Precipio Inc (PRPO) 2005 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to today's teleconference. All sites are online and in a listen only mode. Please note this call may be recorded. I would now like to turn the program over to Mr. Mike Summers. You may begin Sir.

Thank you. I'd like to welcome all participants to our fourth quarter 2005 conference call and also to any who may be listing on the webcast. Hopefully everyone has 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 earlier today or go to our web site, www.transgenomic.com, for details. I will take a few moments here to take care of some necessary legal issues regarding forward-looking information that may be given during this call, then I will turn it over to our Chief Executive Officer Collin D'Silva.

Certain forward-looking status 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.'s reports to the Securities and Exchange Commission. Any change in such factors, risk 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 and Litigation Reform Act of 1995 with respect to all such statements. With that, I'll turn the call over to Collin.

Thanks, Mike. Thank you for joining us today. I'm going to lead off with some general comments and then turn it over to Mike to review the financial results in greater detail. We will then open up the call for questions.

At the end of 2004, we began restructuring efforts to focus on our BioSystems business unit, bringing our cost structure in line with near-term review opportunities. We entered 2005 with two primary objectives. First, it was clear that we needed to improve our capital structure; second, we need to refocus all efforts and resources on our core business and the emerging markets related to personalized medicine. During the fourth quarter of 2005, we took some of the final steps towards those objectives. With the impending sale or liquidation of our Glasgow Nucleic Acids facility which we expect to complete by midyear, all the resources now will be dedicated to our BioSystems business.

While fourth quarter reported revenues were weak, total BioSystems revenue held steady on a year-over-year basis against a considerably improved underlying expense structure. On a regional basis, European sales and emerging market sales represented a major contribution to revenue while North American sales remained weak. Going forward, we are optimistic about revenues anticipated in the first quarter of 2006 based on where we are today in the quarter.

Recent customer publications and ongoing interest in our technologies, products, services continue to validate our belief that we will be able to leverage emerging market opportunities associated with the advancement of personalized medicine, particularly in oncology. Interest continues to escalate in performance studies that correlate specific cancer associated mutations with drug efficacy and clinical outcomes. We believe that a significant number of patient specimens often do not yield data due to limits in analytical sensitivity of the methods employed, and moreover, that our technologies offer a viable and immediate practical solution.

In 2006, we have focused specific sales and marketing initiatives on communicating this value proposition more widely and the initial response has been very positive. Increasing recognition of the need for greater sensitivity in mutation detection has also helped spur interest in our fourth-generation WAVE platform, the WAVE Model 4500, which we launched late in the third quarter of '05. This high sensitivity configuration of this platform has created considerable interest and affords us now not only new system sales opportunities, but also upgrade opportunities as well.

Our Discovery Services business has begun to experience transition in the fourth quarter due primarily to completion of multiple projects for our largest customer. While activity with this customer has declined, Discovery Services has engaged now several new pharma, biopharma and academic clients in late '05 and early '06. While initial projects are typically modest in size and scope, we are encouraged by this broadening of our customer base. We will continue to work actively to grow our business with new and existing clients while continuing to engage new firs-time clients.

During the fourth quarter, we were able to continue to leverage our existing discovery services infrastructure to continue to expand our menu of available CLIA-compliant diagnostic services. Our first patient samples were received for analysis in November of last year. Our menu of validated assays growing from zero is currently approaching 60. This test menu can be viewed through our transgenomic.com Web site under clinical services.

In addition, we expect to become certified by the College of American Pathologists, or being [CAP] certified in the near-term. At present, we are finalizing our tactical sales and marketing plans and expect to escalate our targeted sales effort from this point forward.

An interest in individualized approaches to therapy, particularly in oncology, escalate our ability to provide a vertically integrated suite of services from preclinical discovery to GLC-compliant clinical trials in addition to CLIA CAP certified services. Our diagnostic service offerings will continue to benefit from these unique advantages of our technology base and our in-house expertise.

In addition, we believe that we can fill a regional void in the availability of various genetic testing services for which turnaround time, a local presence and a significant personal touch are differentiating factors.

