the best thing I can offer -- efficient. So if the customer says, hey, we want to order $100,000 of products next week, we can deliver that. Unfortunately, things we can only control what we can control. So I hope that helps.

We have a question from Adam Hutt from Leviticus Partners.

One for the road, boys. I'm familiar with the company called Interpace that had a pancreatic cancer test. They pretty much got knocked out by the insurance companies. Stock has been a big, big wealth destructor. Obviously, the blood cancers, I think, are probably -- you're able to show much more efficacy and return of the dollar, I think, than a particular pancreas test. Should any of us be losing sleep over the insurance monster that's a bit of a bugaboo this quarter?

Thank you, Adam. Yes. So I don't know if losing sleep, but it's always a concern because they are the payers, and they are the ones who ultimately decide. It's not a usual kind of supply and demand model. It's really the payers kind of determine what the revenue or where payments are going to be.

Having said that, all of our products and certainly all of our services use established CPT codes. I'm not familiar with Interpace, but if there's a company that doesn't have an established CPT code or it's a new code that was just assigned, there's a lot of uncertainty around that. And I don't really think that exists.

Our test and the codes we used are long ago established codes and they're not going anywhere. They're supported by thousands of pages of clinical validated data. So I think in that sense, are there going to be rate fluctuations like we saw? Sure. And we, as a company, have to respond by being more efficient to keep that margin, and we're doing exactly that. But I don't think it's going to be a situation where they're going to say, yes, you know what, we're not testing for acute leukemia and we're not paying for that anymore. We're not paying for that anymore. I don't think that's going to happen. So I think relatively speaking, we're okay.

Can you fight -- do you have any restitution against the rate at which they try and -- you do. What can you do besides just margin from within? You can't really see the insurance companies, can you?

No, you can't. No, you can't. So that's pretty much it. And for the most part, we haven't really seen anything egregious just when there's clinically supported data. It's usually relatively stable. And this is kind of the first drop that we've seen in 15 years of operating. It's an 8% drop on one of our tests. It's a frequently run test, but it's an 8% drop. So I think, in general, this is a pretty stable field.

Thank you.

Okay. There are no questions at this time. This concludes today's conference. Thank you for attending. You may now disconnect.

Welcome to the Precipio Q4 2025 and Year-End 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, 2025, 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 2025 fourth quarter and year-end shareholder call. I'd like to thank everyone who submitted questions ahead of time. We will do our best to address them during the call.

But before we begin our financial review and for those of our shareholders that are relatively new to Precipio, I'd like to take a moment to reflect on the impact our work has on patients every day. Behind every diagnostic test we run is a patient waiting for answers often during one of the most difficult moments of their lives. Our test helps physicians determine the most appropriate treatment options for their patients battling cancer, and those answers must be provided quickly and accurately. While today's discussion will focus primarily on financial performance and operational progress, it's important to remember that these results ultimately represent something that is beyond dollars and cents. It represents our contribution to helping patients and their families navigate their battle against cancer.

Now let's turn to a review of our performance in 2025. 2025 was a year of financial and strategic inflection. At the beginning of last year, we set out to achieve an important objective for Precipio, transition from a cash-using company to a self-sustaining business with positive cash flow. I'm pleased to report that in 2025, we achieved that inflection point. During the year, we also achieved several other important milestones, continued revenue growth, improved gross margin and operational leverage, the exercise of all remaining financial warrants, removing any related overhang and the completion of the repayment of Change Healthcare loan, allowing the company to move towards a clean balance sheet.

For many years, like most emerging diagnostic companies, we had to manage the business with a constant constraint of conserving capital and extending our runway. That discipline shaped our company into the highly efficient organization that we are today, but it also meant that many decisions had to be made with shorter capital preservation in mind. Today, we enter a new phase of the company's development. The discipline remains, but we are now increasingly able to deploy resources towards growth initiatives and long-term value creation. The company is moving from focusing primarily on stabilization to one increasingly centered on growth and execution. And during the call, we'll highlight several examples of that shift.

