Orchid Cellmark, Inc. Q4 2007 Earnings Call Transcript

| About: Orchid Cellmark (ORCH)

Orchid Cellmark, Inc. (NASDAQ:ORCH) Q4 2007 Earnings Call March 6, 2008 10:00 AM ET


Thomas A. Bologna – President and Chief Executive Officer

James F. Smith – Chief Financial Officer


Robert Wilby - Banc of America Securities

John Rosenberg – Geneve Capital Group


Good morning. My name is Aldice and I will be your conference operator today. At this time, I like to welcome everyone to the Orchid Cellmark fourth quarter and full year 2007 financial results.

(Operator Instructions)

I will now turn the call over to our host, Mr. Thomas Bologna, President and Chief Executive Officer. Sir, you may begin your conference.

Thomas Bologna

Thank you. Good morning. This is Tom Bologna and welcome to our fourth quarter and full year 2007 conference call. I will like to proceed as follows: James Smith, our CFO, will review the company’s cautionary note regarding forward-looking statements and will then briefly highlight our financial results for the fourth quarter and full year 2007. I will then make some comments regarding those results followed by a question and answer session. Jim?

James Smith

Thank you, Tom. We would like you to know today that remarks made during this presentation and responses to questions may contain some statements which are not historical fact but instead are forward-looking statements based upon management’s current expectation that are subject to risks and uncertainties. Such forward-looking statements could include general or specific comments by us about future company performance including any guidance or projections we may provide concerning the company as well as responses to questions about future operating matters and/or such guidance or projection.

In compliance with the Private Securities Litigation Reform Act of 1995 I am advised to point out that actual results may differ materially from results we may discuss, imply or present in any forward looking statements during this presentation. The risks and additional factors that may cause such a difference includes those set forth from time to time in accordance to SEC filings including but not limited to those factors set forth in the annual report on Form 10-K for the year ended December 31, 2006 as filed with the SEC.

Now, I will discuss financial results. As previously announced on October 31, 2007, we acquired the common stock of ReliaGene Technologies, Inc. ReliaGene is a provider of forensic and paternity DNA testing services based in New Orleans, Louisiana. The net aggregate purchase price was approximately $5.4 million in cash and 560,539 shares of their common stock valued at that time at slightly over $2.9 million.

The results of their operations for the months of November and December 2007 have been included in our consolidated fourth quarter and full year results. Now, I would like to discuss the fourth quarter and full year financial results. I will begin by comparing our fourth quarter 2007 results for the fourth quarter of 2006 and then compare a full year 2007 results to the full year 2006.

Total revenues for the quarter ended December 31, 2007 were $15 million as compared to revenues of $14.9 million for the comparable period of 2006. Increases in the US and UK paternity and US CODIS testing revenue along with revenue associated with the ReliaGene acquisition were all set by decreases in the US forensic casework and UK agricultural testing services revenue.

The decrease in the US forensic casework revenue was primarily attributable to lower volumes. The decrease in our non-core UK agricultural testing services was due to lower volume resulting from the policy change to test only male sheep under the UK government’s National Scrapie Plan.

For the quarter ended December 31, 2007 as compared to the same period in 2006, our UK revenues were favorable impacted by approximately 7% as result to the exchange rate movement of the British pound as compared to the US dollar. I will now briefly highlight our cost of service revenues and gross margin.

Cost of service revenues were $10.5 million for the three months ended December 31, 2007 compared to $9.6 million for the comparable period of the prior year. The decreased in gross margin from 36% in the fourth quarter of 2006 to 30% in the fourth quarter of 2007 was due to decreased in testing volumes associated with the US forensic casework and the UK agricultural testing and in addition, cost associated with expanding our UK capabilities and capacity in anticipation of new tender awards.

Marketing and sales expenses for the quarter ended December 31, 2007 were $1.5 million compared to $1.3 million due to comparable period of the prior year. The increase in marketing and sales expenses approximately during $14,000 was primarily due to increases in our sales organization in US and in advertising. General and administrative expenses for the fourth quarter 2007 were $3.6 million, a decreased of $694,000 compared to $4.3 million for the comparable period of the prior year. The reductions in general and administrative expenses include decreases in legal fees, consulting and insurance expenses.

