Precipio Inc (PRPO) 2004 Q3 法說會逐字稿

Good day. All site are now on the conference line in a listen-only mode. I would like to introduce one of your hosts, the Vice President, Secretary, and Treasurer of Transgenomic, Mitch Murphy. Go ahead, please, sir.

Thank you. I'd like to welcome all participants to our third quarter 2004 conference call. And also to any who may be listening on the webcast. I'm Mitch Murphy, Vice President, Secretary, and Treasurer for Transgenomic. Hopefully everyone's had a chance to look over the press release we issued earlier today. This conference call will be archived and accessible via telephone and Internet. Please refer to our press release from November 12, or go to our website at Transgenomic.com for details. First off here I'll take care of a few necessary 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 subject to certain factors, risks, and uncertainties described from time to time in Transgenomic 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. With that I'll turn the call over to Collin.

Thanks, Mitch. I'd like to welcome everybody joining us on the conference call today. I'd like to first make a few comments in relationship to the sale of our assets of our Boulder facility and the just announced expense reduction plans. And then I'll turn the call over to our CFO, Mike Summers, who will discuss our Q3 and year to date financials in detail. First, the Boulder transaction, coupled with our expense reduction initiative, positions the Company to generate positive operating cash flow in 2005. These steps are expected to reduce our employee base by approximately 90 people and total expenses by approximately 10 to 12 million annually. The majority of the personnel eliminations associated with our expense reduction plan will be completed by the end of November. As you have seen in our press release of today we are pleased to announce significant progress toward our objective of evaluating strategic alternatives for our nucleic acids business. This process culminated with the sale of the assets of our oligonucleotide manufacturing facility in Boulder, Colorado, to Eyetech pharmaceuticals and resizing of our Glasgow operations. Total consideration for the Eyetech transaction included roughly $3 million in cash and the assumption of approximately $2.3 million worth of ongoing facility and equipment leases, which totaled a total transaction value of approximately 5.3 million. The capital generated by the sale will be used for general working capital purposes and to repay a portion of our existing line of credit. Essentially all personnel employed at the facility in Boulder will be retained by Eyetech.

In addition to this sale, we have also resized our Glasgow operations consistent with near-term revenue expectations. We believe these efforts will now eliminate the significant negative impact our SNA business has historically had on our gross margins. With these and other planned biosystem manufacturing cost reductions beginning in 2005 we anticipate significant improvements in our gross margins going forward. Another significant part of our expense reduction plan will impact all areas of operating expenses. We expect to see a reduction in operating expenses of between 5 to $7 million annually. These expense reductions include the closure of two domestic R&D facilities associated with the Company's synthetic nucleic acids business and two European field offices. We believe these undertakings are transforming events in the evolution of Transgenomic to a profitable commercial entity and a leader in its market space. With this new expense structure in place we are now positioned to implement our growth strategy for our biosystems business segment. This growth strategy employs three primary initiatives. First, continued focus on meeting the expanding markets in Asia Pacific for our WAVE instruments and related products. Second, the launch of new consumable products that satisfy existing needs in our customers' work flow. And third, continued investment in the growing market for our discovery services in support of our pharmaceutical customers preclinical and clinical trial needs.

With large scale genome sequencing efforts having subsided significantly and a variety of technologies competing fiercely for the snip gen target market there still exists only a very limited number of solutions that address the need to -- and analyze heterogenous samples with high sensitivity at the molecular genetic level. As is required for detection of sematic mutations associated with cancer or in the analysis of complex and changing populations of bacteria or viruses. We believe our WAVE technology is unmatched in its ability to detect rare mutations in settings such as these and its high level of analytical sensitivity has significant implications. It is now incumbent upon us to ensure the WAVE system's strong value proposition to continue to drive penetration of new and emerging markets and we are optimistic about ongoing opportunities to do so. Geographically we continue to see strong demand for our products in Europe and Asia Pacific with the renewed development of our pipeline of prospects in North America. Finally, as our product portfolio continues to grow and the accomplishments of our customers continue to attest to the value of our technology we remain well positioned to capitalize on such trends with a broad geographic market reach. With that, I'd like to turn the call over to Mike Summers and after his review of Q3 financials, we'll entertain questions from the audience. Go ahead, Mike.

