Precipio Inc (PRPO) 2005 Q1 法說會逐字稿

Good day. All sites are now online in a listen-only mode. At this time, I'd like to turn the program over to your moderator, Mr. Mitch Murphy. Go ahead, please.

Thank you. I'd like to welcome all participants to our first-quarter 2005 conference call and also welcome any who may be listening on the webcast. Hopefully, you've had a chance to look over the press release we issued earlier today. This call will be archived and accessible via telephone and Internet. Please refer to our press release from yesterday or go to our website at Transgenomic.com for details.

I've got a couple of necessary legal issues that I'll take care of here regarding forward-looking information that may be given during this call. Then I will turn the call over to Collin D'Silva, our Chief Executive Officer. 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's reports to the Securities and Exchange Commission. Any change in such factors, risks and uncertainties may cause the actual results, events or 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.

Now, I'd like to turn the call over to Collin.

Thanks, Mitch. Thank you all for joining us today. I'd like to make a few comments first and then turn it over to Mike Summers, our CFO, to review the financial information for the first quarter of 2005 in greater detail.

The first quarter of 2005 results demonstrate the effect of our repositioning that we undertook in the fourth quarter of 2004. Our BioSystems business continues to demonstrate strength and positive trends for future growth.

2004 was a year of transition for Transgenomic, as we undertook a number of actions that were critical to position the Company for future growth and profitability. We exited the oligonucleotide-manufacturing business and downsized our synthetic nucleic acid building block business to align it with near-term revenue potential. In this segment, we continue to focus on some of our primary customers' needs, such as our recent announcement in providing the next generation of advanced chemistry for Geron Corporation. This continues to show our value proposition in that area for novel nucleic acid chemistry products.

Importantly, as we renewed our focus on our BioSystems business and its renewed focus is yielding encouraging early results in the form of a return to sequential revenue growth in the last two quarters -- in addition, the contribution of consumable products and services to our revenue stream continues to be strong, representing approximately a 5% increase in revenue for the first quarter of '05 compared to the same quarter in '04.

Our domestic Discovery Services business continued to post strong revenue growth in the first quarter on both a sequential and year-over-year basis with the majority of these revenues coming from pharma and biopharma customers working primarily in the oncology space.

Our growing BioSystems revenues from an increasingly diverse mix of market segments, coupled with the resizing of our expense structure, allows us to focus on driving toward profitability and positive cash flow from operations in 2005. Continued upcoming validation from our customer base will demonstrate the value proposition of our technology in disease-management related to target therapeutics, primarily in the oncology area. In addition, we will be adding new revenue drivers in our service offerings, directed in the sphere of personalized medicine. These services will continue to leverage our unique and proprietary technology and product offerings. We remain confident that our renewed focus on revenue growth, coupled with positive operating cash flow from our global operations, will drive increased shareholder value.

As you'll hear from Mike Summers' upcoming discussion of our Q1 '05 results, we've made significant strides towards positive cash flow from operations. I would like to now turn it over to Mike and after his review of Q1 financials, will entertain questions from the audience. Mike?

Thank you, Collin. Good morning.

If I were forced to use one word to describe our first-quarter 2005 results, it would be encouraging, encouraging because they reflect, among many other positive things, significant progress towards accomplishing a major objective of generating positive operating cash flows. Net cash flows used in operating activities during the quarter totaled less than 250,000, which included cash paid of approximately 940,000 to settle obligations associated with our 2004 restructuring plan. The improvement in this critical benchmark over all quarters since we became public is measured in most cases in multiple of millions. Revenue growth in our BioSystems operating segment and significantly reduced expenses were the driving forces behind this accomplishment.

Now, let me move onto the detailed results for the quarter. Revenues -- net sales for the quarter ended March 31, 2005 totaled 7.4 million, representing a 15% decrease from the same period in 2004 as a result of an 8% increase in sales in our BioSystems operating segment offset by a mostly-expected 80% decrease in sales in our nucleic acids operating segment. An increasing installed base and strong performance from Discovery Services fueled the BioSystems revenue growth. The expected decline in revenues from our nucleic acids operating segment is largely the result of the sale of our Boulder, Colorado facility and lower sales of chemical building blocks from our Glasgow, Scotland facility.

Gross profit was 3.0 million, or 40% of total sales, total net sales during the first quarter of 2005 compared to 2.9 million and 33% during the same period of 2004. This improvement in gross margin reflects the positive effects of our 2004 restructuring plan and the sale of our Boulder, Colorado manufacturing facility. Our gross profits continue to be adversely affected by excess manufacturing capacity in our nucleic acids operating segment, which generated gross margin losses of 464,000 during the three months ended March 31, 2005, compared to gross margin losses of 729,000 for the same period of 2004. Recent orders from chemical building block customers should result in significant improvement in these results in the second half of 2005.

