Precipio Inc (PRPO) 2006 Q2 法說會逐字稿

Good day everyone. (OPERATOR INSTRUCTIONS). I will now turn the program over to your moderator for today, Mr. Mike Summers. Go ahead, sir.

Good afternoon. I would like to welcome all participants to our second quarter 2006 conference call, and also to any who may be listening on the webcast. Hopefully, everyone has had a chance to look over the press release that we issued earlier today.

I'm the Company's Chief Financial Officer, Mike Summers. Before I turn the call over to our Chief Executive Officer, Craig Tuttle, I need to take care of some administrative matters. 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 website at www.Transgenomic.com for details.

Certain forward-looking statements may be made during this call that reflects 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 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 1985 with respect to all such statements.

Now let me turn it over to our Chief Executive Officer, Craig Tuttle.

Good afternoon everyone. As many of you know, I have just recently joined the Company. I would like to begin my comments by saying that I'm very excited to join Transgenomic. The Company has continued to maintain a high degree of technical expertise and innovation in the field of mutation discovery and detection.

In addition, the Company faces some ongoing challenges that I have faced before, and through which I believe I can help to achieve a strong and sustainable business. Based on my technical and management experiences, I evaluated the Company and its historical performance and decided that I would be able to make a useful and demonstrable impact.

These are clearly the issues I evaluated before assuming my new role. My reasons for this decision are based the Company's large portfolio of publications covering many areas in genetic mutation analysis, a strong market placement of a large number of systems, which leans credibility to the Company's capabilities in genetic variation analysis. Also, a sound portfolio of new products and potentially large volume applications, and due to new attempts at commercializing business opportunities that were previously at least marginally successful, but lacked total commercial focus.

Included in the new product portfolio is a proprietary mutation analysis tool which could prove extremely successful on a majority of sequence-based platforms, in addition to providing strong value and performance when used with our own proprietary platforms. If this product achieves its potential, it could have a material effect on both our revenue and profitability.

In addition, I looked closely at the potential opportunity in applying our WAVE System technology to the improvement in recovery of mixed specimens in forensic testing, as well as microbiology. These factors were what supported my decision to join the Company.

In my short time with the Company I have gained additional respect for the level of expertise and knowledge the Company's employees have in mutation discovery and analysis, coupled with a strong desire across the organization to support further change and growth.

Going forward it is very clear that we must continue looking for cost savings opportunities, as well as further developing our key new products for growing our revenue line, while continuing to develop and champion new applications of our WAVE Biosystems in the discovery and analysis of mutations.

Our technology in this area continues to provide a leading technological solution for analyzing mutations with tremendous sensitivity. Thus with the continued growth in mutation detection, clearly as it moves into a more standard diagnostics utilization for earlier detection of a variety of diseases, including cancer, cancer drug resistance, as well as inborn errors, we at Transgenomic will continue to opportunities to sell both discovery hardware and testing services.

I would now like to turn the call back over to Mike Summers for a summary of our second quarter results.

My further comments are focused primarily on results from the second quarter of 2006. With regard to year-to-date results, I will let the release speak for itself.

Today we reported a second quarter 2006 net loss of 383,000, or $0.01 per share. This compares to a net loss of 998,000, or $0.03 per share, for the second quarter of 2005. The 2006 net loss consisted of a loss from continuing operations of 258,000, or $0.01 per share, and a loss from discontinued operations of $125,000. The 2005 net loss was comprised of a loss from continuing operations of $473,000, or $0.01 per share, and a loss from discontinued operations of 525,000, or $0.02 per share.

Net sales were $6.2 million during the first quarter -- during the second quarter of 2006 compared to 6.9 million during the comparable period of 2005. Our 2006 net sales consisted of Instrument, Consumable and Discovery Services revenue of 3.7 million, 2.3 million and 150,000, compared to Instrument revenues of 3.7 million, Consumable revenues of 2.5 million, and Discovery Services revenues of 661,000, respectively in 2005.

Gross profit was 3 million, or 49%, during the second quarter of 2006 compared to 3.5 million, or 51%, during the comparable period of 2005. The gross profit margin of 49% in the second quarter of 2006 was an improvement from the 46% recorded in the first quarter of 2006. This improvement was largely attributable to lasting improvements in Consumable margins.