Now let me turn to our financial results for the year. For fiscal year 2025, Precipio delivered $24 million in revenue, representing a 30% increase year-over-year compared to 2024. This level of growth reflects the continued expansion primarily in our Pathology Services division as well as strengthening demand for our specialized cancer diagnostic services and molecular testing technologies. Equally important, this growth demonstrates the operational leverage embedded in our business model.

A large portion of our cost structure, including laboratory infrastructure, scientific personnel and operational systems is already in place as a fixed cost. As a result, incremental revenue can be absorbed efficiently without requiring proportional increases in operation costs. Therefore, more dollars can go directly to the bottom line. In other words, revenue growth increasingly translates into improved margins and stronger cash flow. This operational leverage has been a key driver of the improvement in our financial performance throughout the year.

While I'm pleased with the progress we made in 2025, I want to emphasize that we believe we are still in the early stages of realizing the full financial potential of this model. Let's begin with our Pathology Services division, which continues to serve as the operational and financial backbone of the company. Throughout the year, we experienced strong organic growth in this division, driven by both acquisition of new customers and increased testing volume from existing customers. One of the most encouraging aspects of this growth is that it has been achieved without requiring significant additional capital expenditures or laboratory staffing increases. Our laboratory infrastructure remains well below its maximum capacity, meaning the incremental case volume flows efficiently through the system and contributes directly to the improved margins and cash generation.

Beyond revenue generation, the Pathology division also provides a unique strategic advantage for Precipio as it relates to our Products division. Because we operate a full clinical laboratory, we have direct access to incoming patient samples and a real-world testing environment. This allows us to develop, validate and refine diagnostic products rapidly and efficiently before we introduce them to the market. Few diagnostic companies possess this dual with the capability of operating both a clinical laboratory and the product development platform under the same roof. And we believe this integrated model provides Precipio with a meaningful competitive advantage. Looking ahead, our objective for the division remains straightforward, continue growing organically while allowing it to serve as a stable cash-generating foundation for the company.

Now let's turn to the Products division, which we believe represents the company's greatest long-term opportunity. First of all, it's important to acknowledge that the Products division revenues did not grow as expected this year. There are a few reasons for this. And on this call, I'd like to talk about 2 main causes. First, we experienced several customer operational fluctuations. While we did add new customers during the year, we also had pauses from several other customers due to their internal factors ranging from machine downtime to lab tech maternity relief. This caused temporary loss of revenues and subsequent fluctuations, which essentially canceled out some of the growth from new customers.

The good news is we learned from all these situations, and we implemented additional business continuity measures that are intended to reduce these fluctuations in the future. For example, as part of our process when we now onboard a new customer, we may establish at the customer selection, our lab as a backup testing facility to be used if the customer experiences a temporary operational interruption. If activated, our clinical laboratory is then used as the customer send-out lab. This means that if they are down for any reason, the samples get sent to our lab in accordance with the customers' instructions, which helps support continuity of patient testing during those service interruptions. This provides continuous, consistent service to their clinicians, something that's always important to any laboratory, and it provides continuity of revenues to us.

The second reason for the lack of substantial growth was the limited commercial team we had in place. We had one senior executive spending part of their time on product sales plus another junior sales rep person. This team proved to be insufficient for the growth we were targeting. But at the start of 2024, that's all we could afford. That's an example of the company playing defense. But with the shift towards our cash position came a change in the form of now playing offense. Towards the end of 2025, as we saw our business swing to profitability, we focused on strengthening the project commercial team.

In January 2026, we hired an industry veteran experienced Chief Commercial Officer, plus 2 seasoned experienced business development officer professionals full time. So we went from barely 1 person working on the commercial growth of the product division to 3 dedicated full-time and experienced team member. This team will focus on both direct sales as well as developing the relationships we need with our distributors to get into tougher to access customers. I'm confident that with this team, we will be making a lot of progress.

Having said that, during 2025, we saw encouraging progress in this division. Product revenues were impacted by several factors, including the relapse and subsequent return of several customers to full operational volume, the acquisition of new customers and organic growth from existing customers expanding their test menu by adopting additional HemeScreen and Bloodhound panels. We expect to see the impact of all those factors during 2026.

