Precipio Inc (PRPO) 2003 Q2 法說會逐字稿

(CALLER INSTRUCTIONS). I would now like to turn the conference over to today's moderator.

Thank you. I would like to welcome all participants to our second quarter 2003 conference call and also to anyone listening on the webcast. I am Michael Draper, Chief Financial Officer 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 both telephone and Internet. You can refer to our press release issued this morning or go to our Website, www.transgenomic.com for details.

Before we get started, I will take a couple of minutes to take care of some legal issues regarding forward-looking information that may be given during this call. Then I will turn the call over to our CEO 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 SEC. 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 of all such statements.

In addition, our presentation today may include the discussion of non-GAAP financial measures. You can refer to our Website in which we were give additional information regarding any non-GAAP financial measures which may be discussed.

With that, I will turn the call over to Collin.

As outlined in our recent press release, the weakness this quarter in our nucleic acids business unit reflects on-going challenges posed by like of revenue visibility. Nevertheless, we continue to believe in the longer term potential of this business segment. We have accordingly scaled the cost structure of our building block manufacturing operations in Glasgow, Scotland to be commensurate with conservative estimates of volume demand going forward.

Importantly, we are also taking steps to sharpen our focus on our specialty nucleic acid building blocks, our market segment in which are industry-leading expertise in nucleic acid chemistry provides a significant competitive edge. In addition, revenues from our Boulder, Colorado oligonucleotide manufacturing facility will begin to contribute to topline revenue.

In contrast, visibility in our Biosystems business unit continued to show signs of improvement. Biosystems revenues were approximately in line with the first quarter of '03 and increased by approximately 19 percent compared to the second quarter of 2002. Sales continue to be strong in Europe with increasing indications of returning strength in the North American market and significant growth potential in other areas of the world. We believe this growth potential may be related to an increased awareness of the need to identify relevant genetic variation in specific local populations around the world.

Continued strong growth in a number of scientific publications and presentations and site use of our WAVE System provides ongoing validation of the WAVE value proposition and serves to increase awareness of our technology and its advantages. We believe this trend coupled with target marketing initiatives aimed at high opportunity market segments such as oncology and inherent diseases will help to drive revenues from our Biosystems business unit. In addition, recent impending launches of several product line extensions will serve to diversify our revenue stream with an increasing contribution expected to come from sales of consumables.

Our Optimase productline for high fidelity application continues to show significant growth potential. We are starting to see orders for extended supply to some of our larger installed base customers. This is consistent with our strategy to focus on leveraging large research consortiums and our large installed multiple user customers for both instruments and consumables. In addition, our recent launch of our new high sensitivity WAVE System and its added consumables stream offers us significant new opportunities in certain areas of low-level genetic variation detection and capability to perform higher throughput pulling type applications, things that our users have been asking for. We see this as another significant driver of growth in our Biosystems segment.

We continued to build our intellectual property portfolio during the quarter with the addition of two U.S. patents related to our Biosystems platform. In addition we licensed key intellectual property, broadening our ability to commercialize products based on novel nucleic acids chemistries for applications in research diagnostics and therapeutics.

With that, I would like to turn this over to Michael Draper, our CFO, to address financials in greater detail; and then we will return to answer specific questions.

I would like to start with a few highlights from our second quarter results. While we are disappointed with the overall revenues, we are encouraged by the revenue strength shown in our Biosystems operating segment. As compared to the second quarter of 2002, this segment's revenues increased 19 percent. More specifically, the instrument sales that are included in the Biosystems operating segment increased 16 percent; and consumables sales were up 28 percent.

Operating expenses were 7.1 million including restructuring charges of 474,000 in the second quarter of 2003. This compares to 8.9 million in the second quarter of 2002. Including the restructuring charges, this is a decrease of over 20 percent from the prior year. Additionally, operating expenses including the restructuring charges declined sequentially from the first quarter of 2003. During the second quarter of 2002, we closed our previously announced line of credit and now have this facility available for our use.