Operating expenses totaled 4.2 million during the three months ended March 31, 2005 compared to 6.2 million during the same period of 2004. This improvement also reflects the positive effects of our 2004 restructuring plan and the sale of our facility in Boulder, Colorado.

I started this presentation by stating that we made significant progress towards accomplishing a major objective of generating positive operating cash flows. Another one of our major objectives was to increase the understandability of reported results. I'd say we don't get a passing grade in this regard. During the quarter, other expenses, which primarily include interest and other changes related to our Laurus loans, totaled 1.7 million compared to 643,000 for the same period of 2004. The 2005 expenses include a charge of 1.1 million related to previously reported conversions of Laurus loans with the gross value of 2.35 million and to 4.850 million shares of our common stock. This is a non-cash, nonrecurring charge representing the fair value of incremental shares received by Laurus plus accelerated amortization of related debt discounts and premiums.

All that being said, we generated a net loss of 2.9 million for the three months ended March 31, 2005, compared to 3.9 million in the comparable period of 2004. The 2005 net loss included depreciation and amortization of 1.1 million and non-cash financing expenses of 1.4 million.

Our liquidity and working capital positions also improved during the quarter. At March 31, we had working capital of 767,000, a $1.6 million improvement from December 31, 2004. This improvement was due primarily to the previously mentioned conversions of our Laurus loans. We're currently holding $1.6 million in cash and have 1.4 million available under our credit line.

Let me add some remarks about the timing of our quarterly filing. Through our financial closing process, we identified certain adjustments that are required to appropriately report cash flows from operating and investing activities in our consolidated statements of cash flows for the years ended December 31, 2004 and 2003 and for each of the quarterly periods in those years. These adjustments will result only in a reclassification of certain items within these financial statement categories. They will have no effect on the net change in cash and cash equivalents for any period reported or any other line item in the basic consolidated financial statements.

To report these changes, we expect to file an amended Form 10-K for the fiscal year ended December 31, 2004 and amended Form 10-Qs for each of the quarterly periods in 2004 by a week from today, Monday, May 23 -- or a week from yesterday, Monday, May 23, 2005. We will file our Form 10-Q for the quarterly period ended March 31, 2005 immediately thereafter. With regard to this topic, I would be obviously happy to answer questions regarding timing.

At this point, I'd like to turn it back to Collin.

Thank you, Mike. With that, I'd like to turn the floor open for questions and answers.

(OPERATOR INSTRUCTIONS). Matt Arens from Kopp Investment Advisors.

Thank you. Congratulations on the continued progress. A couple of questions -- could we spend a little bit more time on the subject of cash flow from operations, a little more specifically on what it looked like in the quarter, but more importantly, where you see that trending for the next couple of quarters?

I will let Mike take that and maybe just talk through the net cash flow from operations. Mike, talk a little bit about the discontinued operations that resulted in negative cash flow. Mike, do you want to take that?

Yes, Matt, and again, let me repeat what occurred during the quarter. During the quarter, we generated or we used cash flow from operations of just less than $250,000. Included in that was an adverse effect of about $940,000 from -- for the payment of obligations to settle -- from the payment to settle obligations under our restructuring plan.

Right now, our trends are -- in terms of the trends of the restructuring objectives, we expect to spend about 150,000 a quarter for the remainder of 2005. The major difference between the 940 I mentioned and the 150 going forward is all of the severance obligations that we fully settled during the first quarter. Everything going forward, as we will report in our Q, relates strictly or predominantly for future rents on facilities that we've closed. So just in that particular line item, we see obviously significant improvement.

As it relates to the 250 and where we started, if you are using that as a baseline, our expectation would be at least as good as that.

Okay. Do you see any other one-time charges that are likely to hit in the second quarter that might be larger than that 150,000 that you reverenced?

I am so tired of one-time charges! No, the answer, Matt, the answer is I don't see anything.

Definitely not associated with the severance liabilities of our restructuring efforts. All of our restructuring efforts, Matt, are essentially complete, completed in terms of financial impacts.

I don't see any operating item that would create a significant one-time charge at this point. Nothing comes to my attention.

Okay, so is it fair to say that probably starting with the June quarter, the numbers get a lot cleaner in terms of being able to look through them?

No. From an operating perspective, first quarter is pretty clean, Matt. Where we start getting a little bit hairy is in the other expense or the interest expense category, specifically as it relates to Laurus conversions. Right now, again, it's my expectation that the type of conversions we saw in the first quarter we will not recur in the second quarter but from an operating perspective, I feel like the first quarter is pretty clean.

No, I would agree with that. Part of what I wanted to get to it is my hope that we can have a little bit more commentary within the press release and going forward about the key number that I think people are really focused on being cash flow from operations.

Yes, I -- we will indeed talk more about it.

Great. Another question that I touched on in the last call as well -- we still don't have a clean way to report what is actually apples-to-apples business comparisons because we have a big segment of discontinued operations, so you know, when I pull up the Dow Jones News retrieval, the bullet points says that sales were down 15% year-over-year, which isn't an accurate picture of what's occurring at the Company. Is there anything that can be done on that front to really look at what your overall sales look like when you left out Boulder and when you left out some discontinued operations?