One important characteristic that our platform continues to demonstrate is the following: once laboratories adopt our technology, they tend not only to stay with it, but also expand their usage over time. We also continued strengthening our distributor partnerships, which represent an important pillar of our long-term growth strategy. Distribution relationships will eventually allow us to reach a significantly larger number of laboratories than we could through direct sales alone, providing more scalable pathway for expanding the adoption of our technology.

As many of you know, onboarding a new customer -- new laboratory customer in the diagnostic industry involves several steps, including validation studies, workflow integration, IT and regulatory review. These processes can occasionally delay the start of revenue. However, we continue to see a growing pipeline of laboratories progressing through the onboarding process, each representing potentially substantial recurring revenue as they move into full clinical expansion.

Now turning briefly to margins. Overall gross margin improved year-over-year from 41% in 2024 to 45% in 2025, primarily driven by higher case volumes in our Pathology Services division, a more favorable case mix towards higher-margin tests and continued improvement of operational efficiency. In the Products division, margins were temporarily impacted by strategic investments made during the year, including expansion into a larger facility and additional manufacturing in Q3 resulting in gross margins of 30%. However, in Q4, we saw a leap to 90% gross margin for our products. Now I know this is a surprising number, especially leaping from 30% in the previous quarter.

Let me take a moment to explain this operationally. First of all, as a reminder, historically, we were consistently at around 40% to 50% gross margins. And in Q3, we dropped to 30% because of the additional expenses that were burdened into the manufacturing costs. So I'd like to treat the 50% margin number as our baseline given our covered production volume. Here's why Q4 margins dropped to 90%. As part of our production planning in Q4 2025 and looking to Q1 2026, we anticipated 2 disruptions to our production schedule. The first was downtime due to year-end holidays and staff taking time off. The second was equipment maintenance expected in Q1 of 2026, where our production machines would be down for approximately 2 to 4 weeks.

Therefore, in order to ensure we had adequate inventory for our customers, in addition to the scheduled production runs to fulfill orders in Q4, we produced significantly more inventory to cover expected Q1 2026 demand. Keep in mind, when we produce these products, they are intended for sale to our product customers as well as consumed in our own clinical lab. As a result of this larger, more concentrated production run, we inadvertently achieved a much higher margin of 90%. While this was unusually high due to manufacturing circumstances, this is an illustration of the scalability of our products manufacturing capabilities and the impact to margin we can expect to achieve in the Products division as we scale up. As volumes grow, we expect division to demonstrate the strong margin profile typical of successful diagnostic product companies.

Beyond financial performance, 2025 included several important operational and commercial achievements. I'd like to share a few of them with you. We continued the expansion of the HemeScreen and Bloodhound molecular platform. We published an exciting joint academic study with one of the leading cancer centers in the country, Memorial Sloan Kettering Cancer Center in New York, demonstrating the novel clinical value of our Bloodhound BCR-ABL product. We presented a poster at the AMP conference, the Association of Molecular Pathology in collaboration with Wayne State University, showcasing the clinical value of our HemeScreen cytopenia panel.

We made improvements in customer onboarding processes. We expanded our manufacturing capacity, and we strengthened the company's financial position through debt repayment. We believe that each of these milestones contributes to building a more scalable and durable business.

Moving now to market interaction. In 2025, we also began to interact more with the public markets. In 2024 and before, we remain relatively silent and didn't really engage with investors. And if an investor reached out to us requesting a call with management, we typically politely declined and responded that management is not currently speaking directly with investors. But as our story developed and our performance improved, in 2025, we began responding to those inquiries and engaging with investors, both in one-on-one meetings as well as in various public forums and conferences.

During 2025, we had more than 50 unique interactions with investors, family offices, institutional funds and analysts. I believe that while the 300% share price appreciation we saw in 2025 was primarily due to the company's business and financial performance, it's also due to the increased engagement with investors. We plan to continue to engage with the market this year.