Finally, the value proposition of our technology in the molecular diagnostics arena received a significant validation in the form of our recent license and supply agreement with NorDiag, which we announced last month period. NorDiag employees the WAVE systems in its Genefec test, which can detect mutations associated with early development of colorectal cancer. The sensitivity of our technology has proven to be critical in this application. The Genefec test has begun to gain acceptance in Norway and expansion of sales to other Scandinavian countries underway with further expansion across Europe and other international markets planned. Growth of the Genefec sales will provide a pull-through revenue opportunity for Transgenomic based on instrument and consumable sales. We look forward to a productive business relationship with NorDiag going forward.

As indicated in the outset of my remarks, we are able to exit 2005 having achieved our two primary objectives while maintaining our core BioSystems business. We remain optimistic about the opportunities that lie ahead of us both for our product and service offerings. We believe there is strength in the size of our installed base and the mind share that we have gained based on accomplishments that have arisen from that base. We will continue to aggressively manage our cost structure to obtain margin improvement as we also focus on top line growth through our BioSystems business unit.

Now I'd like to turn it over to Mike Summers our CFO to provide further details on our financial results for the quarter and the year ending.

Thank you, Collin. Our loss from continuing BioSystems operations for the fourth quarter of 2005 was 1.8 million, or $0.04 per share and consisted of charges of 719,000 related to debt extinguishment, and to a lesser extent, inventory impairment. Net sales of 5.3 million consisted of instrument net sales of 3.1 million, bioconsumable net sales of 2 million and Discover Services net sales of 261,000. Net instrument sales were adversely impacted by customer returns of approximately $400,000 that related primarily to a third party OEM platform that we distribute. We have not historically experienced significant product returns nor do we see foreseeable significant ongoing return exposures.

Gross profit from our continuing operations for the fourth quarter of 2005 was 2.3 million, or 44%. These margins were adversely impacted by excess capacity in our bioconsumables manufacturing facilities in our Discovery Services labs. Historical margins have ranged 55%. We continue to control operating expenses during -- we continued to control operating expenses during the fourth quarter of 2005 at historically low levels. Loss from our continuing operations for the year ended December 31st, 2005, was 5 million, or $0.14 per share, and consisted of charges of $966,000 related to debt extinguishment and impairment charges. Net sales of 25.8 million consisted of instrument net sales of 14.4 million, bioconsumable net sales of 9 million and Discovery Services net sales of 2.4 million. Gross profit from our continuing operations for 2005 was 12.3 million, or 48%.

Loss from discontinued operations was 9.4 million and 10 million for the quarter and year ended December 31st, 2005. These results which are reflected net of the related sales included impairment and disposable charges of $8.9 million. We continue to negotiate with multiple parties that are interested in purchasing our Glasgow, Scotland facility as a going concern. Simultaneously, we have developed decommissioning and shutdown procedures that can be executed within several months.

With the capital raise that we completed in the fourth quarter of 2005 and the disposal activities that we initiated in the same quarter, the effort to clean up our balance sheet is substantially complete. At December 31st, 2005, we had cash of 6.7 million and working capital of 10.7 million. We are adequately positioned for growth.

Looking forward, we expect first quarter net sales to return to historical averages of our BioSystems business unit of 6 to $6.5 million. We expect operating expenses in the first quarter to be within a range of 3.5 to $[4] million. We expect to report losses from discontinued operations in the first and second quarters of approximately 250,000 each quarter. From a cash perspective, we expect the remaining operations and liquidation of the Glasgow facilities to be marginally cash flow positive.

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

Thank you Mike. At this time, we will open up the floor for questions.

(OPERATOR INSTRUCTIONS). John Schneller, Knott Partners.

I guess I -- I suppose I should start off with one fairly direct and simple question, which is -- what management changes are going to be made immediately and what are you prepared to announce at this time? Because somebody has to be responsible for the revenue shortfall when revenues were largely expected to grow. Something isn't going right here. You [recap] the company to grow it, and yet revenue declined. So I'm wondering, there must be some management changes in the very near future.