Yes, Matt, our Form 10-Q does show the effect of the Boulder transaction and the reduction from revenues associated with it, so you will see that information in the 10-Q when it is filed.

I think, just to follow-up on that, Matt, I think Mike and I going forward, starting in Q2, will try to at least provide a cleaner picture of what our ongoing recurring operations look like and how that compares to '04 with the discontinued operations.

Good, I think that will be very helpful to people.

The BioSystems business, you know, you did see growth in that business, which I think, although the growth numbers on their face are not incredibly impressive, I think it's impressive that you've been able to grow that business while you've been restructuring and have released some personnel and some things like that. When do you anticipate that we can see those BioSystems growth numbers, which are really the driver, I think, of the value of the Company going forward? When do you think we might see those start to accelerate a little bit?

I think you'll see that in the second half of this year. The first half was again a transition period for us as we develop the new marketing strategies and focused on some new product launches and some new market segments that we're focusing in on as we go into the second half of the year.

Okay. That, along with the tremendous progress you've made in cash flows -- and obviously this quarter was a big step towards getting to what we are all anticipating, which is being cash flow positive from operations. Are you prepared, at this time, to talk about when we might be cash flow positive? I mean, should we anticipate that happening in a quarter this year?

Yes.

Good, great. On the nucleic acid business, you had the Geron announcement last month, which was certainly good to see. Could you speak a little bit more to what your expectations are for the Geron business? Also, can you give us a little better feel for what the future of your nucleic acid business looks like?

I will take that, Matt. You know, Geron is a significant customer to us and we've partnered with them over the last several years to be their primary provider for their novel chemistries. We believe that they have an exciting future ahead and we're really pleased to be part of that.

That business, as Mike said, will seek significant improvement in the second half of this year, based on the last supply win we signed with Geron and really expect that business in the second half of this year to be essentially cash flow neutral to cash flow positive.

You know, you guys suffer from what a lot of smaller companies suffer from, and that is, you're kind of last on the list in terms of your auditors getting to your results. I know that's the way you report today. What can be done to really get the auditors to look at these numbers sooner? Because I know it puts you at a disadvantage having to wait this long to get your numbers out. Can that be improved with your current auditor, or at some point, might you have to revisit working with someone else so you can move up in the pecking order in terms of releasing these results sooner?

Matt, this is Mike. Let me take that one. None of our current timing problems would I necessarily blame, if you will, on our auditors. I can tell you that the complexity in our financial statements and our capital structure in particular has created some fairly significant issues for us in the past. I think I can say with some degree of certainty that I'm to the point now where I feel like we've got our hands around those things.

The surprises really that -- what caused this issue for the first quarter was not necessarily anybody's attention to the first-quarter results but the effect of these prior-period reclassifications that appear -- that we're going to restate for. That was really the timing issue, and it seems, in our best interest as a company, that we get all of those restatements done before we get this filing made. We expect to do that within the next couple of days. So that really to me is the issue that generated our delay here. We're not excited about being here on May 17. We expect, going forward, that we will be much more timely in this process, but right now, what I think -- what I'm certain is causing this delay is us dealing with these cash flow reclassification issues.

And the complexity of some of these non-cash charges, like the issues associated with extinguishment of debt that we've had in the previous quarters or these non-cash charges related to the Laurus notes. So as Mike said, Matt, we're very focused on simplifying our reporting and as such, we really believe that, from a timing perspective and from an audit perspective, those issues will go away.

Okay, so would it be a goal for starting with the second-quarter results to try to get your results out in the month following the end of the quarter? Is that a reasonable goal for the near-term here?

I think our objective in the past has been five weeks after the close of the quarter. I think we'd like to shoot for that as we go forward because that was pretty much our calendar that we had set previously to the last several quarters where we've had delays.

Well, I think it would certainly be helpful to everyone if you could get in that pattern, back in that pattern, starting with the next quarter, of reporting within five weeks.

We totally aim to do that, Matt. We agree with you in terms of timing.

Great, that sounds real good. Well, again, congratulations on making a dramatic step towards being cash flow positive, and look forward to the next quarterly report.

Thank you, Matt.

(OPERATOR INSTRUCTIONS). It appears we have no further questions at this time, so I'd like to turn the program back over to your moderator, Mr. Mitch Murphy.

Thank you. I will mention one more time that this call is being archived and available for listening to either over the Internet or on a dial-in basis. Information as to how to accomplish that is contained in our press release from yesterday. You can refer to that or you can also visit our website at Transgenomic.com.

Also, for the benefit on any who may have joined us after the call was already in progress, I will reiterate here 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 of these statements.

I'd like to thank all for listening and participating in the call.

Thank you.

This concludes today's program. You may disconnect at any time.