Looking ahead to 2026, our focus is on growing the products business. With our new dedicated and experienced product sales team as well as process improvements we've implemented, we will focus on accelerating the adoption of our HemeScreen and Bloodhound products, converting our pipeline of laboratories into active revenue-generating customers and expanding the number of institutions utilizing our platform. We expect to see continued growth in the pathology service side of the business as well, further generating cash that will be reinvested primarily into the products business growth.

One example of an opportunity for us is in AML or acute myeloid leukemia testing, particularly where most hospital laboratories currently rely on external reference testing and where turnaround time of testing results can have a direct critical impact on patient lives. Today, most hospital laboratories across the country do not perform AML testing internally and instead send the patient samples to external reference laboratories. For AML testing, these reference labs typically deliver results to the clinician in 7 to 10 days. And this is despite the AML guidelines requiring results delivered within 5 days.

With several targeted therapies tied to specific mutations tested, receiving immediate results is a critical life and death decision. The problem is there is a severe mismatch between the clinical situation facing the doctors and their patients and the diagnostic options available to meet most of these situations. Therefore, we see an unmet need for testing workflows that can better support timely clinician decision-making. By using the combined strength of our pathology services division and our blood AML assay, we will be launching a service that combines rapid molecular testing.

And when I say rapid, I mean next-day results, followed up by a comprehensive analysis 5 days later. We believe this further -- this service could further differentiate our platform and expand both our services opportunity as well as introduce laboratories to the products we offer. This is just one example of the superior service our technology enables us to provide. Further details will be announced as we launch this offering.

We see significant opportunities to expand the share of our Products division within an estimated $500 million addressable market annually in the U.S. As we execute on that strategy over the next 3 to 5 years, we expect the company's revenue mix to move from its current approximate 90-10 weighting towards pathology service to a more balanced revenue mix between pathology services and products.

In summary, while there is still work ahead, we believe the foundation we have built is strong and the opportunities ahead of us significant. In 2026, our focus will be on growth execution, commercial momentum, increased market share and ensuring that our progress is communicated clearly to the market.

I'd like to thank our employees, customers, partners and shareholders for their continued support and trust. We look forward to updating you again next quarter as we continue executing on our strategy and building long-term value for our shareholders. Thank you, and have a great evening.

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

Welcome to the Precipio Third Quarter 2025 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 these 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 all for joining us today to review Precipio's financial and operational results for the third quarter of 2025. This quarter marks a truly proud moment for Precipio. For the first time in our company's history, we've achieved positive adjusted EBITDA of nearly $0.5 million and perhaps even more importantly, we generated over $0.25 million of cash from operations.

That's not just a financial achievement. It's a validation of our long-term strategy, our disciplined execution and the incredible dedication of our team. It also begins the transformation of our team's approach and mindset. To use a sports analogy, we're now moving from defense to offense. I'll give you an example to illustrate this transition.

Last time this year, our management meetings were focused on reaching breakeven. How do we increase in revenue and minimize expenses, extracting more margin dollars out of our existing operations. We believe that achieving financial independence would not only give us the ability to properly grow our business on our own terms. It would also significantly increase the company value and with that, create many opportunities for growth. Those of you who know the health care industry and specifically the diagnostics sector know that it's virtually unheard of to reach profitability and our revenue levels.

Companies with 10x our revenue are believing millions of dollars each year with continuous dilutive capital raises, and we just didn't want to be that company. This quarter, management meetings demonstrated a mindset transformation in the way we look at how we grow our business. The conversation completely changed. It's now all about how to reinvest the cash we're generating in a responsible and strategic manner to further accelerate the growth of our company. That's the kind of transformation that only happens when every part of the business R&D, sales, operations, finance, pulls in the same direction.

We expect that as our consistent performance drives continued market cap appreciation. This will open numerous doors for us to explore multiple ways of growing the business. Since early 2025, as we demonstrated our gradual advances towards this milestone. Our share price has responded tripling since the start of the year. Now that we've reached that financial goal and are on the path for continued growth, we can begin to take a more strategic approach, investing in our growth and market share acquisition.

On today's call, I'm going to share with you a few examples of the steps we've taken to position the company for growth, we anticipate and to serve the growing sales funnel we're seeing. I have to say it's really a great position to be in. Now that we have the resources, our own self-graded resources to take this company to the next level. But first, let me walk you through some of the financial highlights for this quarter and provide some color on a few of the metrics.