Now I would like to discuss our second quarter results in a little more detail. Revenues in the second quarter were 8.5 million versus 9.4 million in the prior year. This represents a 10 percent decrease year-over-year. Breaking down these total revenues, the Biosystems segment revenue was 6.7 million during the current quarter as compared to 5.6 million in the prior year. Our Biosystems segment revenue is made up of instruments and consumables sales. The instrument business continued to perform well during the quarter. Instrument revenues were 4.9 million compared to 4.2 million in the prior year. Instrument sales remained strong in Europe and the Asia-Pacific RIM, while North American sales continue to be weak from a historical perspective. Going forward we continue to see strength in Europe and indications of expanding demand in North America and other areas of the world.

Our average selling products to end-users for our WAVE Systems remains relatively unchanged; and we have not encountered price erosion. Consumable revenues included in the Biosystems segment were 1.8 million during the quarter as compared to 1.4 million in the second quarter of the prior year. Revenues in our nucleic acid segment were 1.8 million in the current quarter versus 3.8 million in the second quarter of 2002. As indicated earlier, we continue to struggle with sales visibility for our nucleic acid products.

This decrease is largely due to a decline in current demand from our bio pharma and pharma customers for our phosphoramidate products. As we have noted in our previous filings with the SEC, we may see large variations in revenues for this segment based upon the degree of success these customers experienced in their own product development.

Additionally, our new oligos synthesis facility in Boulder has begun cGMP production. While the revenues generated by products produced in this facility have been relatively limited to date, we expect that this facility will begin to contribute to revenues on a more significant basis in the second half of 2003.

Gross margins for the quarter were 30 percent compared to 52 percent in the prior year. Margins were adversely affected by the preproduction manufacturing costs related to our oligos synthesis business in Boulder, Colorado and the overall underutilization of nucleic acid production capacity. Biosystems margins remained consistent and within historical averages. This portion of the business had gross margins of 56 percent. Nucleic acid gross margins were a -65 percent as a result of our preproduction costs in Boulder and other fixed manufacturing cost being absorbed across a lower revenue base.

Total operating expenses were 7.1 million. The current quarter included a restructuring charge related to our expense reduction efforts of 474,000. This compares to total operating expenses of 8.9 million in the second quarter of 2002. There were no restructuring charges included in the second quarter of 2002 operating expenses. On this GAAP basis, operating expenses decreased over 20 percent year-over-year. More specifically selling, general and administrative expenses declined 29 percent year-over-year, and research and development expenses declined 20 percent. We may incur additional restructuring charges in the second half of the year as we continue to challenge our expense structure. Our net loss for the quarter including the restructuring charges was 4.7 million or 20 cents per share as compared to 4 million or 17 cents a share in the prior year.

Now I will discuss briefly our year-to-date results. Year-to-date revenues were 18 million versus 19.3 million in the prior year. This represents a 7 percent decrease year-over-year. The Biosystems segment year-to-date revenue was 13.6 million versus 11.6 million in 2002 or a 17 percent increase year-over-year. Year-to-date revenues in our nucleic acid segment were 4.4 million versus 7.7 million in revenues in 2002 or a 43 percent decrease. Year-to-date gross margins were 35 percent as compared to 52 percent in the prior year. Biosystems' year-to-date margins remained consistent and within historical averages at 57 percent. Nucleic acid year-to-date margins were a -35 percent.

Year-to-date total operating expenses in 2003 were 14.3 million and include restructuring charges related to our expense reduction efforts of 738,000. This compares to year-to-date total operating expenses of 17.6 million in 2002. Again, there were no restructuring charges included in the 2002 operating expenses. On this GAAP basis, operating expenses decreased 19 percent year-over-year. More specifically selling, general and administrative expenses declined 25 percent year-over-year, and research and development expenses declined 18 percent. Our year-to-date net losses including the restructuring charges were 8.3 million or 35 cents a share as compared to 7.3 million or 31 cents in the prior year.