We continue to believe that our existing productlines can support sustainable overall margins of 60% or better. While we're exploring strategies to further lower costs associated with our Instrument and Consumable productlines through consolidation, outsourcing and better vendor pricing, our highest priority is to maximize the capacity of our existing labs.

During the second quarter of 2006 our Discovery Services productline generated margin losses of 276,000, representing nearly 5 full percentage points of margin, assuming they break even.

Operating expenses were 3.4 million during the second quarter of 2006 compared to 3.9 million during the same period of 2005. Operating expenses during the second quarter of 2006 were adversely affected by foreign currency adjustments of $36,000. Going forward in 2006 I expect quarterly operating expenses to be within a range of 3.5 million and 3.7 million to account for incremental investments, predominately in sales and marketing.

From a cash flow perspective, the second quarter of 2006 was the best in our history. Cash flows generated by operating activities were positive at 691,000, compared to negative operating cash flows of 959,000 during the same period of 2005. The operating cash flow results were largely the result of improvements in working capital accounts, primarily accounts receivable and inventories. Cash and cash equivalents totaled 7.4 million at June 30, 2006.

With regard to discontinued operations, the Glasgow facility is fully decommissioned, awaiting final approval from Scotland's equivalent of the Environmental Protection Agency. Future expenses and losses related to discontinued operation are expected to be minimal. To date we have sold a nominal amount of discontinued equipment resulting in approximately 40,000 in proceeds. Liquidating the remaining equipment and the facility currently valued at 3.1 million will be a significant priority through the remainder of the year.

Lastly, I wanted to summarize the status of our NASDAQ listing. On August 1, we filed an application to transfer the listing of our common stock from the NASDAQ Global Market to the NASDAQ Capital Market. In conjunction with NASDAQ's final approval of this application, which we expect on or before August 14, we will be providing an additional 180 day calendar day period or through February 12, 2007 in which to satisfy the $1 minimum bid price requirement.

At this point we will turn it back over to of Blake for questions and answers.

(OPERATOR INSTRUCTIONS). [Al Kildoney] of SF Capital.

First, I wanted to -- it is great to see the positive cash flow in the quarter. If you said it, I missed it. But is that something that you expect to be able to maintain from this point forward, or was there something unusual in the quarter that might not show up every quarter in terms of cash flow -- ability to generate cash flow?

This is Mike. Thanks for the question. From a sustainability -- there are really two things that occurred during the quarter that were frankly very long overdue. One is we managed to get our DSO and our receivables to a more respectable level, albeit still not appropriate. And we managed inventory a bit better in terms of just in time type inventory management.

From a sustainability perspective, obviously this Company needs to get to profitability before I can tell you that we going to have sustainable cash flows going forward from an operating perspective. I see opportunities in the next quarter or two for more improvements in the DSO. Probably not to the extent we saw in the second quarter.

Any venture -- can you comment on what a timeline might be per positive EPS?

It is Craig Tuttle. That is certainly a great question and one we study all the time. As you know, we have not made any forward leading statements regarding guidances in that area. But it is our highest priority.

Craig, just sort of -- just wanted to get some insight into how you look at the business longer term. You have done a nice job in the quarter of just focusing on the P&L. But I wonder if you could address a little more opportunities for growth and if there is any way you can quantify those, and maybe give us an idea perhaps when we will start to see some more growth on the top line?

That's the primary question on everyone's minds, I hope. We're still trying to dive a little deeper into quantitating what the opportunities are on an individual basis. And so I wish I could answer that more fully, but as I look at the business as it stands today, notice the pretty big uptick in profitability that occurred when our Discovery Services business hit 660,000 in sales versus what it did this past quarter.

Obviously, that fluctuation occurs when a project ends and another project doesn't come in behind it, or is on a wait and see level. As we look at our Discovery Services business, both the research side as well as the CLIA lab side, we're clearly trying to get that to breakeven by the end of the year.

We are doing everything possible, and in particular we're really focusing a higher expense level and effort level on the sales and marketing side. And we have split those two businesses apart in terms of sales coverage, so that we're really focusing on the clinical side to bring in more specimens for mutation analysis, clearly along mitochondrial analysis -- or the mitochondrial analysis side. And we're starting to pick up new contracts as a result of that. And we've had some pretty good results in comparison to competitors in that area by detecting mutations that were missed -- or a mutation that was missed in another competitor.

