Precipio Inc (PRPO) 2003 Q4 法說會逐字稿

Good day, all sides have been transferred into the main conference. At this point, I'd like to turn the conference over to your moderator, Mr. Mitch Murphy, go ahead, please.

Thank you. I'd like to welcome all participants to our fourth-quarter 2003 conference call. And also to anyone listening on the Webcast. I'm Mitch Murphy, VP and Secretary and Treasurer for Transgenomic. Hopefully, everyone's had the chance to look over the press release that we issued earlier today.

This call will be archived and accessible by both telephone and internet. You can refer to our press release issued this afternoon, or go to our website at www.transgenomic.com for details.

Before we get started with the call itself, I'll take a couple of minutes here to take care of some legal issues regarding forward-looking information that may be given during this call. Then I'll 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 subjects to certain risk factors, risks and uncertainties, described from time to time in Transgenomic, Inc.'s reports to the SEC. Any change in such factors, risks and uncertainties may cause the actual results, events and performance to differ materially from referred to in such statements. Accordingly, the Company claims protection of the Safe Harbor for forward-looking statements contained in the Private Securities and Litigation Reform Act of 1995, with respect to all such statements.

With that being said, I'll turn the call over to you, Collin.

Thank you, Mitch. Good afternoon, everyone. As detailed in our press release and attached financials, our fourth quarter revenues increased 13 percent sequentially, in line with previous guidance given by the Company.

We also continue to achieve incremental reductions in SG&A and R&D expenses on a sequential basis. We believe that we have made progress in several important fronts in the past quarter. And we continue to vigorously look at opportunities in improving our operating results.

In our Biosystems business unit, we continue to expand our installed base of WAVE systems, and importantly, we have posted strong consumer growth on both a year-over-year and sequential quarterly basis.

We continue to focus, now, on two strategic objectives, which include -- building our product portfolio and expanding our distribution channel.

Our efforts in building our product portfolio include the introduction of new consumer products, such as our Optimase proofreading (ph) Polymerase, which allows us to benefit from a larger portion of our customers workflow. And our surveyor Mutation Detection Kit, which offer a platform independent approach to mutation detection.

In addition to building our consumables product portfolio, we also have focused on building are instrument product portfolio. In January, we announced two such agreements, one with Nanogen and the other one with Spectramatics (ph) which enable us to distribute their instrument platforms in the European market. We believe all parties will benefit from both the opportunity to offer these products to our existing customer base, as well as our efforts going forward to promote this portfolio of products to future customers.

In addition to building this deeper product portfolio to address our current and future customer needs directly, we continue to build our distribution infrastructure. In the fourth quarter, we signed a distribution agreement with Fisher Scientific for the sale of some of our consumer products, and also added to our distributor network in the emerging market territory.

We have a positive outlook regarding ongoing opportunities to enhance the market presence of our WAVE system, Transgenomic's flagship product line.

With continued expansion of our base of over 1,000 WAVE systems installed in laboratories around the world, our customers continue to display significant productivity in the form of more than 850 published papers and presentations at key scientific meetings.

For example, at the recent American society of Hematology meeting in December, customers made presentations describing the analysis of genes encoding important drug targets for leukemia, in which the mutations detected could potentially impact drug efficacy, or the emergence of drug resistance. Our WAVE platform, particularly the WAVE HS (ph) system -- offers the analytical sensitivity required to scan or score for mutation that may be present in only a small percentage of cancer cells. Yet, may have important implications for disease progression, response to therapy, or emergence of drug resistance.

It is this unique capability that also plays prominently in the escalating success of our discovery services business. In which we offer laboratory services aimed at discovering and analysis of Genomics biomarkers in the setting of translational and clinical research.

Our value proposition in this area has resonated particularly strongly with leading developers in the oncology therapeutics arena. In December, we announced establishment of a massive services agreement with Novartis (ph) Oncology group. We believe we will benefit from increasing interest in activities of this nature, and are working to capitalize on emerging market opportunities in this area.

Finally, although we have discussed in previous quarters the challenges inherent in predicting revenues in our nucleic acids business unit, the sequential increase in fourth quarter revenues is consistent with our belief that nucleic acids revenues hit bottom at third quarter. We have scaled expenses at our Glasgow, Scotland facility for manufacturing of nucleic acids building blocks to be in line with conservative estimates of demand.

And, our Boulder, Colorado facility -- that manufactures specialty (indiscernible) nucleotides under CGMP (ph) conditions, began to generate revenue in 2003, with fourth quarter revenues sequentially higher.