Thank you, Collin. Let me start by summarizing our third quarter and year to date financial results. For the third quarter of 2004 we generated a net loss of 8.4 million on revenues of 8.2 million and gross margins of 1.3 million. The third quarter net loss included a noncash charge of 2.9 million related to a loss on extinguishment of debt that I'll provide more details on later. For the nine months ended September 30, 2004, we generated a net loss of 27.4 million on revenues of 25.8 million and gross margins of 7.4 million. The year to date net loss included noncash charges totaling nearly 15 million, including 12 million related to an impairment of our synthetic nucleic acids operating segment and 2.9 million related to the loss on extinguishment of debt. I will now discuss third quarter results in more detail. Revenues totaled 8.2 million compared to 7.5 million for the same period of 2003. Revenues from our biosystems and nucleic acids operating segments totaled 5.5 million and 2.7 million compared to 6.1 million and 1.5 million for the same period in the prior year. Sales from our biosystems operating segment for the third quarter of 2002 included bio instrument sales of 2.9 million, bio consumable sales of 2.1 million, and discovery services sales of $512,000. Third quarter bio instrument sales were unfavorable compared to prior year while both bio consumables and discovery services generated sales increases. The growth in bio consumable sales is due to our growing installed base of WAVE systems and introduction of new consumable products as well as various product line extensions that target specific uses of these products.

Increased discovery services revenue is attributable to a focus on providing genetic variation discovery and analysis services to our pharmaceutical base customers. Sales from our nucleic acids operating segment for the third quarter of 2004 included building block sales from our Glasgow, Scotland, facility of 2.3 million and oligonucleotide sales of 412,000 from our Boulder, Colorado, facility. Third quarter building block sales were favorable compared to prior year due largely to increased sales to Geron Corporation. Oligonucleotide sales remain relatively flat compared to prior year. As we look forward to the fourth quarter of 2004 we expect bio instrument sales to rebound to more historic levels and we also expect continued increases in our bio consumable and discovery services product lines. Sales from our nucleic acids operating segment will decline as a result of the sale of our oligonucleotide manufacturing facility and expected slowness in our custom building block business. Gross margins for the third quarter of 2004 were 1.3 million compared to 775,000 for the same period of 2003. Excess manufacturing capacity in our nucleic acids operating segment continued to adversely affect gross margins. As a result of the sale of our oligonucleotide manufacturing facility and the restructuring plan implemented in November 2004, we anticipate that our cost of goods sold for our nucleic acid products will be significantly improved. However, until demand for our nucleic acid products increase we will continue to have excess manufacturing capacity and lower than expected margins.

Operating expenses for the third quarter of 2004 were 6.1 million compared to 6.7 million for the same period of 2003. The reduction related primarily to lower research and development costs. Other expenses for the third quarter of 2004 were 3.7 million compared to 105,000 for the same period of 2003. Other expenses include losses on sales of available for sale securities, interest expense, and a loss on debt extinguishment. The difference related primarily to increased interest expense in the 2.9 million noncash loss on debt extinguishment. The loss on debt extinguishment was a noncash charge related to certain modifications to our Loris facilities that were treated as extinguishment for financial reporting purposes since the change in present value of expected cash flows between the original and modified agreements was greater than 10%. On August 31, 2004, Loris agreed to extend our borrowing base waiver on the credit line through March 19, 2005. In addition, Loris deferred certain payments due under the term note and reduced the interest rate on both the Loris loans to 0% for any day the closing price of the Company's common stock is at or above $1.75 per share. In return the Company lowered the conversion price on each of the Loris loans to $1 per share and issued a warrant to Loris covering an additional 400,000 common shares at an exercise price of $1.25 per share.