Total other income for the three months ended December 31, 2007 was $345,000 including $223,000 in interest income compared to other income of $778,000 in the fourth quarter of 2006 including a $178,000 in interest income. During the fourth quarter 2007, the company revised its estimates for [630] lease guarantee liability and recorded a benefit of $185,000. During the fourth quarter of 2006, the company recorded a reversal of accrued expense obligation totaling $200,000 and a reversal of accounts payable obligations totaling $255,000.

Net income tax benefit during the three months ended for both December 31, 2007 and December 31, 2006 was $1.1million. Both quarters reflect the proceeds from the sale of state net operating losses of approximately $1.1 million in 2007 and $749,000 in 2006. I will now compare a full year 2007 results to 2006.

Total revenues in 2007 were $60.3 million compared to $56.9 million for 2006. This increase was largely due to higher forensic casework in both the UK and the US. Increases in the US CODIS work and the acquisition of ReliaGene hardly offset by lower UK agricultural testing services and declines in government and private paternity revenues in the US.

As mentioned during my discussion of the fourth quarter results, the decreased on our non-core UK agricultural testing service revenue was due to the policy change to test only male sheep as opposed to testing both sexes. The impact of such change year on year was a decrease of approximately 52% in actual samples tested.

For the year ended December 31, 2007 as compared to the same period of 2006, our revenues were favorably impacted by approximately 9% as a result of the exchange rate movement of the British pound as compared to the US dollar. Cost of service revenue for 2007 was $40.2 million compared to $39.7 million in 2006. Gross margin for 2007 was 33% compared to gross margin of 30% for 2006.

Margins in 2007 were favorably impacted by higher average selling price in casework and CODIS in North America and operational improvement. Operating expenses, other than cost of service revenues, decreased from $29.2 million in 2006 to $24.2 million in 2007, as a result of the continuation of our cost cutting efforts.

I will now discuss our liquidity and capital resources. As of December 31, 2007, we had $20.9 million in cash and cash equivalents as compared to $24.1 million as of December 31, 2006. Working capital decreased to $25.5 million at December 31, 2007 from $30 million of December 31, 2006. This decrease in working capital was primarily the result of the cash spent to acquire ReliaGene and improved accounts receivable collection.

Net cash provided by operations in 2007 was $3 million as compared to cash used in operations in 2006 $11.6 million. This improvement in operating cash flow is a result of our decreased net loss, improved collections of our accounts receivable and a decreased in paying down accounts payable and accrued expenses for 2007 as compared to 2006. Capital expenditures in 2007 were $1.2 million.

Now back to Tom.

Thomas Bologna

Thanks, Jim. Before going to the Q&A, I will like to briefly review our fourth quarter and full year 2007 results and also give you some insight into what to expect for 2008.

Relative to the full year of 2006, our financial results improved significantly. Our 2007 operating loss decreased approximately 2/3 from $12 million in 2006 to $4.1 million in 2007. The fourth quarter of 2007, however, proved to be relatively challenging. Our operating loss increased by a $355,000 from $956,000 for the fourth quarter of 2006 to $1.3 in Q4 2007. I will give you more specific detail as I describe the general results of each of our operating sites but overall, the following should be noted:

First of all, volume for North America casework was down in Q4 2007 relative to the fourth quarter of 2006. We also recognized two months of ReliaGene revenue for the quarter but it was not enough to increase overall North America casework revenue. However, without taking into consideration the additional revenue of CODIS work realized from the acquisition of ReliaGene, the decrease in volume in North America casework was partially mitigated by a healthy increasing Q4 2007 casework relative to the comparable quarter of 2006.

With the addition of the ReliaGene CODIS work, CODIS revenue increased significantly in comparison to the fourth quarter of 2006. The challenging part of our business is that it is often quite variable in the sense that it is dependent on cases when cases are received even though we have won a contract or series of contracts. Regarding Q4 2007 volume for North America paternity an increase relative to the fourth quarter of 2006 and with the added volume from the ReliaGene business, we realized a nice increase in sales.

