Precipio Inc (PRPO) 2002 Q4 法說會逐字稿

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Good day. If you need any assistance today press the star and the zero on your touchtone telephone and a coordinator will return to is assist you I'd like.

Good day. If you need any assistance today press the star and the zero on your touchtone telephone and a coordinator will return to is assist you I'd like to turn the conference over to your host, Mitch Murphy. Please go ahead, sir.

Thank you. I'd like to welcome all participants to our fourth quarter conference call and also to any who may be listening on the web cast. I'm Mitch Murphy, vice president, secretary and treasurer for Transgenomic. Hopefully everyone has had a chance to look over the press release we issued earlier today.

This conference call will be archived and accessible by telephone and Internet. Please refer to our press release from January 28 or go to our web site at www.transgenomics.com for details.

Take a couple of minutes here to go over some of the necessary legal issues regarding forward-looking information that may be given during this call. And then I'll turn it over to our chief executive officer Collin D'Silva.

Certain forward-looking statements may be made during this call that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results.

Such statements are subject to certain factors, risks and uncertainties described from time to time in Transgenomic, Inc. reports to the Securities and Exchange Commission. Any change in such factors risks and uncertainties may cause the actual results, events and performance to differ materially from those referred to in such statements.

Accordingly, the company claims protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 with respect to all such statements.

In addition, our presentation today will include a discussion of non GAAP financial measures. We will rerefer you to the press release of today, which is included on the investor relation's sections of our web site where we have posted additional information on these non GAAP measures including a reconciliation of each such measure to the most directly related GAAP measure. With that I'll turn the call over to Collin.

Thank you, Mitch. I'd like to make a few open remarks and then turn it over to Bill Rasmussen, CFO to review the financials in more detail.

Then we'll come back to answer any questions from those listening in.

We were disappointed in our financial results for the year 2002. However, in the fourth quarter, we posted our first sequential increase in top line revenue in several quarters. This increase was driven primarily by significant sequential rebound in our instrument sales, which was unfortunately offset to a large degree by decreasing in our nucleic acids revenue the latter impacted by customers revenue specified delivery schedules.

Although we do not achieve our designed results in 2002, we do feel we have made significant progress in investing for the future.

Strategic investments in both plant and personnel leaves us better positioned to achieve renewed growth accompanied by diversification of our revenue stream. Importantly, this has been done by building our core competencies while maintaining our historical strategic focus.

We believe the rebound in instrument sales can be attributable to the ongoing need for genetic variation studies and, importantly, the continuing penetration of the WAVE platform in the clinical genetics area.

We believe this bodes well for future penetration of the platform into the clinical diagnostics area. In terms of manufacturing operations, during 2002 we continued to experience weakness in top line revenue growth. However, due to our higher capital expenditures and manufacturing infrastructure, as impact on fixed costs, we experienced a negative impact on the bottom line at these revenue levels.

As revenue levels recover, we should regain operating leverage in manufacturing operations. Part of our restructuring announced for the fourth quarter specifically addressed our manufacturing costs in our nucleic acids product line.

We will continue to focus additional cost containment activities in both materials and labor in order to return to our manufacturing operations to historical gross margin percentage levels.

Similarly, in the operating expenses area, our efforts to improve manufacturing margin percentages also has resulted in us evaluating our operating expenses. And as part of our restructuring we have refocused operating expenses to support our most valuable strategic markets.

Focusing our sales and marketing resources on near term opportunities, focusing our R&D efforts on consumable pull through opportunities and controlling our general and administrative costs at our historical low levels, will allow us and should allow us to regain progress towards profitability as we regain momentum in revenue growth. In terms of our product lines.

In terms of our product lines, our bio-instruments product line continues to see strong interest in a high sensitivity scanning technology platform, which our WAVE system meets.

This strong interest includes our new WAVE MD product offering, as well increased general interest in large collaborative efforts to perform disease specific association studies. And greater interest in the whole area of translation al medicine. We continue to see strong validation of the technology in terms of research publications, with over 500 to date.

And increasing at a rate of approximately 50 to 75 publications per month. In addition, we'll be launching several new applications on the WAVE platform in 2003, which should drive demand and restore momentum in WAVE sales growth.

In our synthetic nucleic acids business we continue to invest in personnel and facilities. We anticipate initiation of our CGMP specialty of our nucleic facility in Boulder Colorado in the first half of 2003.