Now I would like to discuss our cash flow and our cash utilization. We ended the quarter with $3 million in cash. Cash utilized in the second quarter was 3.4 million, for a year-to-date total cash utilization of 10.3 million. Net funds used during the quarter in operating activities were approximately 3.6 million, which included funding a net operating loss of 4.7 million offset by non-cash charges of depreciation and appreciation and changes in other working capital amounts.

We made progress in reducing our receivables days outstanding and improved our overall receivables aging. We were disappointed, however, that we were unable to significantly reduce inventory levels. Converting our working capital into cash remains a focus area. As such, we will continue to focus on receivable collections and are hopeful that we will be able to significantly reduce inventory levels during the remainder of 2003.

We also utilized 1.2 million in the quarter for capital expenditures. These expenditures primarily related to our nucleic acid expansion plant in Scotland and our oligos emphasis manufacturing facility in Boulder. This level of expenditure is down from the first quarter level of 3.7 million. As the current phases of facility expansions have been substantially completed, we expect further reductions in capital expenditures during the remainder of 2003. Cash provided by financing activities in the quarter in the form of advances on our line of credit totaled 1.3 million.

We will start the quarter with $3 million in cash. The expense reductions mentioned earlier are expected to help reduce our operating cash burn rate. We are looking at utilizing approximately 2 to 3 million to support operating activities in Q3 2003. This range is dependent upon our ability to achieve both our revenue and expense objectives along with managing effectively our other working capital components, particularly inventory and Accounts Receivable. Capital expenditures for the remainder of the year should be in the $1.3 to $2 million range. This would give us total capital expenditures for the year of between 6.2 and 6.9 million. This is a reduction of 1.5 to 2.2 million compared to the capital expenditure budget noted in our 10-K.

As previously discussed, during the quarter we closed our $5 million operating line of credit. This line of credit is currently available to us and to the extent of available collateral for the line where we utilize as liquidity demands dictate. We are currently in the process of offering a sale leaseback transaction for one of our manufacturing facilities. We believe that such a transaction is appropriate and will allow us to remonetize this significant asset, thereby providing additional liquidity.

Based upon our current projections, we believe that current cash balances along with our line of credit and the net proceeds of the proposed sale leaseback transaction will provide us adequate liquidity. These projections may or may not be realized based upon actual operating results and changes in working capital. Thus during or after this period, if our existing cash or short-term investments, cash generated by operations and available borrowings under credit arrangements are insufficient to satisfy our liquidity requirements, we will take appropriate actions as needed.

A little discussion here of an outlook. It remains difficult projecting revenues. We are encouraged by the pickup in interest over the last couple quarters in our Biosystems business and expect this segment to remain solid. We believe that revenues from our nucleic acid segment have bottomed out and anticipate that we will see revenues from this segment begin to expand in the second half of 2003. Gross margins on the Biosystems group remained strong, and we believe we will continue in the historic ranges we have experienced. The nucleic acid business gross margins will continue to be adversely impacted by the Boulder manufacturing costs and the overall under utilization of manufacturing capacity. We see this impact lasting at least through the end of this year. We continue our efforts in reducing operating expenses and believe that they will likely decline compared to the second quarter of 2003 exclusive of foreign currency effects.

At this time, I would like to turn the call back to Collin.

At this time, I would like to turn it over to open the floor to any questions.

(CALLER INSTRUCTIONS). It looks as though we have no questions.

Okay. Thank you very much. I would like to thank everybody for joining us for the review of the Q2 results. I would like to turn it over to Mike.

I will mention one more time that the call is being archived, and it will be available for listening to either over the Internet or on a dial-in basis. Information as to how to do that is contained in our press release issued this morning. You can refer to that, or you can visit our Website, www.transgenomic.com.

Also for the benefit of any who may have joined us after the 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 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. And in addition, our presentation today may have included some non-GAAP financial measures. You can refer to our Website for additional information regarding any non-GAAP measures which may have been discussed.

With that, I would like to thank you all for listening to the call. Thank you.