On the Discovery side, we have a handful of projects that continue with NIH through their NCI Group, but also now we have just picked up one outside of the National Cancer Institute. So as some of those move into broader scale, those revenues we hope will increase.

And we have a variety of pilot projects now, which I'm glad to say, for pharma companies. I won't point them out yet. But if those prove positive in the pilot stance or test, then they will move into full-blown projects. And as you know, we had a substantial revenue stream from one individual company previously. And when that was internalized as an effort we lost that revenue stream. We're trying to build on that now by putting real strong market effort into that.

I am confident that we're going to see good results very quickly, the next six to twelve months on growth beyond breakeven in the Discovery Services business. The one product that I referred to, our Surveyor product has shown extremely viable performance on mutation analysis at both Dana-Farber study as well as NCI study. And while that doesn't relate to commercial success, one of the outcomes of that -- a looming publication, is that our new product works very well, not only with our own technology, but on standard sequencing platforms.

And sadly, I will say that there's a few more competitor sequencers out there then there are WAVE Systems, particularly in the U.S., and as such that it is a much larger opportunity for us than we have looked at previously.

But the commercialization of that is going to require I think thinking outside of what we have done normally and look to see if we can secure a partnership to help drive that against the thousands of users that exists.

Lastly, we do have some interesting publications and studies that have been ongoing, some for a number of years, that are finally coming to a point where we can look to bear fruit with them. One of them is the forensic area. And as you know, 90% of crime at this time is not tested with DNA when it could be. The majority of that is property crime.

Such with property crime there is two problems that are inherent with it. It is certainly low copy number, and as well as mix specimens. The majority of mix specimens are usually -- I think 80% of them are two individuals contributing to the specimen. And it is very difficult with sequencing technology to pull those apart.

So the major problem would be to separate those. And fortunately we have had an ongoing relationship with a contributor in the University of Denver who has published extensively in the use of our system to actually prepare much cleaner DNA specimens that could then be further tested, and even with those results, go into the CODIS database for both missing persons, as well as further sequencing.

That is one we don't have our hands around completely, but it is one that I know is a huge opportunity in the U.S., depending on how we can and do participate in it. I hope that answers your question broadly.

That is definitely helpful. When it be fair to say that a fair characterization, if you will, that in the near term perhaps somewhat flattish revenues, if you will, as you focus on positive earnings, and then some point, hopefully not in the too distant future, a resumption of growth, if you will?

That is how I look at it at the moment. Clearly, we want to see revenue growth in the Discovery Services area come at us pretty quickly. We've got a committed business that should bring us to profitability by the end of the year. But the group is really working very hard on the commercial side, and we have just hired a couple more people to get out and beat bushes. That is something we're looking for on a short-term basis.

On the overall side, yes, I have to admit that we're going to look at relatively flat revenues on the Instrument side, unless we can come up with new applications such as forensics or microbiology detection that will spur sales beyond where they are right now.

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

To pin you back on one of Al's questions, given the detail that you gave about the positive cash flows in the quarter -- and again congratulations on that. That is certainly good to see. Should we expect -- is a reasonable expectation for the third quarter that you will be positive cash flow, but probably not to the extent that you reported in this quarter? Is that a proper interpretation, Mike?

Thanks for the question. Obviously, our goal is that -- we're not in a position necessarily to forecast 3Q. Let me just talk about the composition of 2Q sales just briefly, and you will see this in our 10-Q.

The composition of sales during the quarter, again, we continue to struggle in North America. North America, however, always represents for us good, efficient paying customers. Europe represents good, not so sufficient paying customers. And in the second quarter we did see a lion's share of our sales go into Europe. So I am concerned about that effect in the third quarter.

We think that we've enhanced our sales order processing procedures to mitigate for some of that. But I'm not willing to commit -- obviously my goal is to be cash flow positive again in the third quarter. That is our goal. It is an internal goal. It is consistent with our overall plan for the entire year. But I'm not willing to sit here and commit to you that that is going to occur.

That's helpful. Could you speak -- either one of you could you speak to the seasonality that you expect from Q2 to Q3? We've had enough variables in the last couple of years where I know there was a point in time where generally we would see revenues sequentially step down from Q2 to Q3. You know there is some invention in some areas and some challenges at this point time. On the total revenue, I know you have spoken to components of it, but on total revenue what should we expect in terms of seasonality and that sequential movement from Q2 to Q3?