We've assembled a leading team with scientists with extensive experience in the commercial development of novel nucleic acid chemistry. This effort has been validated by bringing new commercial opportunities in the area of R and A and optimum chemistries to Transgenomic by leading entities around the world. With that I'd like to turn it over to Bill Rasmussen, our CFO for detailed description analysis of our financial.

Thanks, Collin. I would like to thank all of you for participating in our fourth quarter conference call.

I'll start out with a review of Q4 operations and then review the full year after that.

Revenues in the fourth quarter were 9.2 million versus 10.7 million. This represents 14 percent decrease year-over-year. As Collin mentioned, we did see a slight increase over Q3, 2002. The instrument business had a strong rebound in Q4. Revenues were 5.7 million, compared to 4.0 million in Q3, 2002.

In Q4, 2001, the revenues were 5.9 million. Instrument orders during Q4 were 6.9 million, which is the highest order level since Q4, 2000.

We continued to see weakness in North America. Asia performed to budget and Europe was exceptionally strong.

Commercial applications in the U.S. remained slow. ASPM WAVE remains relatively unchanged. We have not encountered any price erosion or margin deterioration. We are approaching the sale of our one thousandth instrument. Consumable sales were weak during the current quarter.

Revenues were 3.5 million compared to 4.9 in Q4, 2001, and sequentially below the 5.1 million in Q3, 2002. The weakness occurred in our synthetic nucleic acid product line as Collin mentioned.

Bioconsumables were flat between Q4 and Q3 of 2002 and up approximately five percent over Q4, 2001. S and A revenues were impacted by deliveries of a couple of significant orders being delayed by customer delivery requirements.

New orders for S and A products were below expectation. Gross margins for the quarter were 41 percent compared to 55 percent in the prior year, and 47 percent in Q3, 2001.

These margins were adversely affected by the pre production manufacturing costs relating to our synthetic synthesis business in Boulder Colorado, if we exclude the pre production costs, gross margins would have been 50 percent, which was a 300 basis point improvement over Q3.

The increase in margin relates primarily to product mix, instruments and bio consumable portion of the business had margins of 57 percent. Gross margins in all of our product lines, but particularly in our synthetic nucleic acid products were negativelily impacted by fixed manufacturing costs being allocated over a smaller revenue base.

Our operating expenses - Excluding the charges related to the restructuring and note receivable, operating expenses were 9.4 million in Q4, 2002, versus nine million in the prior year.

On this adjusted basis, operating expenses increased between 4 and five percent year-over-year. The current quarter included a restructuring charge related to our expense reduction efforts of 3.3 million, and a loss on the write down of a portion of a note receivable.

This charge approximated 375,000 dollars. Excluding the charges noted above, selling general and administrative expenses in 2002 were flat with 2001. And research and development expenses were up 400,000 dollars.

The 3.3 million restructuring charge in the fourth quarter included severance, charges to reduce or eliminate facilities, and the write off of certain assets.

We will also report an additional restructuring charge in the first quarter; we estimate this charge will be in the range of 500 to $700,000. The combined charge in the fourth quarter, plus what we will take in the first quarter, will be in the range of our prior guidance in January.

The loss on the note was with Jen Odyssey for whom we entered into a service provider agreement. They had been attempting to raise additional capital through a private placement but were unsuccessful.

And then they began to discuss with us the need to scale back their operations due to a lack of funds. Our options were to negotiate a cash settlement or to convert our loan into their stock.

We felt, based upon their current financial situation, accepting the reduced cash payment was our best outcome. Net loss for the quarter was 9.3 million, or 40 cents a share, compared to 2.7 or 12 cents a share in the prior year. Excluding the restructuring charge and the loss on the loan, our net loss would have been 5.7 million, or 24 cents a share.

The larger net loss in 2002, excluding the charges compared to 2001, was primarily due to the decrease in revenue, the lower gross margins, which is a result of fixed manufacturing costs being spread over a smaller revenue base, and the slightly higher operating expenses.

With that, I'd like to compare 2002 with 2001 in total. Revenues decreased in 2002 to 37.6 million from 38.5 million, or roughly two percent.

Instruments were 18.8 million in the current year, versus 23.1 million in 2001, an 18.6 percent reduction.

Consumables increased in 2002 to 18.7 million, from 15.3, or 22.1 percent increase. Gross margins decreased as a percent of sales to 47.9 percent, from 55.3 percent. This was due to the shift in the mix of revenues and also due to the scale up in manufacturing facilities.