We believe we are well-positioned to leverage our expertise in nucleic acid chemistry to support the commercialization of next-generation synthetic nucleic acid molecules for use in research, diagnostics and therapeutic settings.

With those initial comments, I would like to now turn it over to Mike Draper, our CFO, where Mike will discuss our financials in greater detail. And we will then come back for a question-and-answer session. Mike?

Thanks, Collin, and good afternoon. I would like to start with a few high-level comments in regards to our fourth quarter results.

We're pleased with our overall improvement in revenues and gross margins as compared to the third quarter of 2003. As Collin noted previously, revenues for the quarter increased sequentially by over 13 percent -- in line with our prior revenue guidance of a 10 to 15 percent sequential increase.

As compared to the third quarter 2003, our Biosystems unit revenues increased over 7 percent and our nucleic acid unit revenues increased over 33 percent.

Gross margins for the quarter were 31 percent as compared to 10 percent in the third quarter of 2003. We are encouraged by the continued revenue strength shown in our Biosystems operating segment, and the sequential revenue increase shown in our nucleic acids unit.

Additionally, we continue to make progress in controlling and reducing operating expenses.

Selling general and administrative expenses were 4.1 million in the current quarter, as compared to 6.1 million in the fourth quarter of 2002, and 4.3 million in the third quarter of 2003.

Research and development expenses were 2.2 million as compared to 3.3 million in the fourth quarter of 2002, and 2.4 million in the third quarter of 2003. These year-over-year declines represent decreases of over 30 percent.

Now, I will discuss our fourth quarter results as compared to the prior year in more detail.

Revenues in the fourth quarter were 8.5 million versus 9.2 million in the prior year. This represented a 7 percent decrease year-over-year. Breaking down the total revenues -- Biosystems segment revenues were 6.4 million during the quarter versus 7.2 million in 2002. Instrument and related service revenues were 4.4 million as compared to 5.7 million in 2002. While this decrease of 24 percent is significant, it should be noted that the fourth quarter 2002 instrument and service revenues represent the highest revenue quarter in the past two years for that portion of our business.

Bio consumable revenues were very strong in the quarter, showing a 47 percent increase to 2.1 million from 1.4 million in 2002. Additionally, bio consumable revenues were up sequentially from third quarter 2003 by over 10 percent, representing the eighth consecutive quarter of sequential revenue growth. We continue to believe that the demand for our Biosystems unit products is strong, and we expect to continue expanding sales of our bio consumables due largely to growth in sales of our new product offerings, such as opt maze and the surveyor mutations detected kits.

Revenues in the nucleic acid segment were flat as compared to 2002 at 2.1 million. Our new Oligo synthesis facility in Boulder began to generate revenues in the current year, and has shown steady increases each quarter in 2003. We expect this trend to continue. Revenues from products and services related to the Boulder facility were approximately 600,000 in the fourth quarter of 2003.

We continue to struggle with sales visibility for our nucleic acid products -- more specifically, our chemical building block 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 our customers experience in their product development.

We would like to move to gross margins now.

Overall, the gross margins for the quarter were 31 percent compared to 41 percent in the prior year. Margins were adversely affected by excess manufacturing capacity in our nucleic acid business unit. Biosystems margins remained consistent and within historic averages. This portion of the business had gross margins of 57 percent in the fourth quarter of 2003 -- unchanged from 2002. Nucleic acid gross margins were a -48 percent as compared to a -16 percent in 2002. These margins are the direct result of our excess manufacturing capacity at both our Glasgow and Boulder facilities.

We will move to operating expenses. Total operating expenses were 11.1 million, including a goodwill impairment charge of 4.8 million. This compares to a total operating expenses of 12.7 million in the fourth quarter of 2002, which included 3.3 million of restructuring charges.

Breaking this down, sales, general and administrative expenses were 4.1 million in the current quarter as compared to 6.1 million in the fourth quarter of 2002.

Research and development expenses were 2.2 million as compared to 3.3 million in the fourth quarter of 2002. Again, these year-over-year declines represent decreases of over 30 percent.

The $4.8 million goodwill impairment charge is a result of our annual goodwill impairment tests as required by statement of financial accounting standards 142. Specifically, we engaged in external valuation firms to form performed our annual impairment test. The test is a two-step process whereby a fair value of our two reporting units is determined and compared to the book value of that unit. If the indicated fair value is less than the book value, then the potential impairment is indicated and must be quantified in step two of the process. In the case of our nucleic acid business unit, a potential impairment was indicated and quantified at 4.8 million. This charge is recorded as an operating expense and a reduction to the goodwill carrying value.