This is Mike. Thanks again, Matt. Let me, before I answer that question, talk one more -- just give you one more bit that is of interest to probably everybody on this call. In terms of operating cash flows, everything I have said is where I want to leave it. In terms of cash flows in general, however, we have spent a good deal of time, money and effort decommissioning the facility in Glasgow. That is substantially complete.

And I said in my comments today that we have about $3.1 million worth of assets that we're now going to begin to aggressively pursue liquidation of those assets. While obviously the sale of those won't help my operating cash flows going forward, I do expect -- it is in our plan to sell those by the end of the year. That is just FYI.

We look at internally two things. We look at cash almost on a daily basis. No, we look at cash on a daily basis. And secondly, I look at something called overall liquidity. And right now I take the $7 million plus of cash we have, and I add to that the $3 million plus we expect to get from the liquidation of the Glasgow facility, and I look at a $10 million plus asset. If you walk through our doors today in Omaha or in any other location, you would hear us talking about a liquidity number that is north of $10 million.

Onto your question with regards to the seasonality of sales, the facts are the third quarter has been hard for us. If you look back for the last three consecutive years, it has been one of our hardest quarters, save for the fourth quarter of 2005.

The reason it has been is our dependency upon Europe. And in the third quarter, as many of you know, Europe tends to slow down. And so we would expect a slow down in Europe in the third quarter. However, we also have gotten a little bit smarter about that in the last several years, and we think we have strategies in North America to solve that problem.

That is kind of where we're going with this -- we will see a slowdown. There is no question our forecast say that now for Europe in 3Q. We expect it. We expect to see North America and other parts of the world pick that up.

You commented on a couple of key geographies. How about Asia?

Asia has been pretty stable for us over the last eight quarters. I wouldn't expect it to change.

Craig, you mentioned in the prepared commentary, and then in response to one of Al's questions, the importance of Surveyor, which is certainly music to my years, because I see a tremendous potential with that product. And it sounds like you're looking at some innovative approaches how to more effectively address the market with that.

You also spoke to the opportunity in forensic analysis. And I know you've got substantial background in that area. Can you get a little bit more specific in that area in particular and how you can go after some opportunities that seem to be low hanging fruit, and how quickly you think you can have success in that area?

That's a great question. There is actually two sides to the answer. Number one is in China we are already being used, or the WAVE System is already being used to replace typical STR data or STR analysis. That is very interesting because that is an application that is much more cost effective. Part of the, I guess, the revenue creation side of our business that suffers is that each instrument placement comes with a very modest revenue stream on a consumable basis. And I am used to much more large diagnostic or per test revenues in businesses that I have run.

But as it hits China, for example, they actually -- and typically enjoy that type of scenario where they can apply very talented resources to running equipment that is very cost effective to produce an answer.

It is a little more complex as a market to approach in the U.S. because it is all sequence-based right now. When they end up with a mixture problem they just can't report it. In the case can't rely on the DNA analysis to go to a positive case report. But the bottom line is right now mitochondrion analysis is used extensively for missing persons. That is the smallest low hanging fruit, of course.

We hope to be able to expand our collaboration and go beyond the current collaboration that we have with the University of Denver researcher who has done great work in this area. And he himself is finishing up some forensic validation of his work so that it can be used in cases, particularly for missing persons. In fact, he is now working on a contract from -- or a grant from the National Institute of Missing Persons and Children. That is the first area to approach.

The next is one that we are going to have to study and show the utility of the system to be able to actually separate mixture samples, and then be able to put that into the standard STR sequence analysis. Again, that is going to take longer term, and I think that is a little bit of a -- up in the air solution, although it would be both cost effective and one of a few ways that it could be achieved.

So again, my answer is twofold. One, it is already being used in a forensic application in Asia, and I expect that to continue. But in the U.S. it will take more work just because we're slower to adopt it.

At this time it appears there are no further questions from the phone lines. I will go ahead and turn the program back over to the speakers for any closing remarks.

Thank you. I will 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 up basis. The information as to how to do that is contained in our press release from earlier today. You can refer to that or you can also visit our website, 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 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.

I would like to thank all for listening and participating today. This concludes Transgenomic's second quarter 2006 conference call.