Operating expenses increased to 39.7 million in 2002, versus 31 million in 2001.

2002 includes a restructuring charge in the loss on the notes receivable, excluding these items operating expenses would been 36 million or 16 percent increase over the prior year.

This increase is primarily due to additional head count and the related expenses associated with supporting a larger employee base.

The net loss for 2002 was 21.4 million, or 91 cents per share, compared to 7.4 or 33 cents per share in 2001. Excluding the restructuring and loss on the note, the net loss would have been 17.7 million, or 75 cents a share.

The higher loss in 2002 was primarily the result of lower gross margins, higher operating costs, and a decrease in investment income.

I'd like to now move to cash flow. We ended the quarter and year with 13.3 million in cash and short-term investments. Cash utilized in the fourth quarter was five million.

Net funds used in operating activities were approximately 2.5 million, which included funding a net operating loss of 9.3 million, offset by non-cash charges of depreciation and amortization, and changes in other working capital amounts. We also utilized 4.3 million in the quarter for capital expenditures.

These expenditures primarily related to our nucleic acid expansion plant in Scotland and our synthesis manufacturing in Boulder. We also had proceeds of approximately 1.7 million from investing in financing activities.

Foreign currency had a positive impact of approximately 100,000 dollars.

For 2003, we'll start the year at 13.3 million in cash. The expense reductions and restructuring mentioned earlier should enable us to reduce our operating cash burn rate.

The restructuring should reduce quarterly operating expenses by roughly 20 to 25 percent. We're looking at utilizing approximately two million to four million dollars supporting operating activities in Q1 of 2003. This range is dependent upon our ability to achieve both our revenue and expense objectives and managing effectively our working capital components, particularly inventory and accounts receivable.

Capital expenditures for the full year should be in the seven to nine million-dollar range. They relate primarily to our synthesis manufacturing facility in Boulder. To date we're primarily financed all capital expenditures with cash.

We're currently exploring a number of financing options. These include, but are not limited to capital and operating leases, asset based loans, and/or more traditional bank financing.

We have also begun evaluating private placement and shelf registrations. We believe we will have a number of alternatives available to us if they are needed. Our outlook, it remains difficult projecting revenues. We're encouraged by the pickup of interest in our WAVE business.

But we still do not have the visibility that we would like. We have a number of customers discussing their needs relating to our consumable business, and we are optimistic that we will soon see an up tick in orders. With that said, our optimism is tempered by the potential word events dampening the world economy. We're currently looking for a slight increase in sequential revenues in Q1 compared to the just completed fourth quarter of 2002.

Gross margins will continue to be adversely impacted by the Boulder manufacturing costs. We see this impact lasting at least through the first half of the year. As mentioned earlier, our quarter operating expenses should decrease by 20 to 25 percent. As also mentioned, we will have an additional restructuring charge in Q1 of between 500 and 700,000 dollars. With that, I'd like to turn it back over to Collin.

Thank you Bill, with that we'd like to turn it over for questions and answers.

If you would like to register your phone line for a question you may do so by pressing the star and the 1 on your touchtone telephone. The question can be withdrawn by pressing pound key. Again to ask questions press the star and the 1 on your touchtone telephone.

Again, to ask questions press the star and the 1 on your touchtone telephone.

It appears we have no questions at this time, sir.

Okay. Mitch.

Okay. Thank you. I'll mention one more time that this call is being archived and it will be available for listening to either over the Internet or on the dial in basis. The information as to how to do that is contained in our January 28th press release.

You can refer to that or you can also visit our web site, www.transgenomics.com. Also, for the benefit of those who may have joined us after this call was already in progress, I will reiterate that certain forward-looking statements may have been made during this call that reflect management's current views and estimates of the future economic circumstances, industry conditions, company performance and financial results.

These statements are subject to certain factors, risks and uncertainties described from time to time in our reports to the SEC.

Any change in these factors, risks and uncertainties may cause the actual results, events and performance to differ materially from those referred to in such statements.

Accordingly, the company claims protection of the safe harbor for forward-looking statements with respect to all such statements.

In addition, our presentation today included a discussion of certain non GAAP financial measures. We refer you to the press release of today, which is available on the investor relations section of our web site where we have posted additional information regarding these non-GAAP financial measures, including a reconciliation of each such measure to the most directly comparable GAAP measure.

With that, I'd like to thank you all for listening and/or participating in the call.