We continue to challenge ourselves to further control and reduce our operating expenses, and look for further declines in our total operating expenses going forward.

Our loss for the quarter was 8.5 million or 32 cents per share, as compared to 9.3 million or 40 cents a share in the prior year. Again, the $8.5 million loss includes the goodwill impairment charge of 4.8 million. The $9.3 million loss in the prior year includes restructuring charges of 3.3 million.

Now I will briefly discuss our year-to-date results

Year-to-date revenues totaled 34.1 million versus 37.6 in the prior year. This represented a 9 percent decrease year-over-year.

Biosystems segment revenues for the year were 26.2 million, as compared to 24.2 million 2002, or an 8 percent increase year-over-year. Total revenues for the nucleic acids segment were 7.9 million as compared to 13.3 million in 2002, or a decrease of 41 percent. This decrease is largely due to a decline in current demand from our biopharma and pharma customers for our Phosphoramidites products. As we have noted in our previous filings, we may see large variations in revenues for this segment based upon the degree of success from these customers.

Year-to-date gross margins were 28 percent as compared to 48 percent in the prior year. Biosystems' margins remain consistent and within historical averages at 57 percent. Nucleic acid margins for the year were a -65 percent.

Total operating expenses in 2003 were 32.1 million, again, including the 4.8 million goodwill impairment charge and restructuring charges related to our expense reduction efforts of 738,000. This compares to 2002 operating expenses of 39.3 million, which included restructuring charges of 3.3 million.

On a GAAP basis, operating expenses decreased 18 percent year-over-year. More specifically, sales, general and administrative expenses for the year were 17.2 million as compared to 23.7 million in 2002.

Research and development expenses were 9.3 million as compared to 12.2 million in 2002. These year-over-year declines represent declines of 27 percent and 24 percent respectively.

Our year net loss, including the impairment charges and restructuring charges, was 22.8 million or 93 cents, as compared to 21.4 million or 91 cents in the prior year.

Now, I would like to discuss our cash and liquidity situation.

We ended the quarter with 1.2 million dollars in cash and cash equivalents. Additionally, we had approximately $3 million outstanding on our line of credit.

In regard to our liquidity position and access to cash -- there were a number of important positive developments in the fourth quarter of 2003, and thus far in 2004.

First, we previously announced that we had entered into a term sheet agreement outlining the general terms of our proposed sale and leaseback of our Glasgow manufacturing facility. As we progress in the documentation of the sale leaseback transactions, certain elements of the agreement became unacceptable to us. As a result, we secured an alternative financing vehicle, and in February of this year, Loris (ph) Funds issued a proposal to us to expand our relationship through a three-year $2.75 million convertible term note. We determined that that convertible note was a more attractive financing vehicle as compared to the sale leaseback. As result, we entered into the convertible note with Loris. The transaction closed on February 19.

The debt is convertible into Transgenomic common stock at a fixed conversion price of $2.61 per share. Proceeds from the note were used to retire our long-term mortgage note for the Glasgow production facility that was held by the Royal Bank of Scotland, and will also provide additional working capital.

Net proceeds available from the note after the repayment of the Royal Bank of Scotland debt, and the transaction related expenses are approximately $750,000.

Additionally, we previously announced that we had entered into a new revolving line of credit agreement with Loris funds. As expected, this facility has provided us with much more flexibility and access to funds as compared to our prior line of credit. This new line is a $7.5 million facility based upon a calculated borrowing base of eligible accounts receivable in inventory.

In February of this year, Loris provided us with a letter waving the borrowing base limitation on a line of credit for the remainder of 2004. This is significant, as it means that the Company has access to the full $7.5 million credit facility without limitation as to the calculated borrowing base.

Based upon our current financial projections, we expect to meet our liquidity needs with our current cash, and continued focus on converting accounts receivable and inventory into cash, funds provided by the new convertible note, and additional advances on our line of credit. 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 and short-term investments, cash generated by operations, and available borrowings under credit agreements, are insufficient to satisfy our liquidity requirements, we will take appropriate actions as needed.

We would like to provide a little outlook now.

Specifically, however, we will not be providing revenue guidance at this time. However, we will make a few comments in regards to our specific units.

We are encouraged by the continued strong interest in our Biosystems business, and expect this segment to remain solid. More specifically, our previously announced distribution agreements with Nanogen and Spectrametics (ph) are expected to benefit revenues in this business unit in the second half of 2004.