Q3 reached $6.8 million, a 30% increase year-over-year and a 20% increase quarter-over-quarter. This marks yet another quarter of double-digit growth driven by both our Pathology Services division and our Products division. Starting with our Pathology Services division, our team delivered an exceptional quarter. Turns out the $2 million monthly record for pathology revenue in July, which we mentioned in the last shareholder call, wasn't just a fluctuation, but rather our new norm.

Revenue increased from -- by roughly $1 million or 20% from $5 million in Q2 to $6 million in Q3. That growth came largely from new customers selecting Precipio for our services. Our pipeline of additional customers remain strong. Several are in trial phases right now, and we expect continued conversions in the coming quarters. What's particularly pleasing is that we achieved this growth without significant increase in fixed costs. Our operations team absorbed the additional volume efficiently leading to continued gross margin improvement, which rose from 43% to 46% this quarter.

One of our sales reps came back from a meeting with a new oncology group and reported back on the success of winning a new customer. She said, they're switching over from one of the large national labs because they're just tired of being treated like another number. That's been a recurring theme we frequently hear. Our agility and personalized service are winning customers over from much larger competitors as we support them in their efforts to provide the best care to their patients.

Fortunately, we've built not only the necessary infrastructure to deliver this level of service in a scalable manner. More importantly, we've developed a culture and mindset that enables us to give a customer truly personalized attention. And it's our culture that turns that scalability into sustained success. It's a culture that's defined by accountability, collaboration and customer empathy, qualities that enables us to grow while maintaining exceptional service and simultaneously growing our gross margins.

Now moving to our Products division. Our Product division delivered 16% quarter-over-quarter growth increasing from approximately $620,000 in Q2 to $720,000 in Q3. This growth was driven primarily by increased utilization from existing customers and by the introduction of new panels that expanded our customers' purchases. We also laid the groundwork for several new customers who will go live between this quarter and the next, setting up the division for continued growth. One of our long-time customers recently expanded from using just 1 of our panels to 3 and soon to before. They remarked that our platform significantly reduced their turnaround time, cut down tests they were sending out and had a positive impact on their bottom line. That's exactly the kind of deepening engagement that drives our growth.

On the distribution side, we're seeing an exciting uptick in activity, which has resulted in the expansion of our distributor generated sales funnel. First, we've increased our interaction and further built relationships with distributor sales reps. Next, we've identified more qualified targeted customers. Third, we've been brought in to present our value proposition to these customers. And finally, those meetings have resulted in us submitting proposals and developing an onboarding plan with customers. In short, the business model with our distributors is starting to work. All of this points to steady recurring revenue base that's expanding quarter after quarter. We continue to believe that although for now, the majority of our business still comes from internal direct sales, the pathway to real scalable growth is by leveraging our distributors' network and we're beginning to see the fruits of that model.

Moving to discuss gross margins. Overall, gross margins improved slightly from 43% to 44%, and we expect that steady upward trend to continue as both divisions grow and scale. I'd like to take a moment to discuss the product divisions operations because I think it's worth explaining what's behind the temporary decline in gross margins from 44% last quarter to 30% this quarter. This change was not caused by production inefficiencies or high raw material costs. It's tied to 2 relatively small strategic investments we made that are important to our next phase of growth.

First, we expanded our lab space. Over the years, as our clinical pathology services business grew, keep in mind, we've doubled our case volume in the past 2 years. Our lab space footprint remain the same as we handle that volume. As our products division grew, there became a need to establish a dedicated lab space area for production instead of a lab space that was shared by both divisions. One of the principles of being able to produce a quality product is that clinical services and product production space really should be separated. Since our company's inception, we've occupied one floor in our building and in Q3 of this year, we had the opportunity to expand and take on part of the floor above us. This expansion enabled us to properly separate the 2 parts of our business for improved efficiency, quality and growth.