Thanks, John. This is Collin. Yes, we are evaluating all of our senior management positions. We have an ongoing effort to look at critical positions in the Company, and we would expect to make those announcements roughly by the end of the quarter -- in the second quarter. We are in the process of aggressively looking at that as we speak.

And the next question is the Glasgow facility. As every discussion I've had with the company over time was supposed to essentially be off the books at the latest exiting the first quarter. But essentially, it was supposed to be off the books sometime during the first quarter. Just wondering what the delay is. It's a relatively small operation. So I would assume it's extremely easy to shut down. Because it hasn't been sold thus far, why are you not aggressively in shutdown mode?

John it's Mike. We are continuing to negotiate with multiple potential buyers. We expect that those negotiations will come to conclusion within the next few weeks. Until then, at that point, you are right. We can go to aggressive shutdown mode. We have actually begun -- we've simultaneously begun shutdown procedures, and you are correct, it will not take that long to shut it down once a final determination is made.

So by the end of the second quarter, I should expect this to not last until the end of the second quarter as were the remarks by Collin in his opening comments?

I think it would be highly unlikely that it would go beyond the end of the second quarter.

We have some environmental regulations that we have to meet, John, with respect to basically shutting the facility down, and that's our ongoing requirements and that is what remaining and going into the second quarter, basically. But for all effective purposes, production has been shut down.

Gross margins declined from a year-to-year basis 49.9 roughly for the full year of '04 to 47.75 for the full year of '05. And then for the three months ended in the fourth quarter, gross margins declined. But that was roughly, it was a little over 210 point decline. Gross margins for the fourth quarter declined from 46.1 to 43.6, roughly 250 basis points, meaning that there's a sequential acceleration in the decline in gross margins. Given that this company has historically -- well, the accumulated deficit I would assume, without even looking at the balance sheet is somewhere in the $120 million range, between 120 and 130 million. What can you tell shareholders to get them comfortable that a sales decline, a gross margin decline, a delayed sales/nonclosure of a business that has bled tons of cash and no immediate management changes to announce -- what can you tell existing shareholders on your conference call that you scheduled to discuss your results with shareholders to give us any level of confidence that the existing management team under the existing plans can do anything to stop the decline in sales, to stop the decline in margins, to actually hit some members at the time that management had put out those projections? I'll leave it at that. And if I guess absent some sort of a logical explanation to that series of questions, why should people continue to own your stock?

Let me take that John. There were some onetime effects on -- that impacted revenue on the top line that Mike discussed and effectively margins also. In the first quarter of this year, of 2006 based on what we know and where we are today, which is quite well into the quarter, we will expect to see a return, an increase in revenue and a return in terms of gross margins. That is what we see as of today for sure. And based on the activities that we have in place and the plans that we have in place with respect to manufacturing, consolidation, et cetera, we expect to continue to be able to show gross margin improvements year over year. And we are committed to doing that and we are planning on it as we speak.

It's a little bit of a misnomer. You can't say we would expect to continue to show improvement to gross margins year-over-year, because you haven't done that yet. So.

We expect to show an improvement in gross margins year-over-year, and we would definitely expect that gross margins in Q1 would return to our levels that we saw prior to Q4 last year. There were certain onetime anomalies in the quarter that created that differential.

I'll get back in queue.

Okay thank you.

(OPERATOR INSTRUCTIONS). There appears to be no further questions, gentlemen.

Let me just make one statement in closing in reference to John. John and the other shareholders that are present -- as a major shareholder myself of the company, I'm committed to building this business and returning shareholder value. And we'll do everything in our power here this year to drive the value of this business that we inherently have. And Mike and I are committed to doing that.

And John, we will be discussing further changes on a variety of fronts and further initiatives to grow the top line revenue into the markets that are emerging here very shortly.

Thanks, Collin. I will mention one more time that this call is being archived and it will be available for listing to either over the Internet or on a dial-in basis. And the information as to how you do that is contained in our press release from earlier today.

You can refer to that, or you can also visit our web site, which is www.Transgenomic.com. Also, for the benefit of those who may have joined us after this call was already in progress, I will reiterate that sort 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 changes 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. I'd like to thank all of you for listening and participating today. This concludes Transgenomic's fourth quarter 2005 conference call.