In our third quarter conference call, we noted that we believe that revenues from our nucleic acid unit had bottomed out and had begun to rebound. While we saw revenues from this segment expand in the fourth quarter, we remain cautious in regard to projecting our nucleic acid year revenues.

Gross margins on the Biosystems remain strong and we believe will continue to be within historical ranges. The nucleic acid business gross margins will continue to be adversely impacted by excess manufacturing capacity. Improvement in these margins will be largely dependent upon increases in revenue.

We expect to see the impact of the excess capacity lasting through 2004.

We continue our efforts in reducing operating expenses and believe they will likely decline compared to the fourth quarter of 2003.

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

Thank you, Mike. At this time I would like to turn the floor over and open it up for questions.

Thank you. This is the conference operator. (Operator Instructions). Matt Arrens (ph), Comp Investment Advisers (ph).

Mike, could you go back and go over the discussion of the line of credit. I was not certain here -- you said that you have 3 million less in the line --?

No, Matt. We had 3 million outstanding on the line at the end of the year. Okay?

Okay. And that was at the end of the year. And you said the terms are such that you have the ability to go 7.5 million into that line?

That is correct. That is based upon the waiver we recently received from Loris. Previous to that, it was a -- lower of 7.5 million, or the calculated borrowing base. Which consisted of eligible receivables and inventory. They waived that restriction allowing us access to the full 7.5 million for the remainder of 2004. Should we need it.

And then the convertible note -- was that -- was that 2.5 million?

2.75 million.

And so that's in addition to that line?

Yes, that's correct. We did the convertible note as an alternative to the sale leaseback of the Glasgow facility. The terms of the sale leaseback -- there were certain items introduced into that agreement that we found unacceptable and felt that this convertible note was a better alternative.

Moving on to the -- thank you for that clarification. Moving on to the outlook. Did you give any guidance at all in terms of revenues that I missed there? Or are you feeling things are adequately uncertain right now -- that you cannot give any direction, even if it is sequential growth or whether we're looking for the first quarter to be sequentially down?

Matt, we did state that we were not going to give specific revenue guidance at this time. But I can tell you that, based upon our current outlook, we do look at the potential for sequential growth in the first quarter.

Okay. If you could speak a little bit to it -- it's kind of difficult, if you look back in the history of revenues and what kind of sequential factor there is, because -- you went through, first, a stage where you were growing from a very small base, so you were seeing growth every single quarter. And then you got into the point where results were muddied by the rapidly changing environment. But, in a more normalized environment, would you typically see revenues sequentially down from the year-end to the March quarter? Or would you typically see growth between those two quarters?

I think, Matt, you typically see growth in that quarter.

Okay. So there's nothing seasonal that should mean that we should not see growth there?

I don't believe so, no.

Okay. And then the last question that I have -- is it possible for you to give us a little more clarity as we look at the two businesses -- and I appreciate the detail that you give us on both sides of business, that's always helpful. Could you give us a little more clarity -- if you look at the Biosystems business as a self-standing business, and eliminate the other side of the business, what do you see as a reasonable run rate that you would need to have for that business to be cash flow positive?

That would be -- we're looking at guidance here, Collin, do we want to get into that type of discussion?

And maybe, if not, maybe I can turn the question a little bit differently to make it so it's not as much guidance -- but maybe -- you've made, obviously, you've made improvements in expense reduction -- fairly dramatic expense reduction. It sounds like there are more improvements that we are going to see throughout this year. I am just tying to get a ballpark feel for -- if you could have 30 million in revenues on that side of the business, could you be cash flow positive at 30 million? Or maybe a ballpark -- does it have to be significantly higher than that? Or maybe just a feel in that sense?

No, Matt, I think that if you're asking if we feel we could be cash flow positive at 30 million on Biosystems revenue, looking at just that business unit, the answer would be yes.

Alright. That's all I have, thanks, guys.

(Operator Instructions). We have no further questions from the phones at this time. I will turn the program back to (indiscernible).

Thanks. This is Mitch Murphy again. I will close the call up here. I wanted to mention one more time, that this call is being archived and it will be available for listening too 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 afternoon. You can refer to that, or you can also visit our website -- Transgenomic.com.

Also, for the benefit of any who have 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. With that, I would like to thank you all for listening to the call.

This concludes today's teleconference program. We do appreciate your participation. You may disconnect at (indiscernible). Thank you.