The incremental annual rent for this additional space is approximately $120,000 per year, and this quarter was the first time that increase hit the P&L, causing a decline in margins. However, if you do the math, with the incremental quarterly cost of the new space of approximately $30,000 an increase in revenue of $100,000, like the one we had this quarter, gets us right back up in the mid-40s gross margin. Second, we brought on an additional technical support specialists whose responsibility is helping customers onboard faster and start generating revenue sooner. One of the things we observed, and we've discussed this before, is that customer laboratories are typically overcapacity understaffed and constantly experience to personnel constraints.

They're busy running their daily clinical samples as they should, but therefore, projects such as validating and bringing on new assays may often take a back seat. Having the presence of our technical specialists on site at the customer, helps direct more attention to validating our product. Our specialists provide a lot of guidance and support. We don't do it for them, but we can certainly help them move things along. And shorten the time line to going [ live ]. The ROI of accelerated revenue versus the cost of the specialist is clear. This new technical specialists began last quarter. And while he has spent the majority of his time training, he was also able to spend some time with the customer to help accelerate their onboarding of 2 new panels, which will result in an incremental quarterly increase of approximately $50,000 a quarter.

These 2 incremental costs will temporarily affect margins, but they're exactly what we need to support the next $50 million of annual revenue growth. So just as the margin dipped down a bit because of these critical fixed costs, it will correct back up just as quickly as revenue scales up. Both the new lab space and the support specialist position us to expand efficiently, and we don't anticipate the need for any more overhead in the next 12 to 24 months. Meanwhile, the Pathology Services division continues to increase margins rising from 43% to 46%, reflecting the benefits of the volume leverage and smart capacity investments we made in the past.

Overall, we're confident that the total company gross margin will continue to rise and exceed the 50% mark by mid-2026, as both divisions build more revenues on their existing infrastructure. Our Q3 adjusted EBITDA came in at $469,000 compared to $100,000 a year ago and compared to a loss of $78,000 in the previous quarter Q2 2025. That's a swing of over $0.5 million in just 1 quarter, and that includes additional investments in facilities and personnel to fuel growth. Equally important, we generated $285,000 in cash from operations compared to a cash burn of $148,000 in the previous quarter Q2. That's a $433,000 positive cash swing in operating cash flow.

We are 2 months away from completing our full repayment of Change Healthcare, which is $240,000 a quarter. Meaning that starting in Q1 2026, cash generated from operations will stay with the company. These results show that we've crossed an important threshold. Number one, we're no longer dependent on outside capital to operate our business and can grow organically. We are now a self-sustaining business and can fuel our own growth. But number two, as our market cap increases to match our financials, new strategic opportunities we present themselves and that the greater market cap will be easier to finance with outside capital. Either way, from my vantage point, I can comfortably say that the company will never need to raise capital to cover bird. And boy, that's a great place to be.

Looking ahead, as we close out 2025 and move into next year, our priorities are clear: number one, continued driving double-digit growth in both divisions. Number two, expand margins as we scale up. Number three, we invest our cash into growth initiatives that strengthen our market position. And number four, translate the company's operation and financial success into increased liquidity and share price appreciation through more investor-facing activities. Financial independence opens a world of opportunity from strategic partnerships to new innovative products to operational investments that make us even more agile and competitive.

Our teams have shown tremendous discipline and creativity in getting here, and we plan to build on that momentum. One of the things I love most about our company is how our mission and metrics go hand in hand. When recently, one of our pathologists told me, every time we get a diagnosis right, that's a patient whose correct treatment starts faster. It reminds me of why this growth matters beyond just numbers. I want to take a moment to thank every member of our Precipio team. This achievement is yours. Our sales team operates with the focus and agility of Hawks, consistently capturing market share from our competitors while the rest of the team balances limitless dedication to patient care with operational and financial prudence to efficiently manage the business. This achievement belongs to them.

I'd also like to thank our shareholders who have been patient and have been with us on a tough journey. I hope everyone sees the focus and determination to translate the company's business and financial success into shareholder value. I really think this is just the beginning.

Thank you all for your continued trust and support. Wishing you all a great holiday season and a happy new year, and we'll talk again in 2026. Have a nice evening. Thank you.

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