I will now briefly discuss year-to-date results. Revenues totaled 25.8 million compared to 25.5 million for the same period in the prior year. Revenues from our biosystems and nucleic acids operating segments totaled 18.4 million and 7.4 million compared to 19.7 million and 5.8 million for the same period in the prior year. Sales from our biosystems operating segment for the nine months ended September 30, 2004, included bio instrument sales of 10.8 million, bio consumable sales of 6.3 million and discovery services sales of 1.4 million. Year to date bio instrument sales were unfavorable compared to prior year while both bio consumable and discovery services generated sales increases. Sales from our nucleic acids operating segment for the nine months ended September 30, 2004, included building block sales from our Glasgow, Scotland, facility, of 5.6 million and the oligonucleotide sales of 1.8 million from our Boulder, Colorado, facility. Gross profit for the nine months ended September 30, 2004 were 7.4 million compared to 7 million for the same period of 2003. Excess manufacturing capacity in our nucleic acids operating segment continued to adversely affect gross margins. As a result of the sale of our Boulder, Colorado, facility and the restructuring plan implemented in November 2004, we anticipate that our cost of goods sold for our nucleic acids products will be significantly improved. However, until demand for our nucleic acid products increase we will continue to have excess manufacturing capacity and lower than expected margins. Operating expenses for the nine months ended September 30, 2004, were 30.2 million compared to 21.1 million for the same period of 2003. The increase related primarily to a noncash impairment charge we recorded during the second quarter of 2004 associated with our nucleic acids operating segment. Other expenses for the nine months ended September 30, 2004, were 4.7 million compared to 261,000 for the same period of 2003. Again, the difference related primarily to increased interest expense and the 2.9 million noncash loss on debt extinguishment that I previously discussed.

Now I'd like to address our liquidity position. As of September 30, 2004, we had approximately 1.1 million in cash and cash equivalents, plus 400,000 available under our credit line. Today, we have cash and cash equivalents of 500,000, plus an additional 2.8 million available under our credit line. The changes from September 30, 2004, relate primarily to the sale of our oligonucleotide manufacturing facility in Boulder, Colorado. I would like to briefly summarize our short-term outlook. We expect that existing liquidity is sufficient to meet our cash needs for the remainder of 2004 and into 2005, and we are positioning ourselves to generate net positive cash flows in 2005. To accomplish this objective it is essential that we achieve revenue growth in our biosystems business unit and effectively execute and generate the benefits inherent in our restructuring initiatives. As previously mentioned, we expect biosystems sales to rebound to historical levels and we expect the cost savings associated with our restructuring initiatives to reduce expenses by 10 to $12 million annually. These projections may or may not be realized based upon actual operating results and capital requirements. Thus if our existing cash balances, cash generated by operations and available borrowings under our credit arrangements are insufficient to satisfy our liquidity requirements we may need to sell additional equity or debt securities or obtain additional arrangements, sell certain assets, or further reduce expenses. At this time I'd like to turn the call back to Collin.

Thanks, Mike. With that, I'd like to turn the floor open to questions.

At this time, if you would like to ask a question, please press the star followed by the 1 on your touch-tone phone. To withdraw yourself from the queue at any time you may press the pound sign. Once again, please register for a question or comment by pressing the star and 1 now. One moment while we await our first registrant. It appears that due to a very thorough presentation today we have no questions from our audience.

Okay. Thank you. Mitch?

Thanks, Collin. 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 a dial-in basis. The information as to how to do that is contained in our November 12, press release. You can refer to that release or you can visit our website at Transgenomic.com. Also, for the benefit of those who may have joined us after this call was already in progress, I'll 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'd like to thank all for listening and participating in the call.

Ladies and gentlemen, this does conclude today's teleconference. We appreciate your participation, and we hope you have a wonderful day.