I am pleased to note that the integration of ReliaGene into our operations is proceeding very well and ahead of our expectations. The paternity business is being moved to our Dayton and East Lansing facilities and the ReliaGene forensic business is being relocated to our Dallas and national operations.

I am pleased to note that we are moving some key and highly experienced ReliaGene people to our Dallas and national operations. We expect all of the ReliaGene business to be moved to our facilities by the July timeframe. Excluding the exchange rate considerations, Q4 2007 UK forensics and paternity revenue increased relative to the fourth quarter of 2006. Taking the exchange rate into consideration, our UK forensics business declined slightly and our paternity business was flat.

Consistent with the policy change that we experienced in Q3 to test only male sheep under the UK government National Scrapie Plan, our agricultural business decreased relative to the fourth quarter of 2006. That decrease, along with the decrease in our UK immigration business result in an overall decrease in UK revenue in Q4 2007 relative to the fourth quarter of 2006.

Our Q4 2007 R&D, sales and marketing, and G&A expenses decreased approximately $500,000 relative to Q4 2006. We did however incur a higher cost of sales that included unused capacity related to our building infrastructure and anticipation of winning healthy volume from that South West/North West and Wales regional tender, known internally as the mega tender and due to unused capacity in our Dallas operation.

Regarding the mega tender, we are very pleased with the result. We won a significant portion of two of the service packages we tended for. The details are now being worked out on how to bring that business into our operation. We anticipate this award to amount several millions of dollars of UK business in 2008. Also, as noted in our past quarterly filings, we have been in discussion with LGC regarding their acquisition of FAL in 2005 and its impact on the business that we provide for three key police forces as a subcontractor for tenders won by FAL.

After months and months of positive discussions, we believe that LGC will likely now insist on independently servicing a significant portion of that business for two key police forces. We believe this change in LGC’s position is the result of our success with the mega tender and also coincides with the management change at LGC. We do know that we have a strong positive relationship with the police forces being service through our contract with LGC largely as a result of the high levels of service that we provide.

This is most strongly demonstrated by the fact that we often succeed our contractual turnout times with well over 90% of results delivered in three days with the significant portion of the samples often over 80% processed in only two days. We also believe that we are making good progress regarding the National Procurement Plan.

To put that plan in perspective, the mega tender applies to 14 police forces. The National Procurement Plan applies to remaining 29 police forces in England and Wales. I am pleased to announce that we passed the PQQ, a first hurtle for that plan. We expect the plan to be completed in midsummer and tendering late of this year or the first quarter of 2009.

So, let me now briefly comment about the UK forensics market in general. We believe that it is indeed in the state of transition as evidenced by the mega tender and the National Procurement Plan and increasing amount of work has and will be tendered. We expect that the 29 police forces in England and Wales will tend to their forensics work through the National Procurement Plan which has previously noted as expected to be implemented this year.

We further believe the National Procurement tender process is yet another opportunity for us to gain a new business and also regain some or all of the work that we are at risk of loosing in our current arrangement with LGC. In other words, we believe the transition enable us to regain business that we would otherwise not have had the opportunity to pursue. It is for us to gain and our competitors to loose.

I will also like to point out that in the fourth quarter of 2007, we turn the profit. We are in 1 cent per share largely resulting from the sale of New Jersey state operating losses. Lastly, I would be just ingenious of me to say that I am pleased with our fourth quarter results because I am not. Up until the fourth quarter, the turnaround had been going very well and probably better than most anticipated.

Let me now try to put into perspective where we are, why Q4 was a disappointment and what to expect going forward. I will do that as I go through each operation and subsequently summarize my thoughts followed by opening the call for questions.

Let us start with our US forensic business. Q4 was a tough period for our Dallas operation. The challenge we had was simple. Q4 2007 incoming casework did not materialize. We have won significant bids, we have avoided chasing low margin business and our challenge, for the most part, is not with the variable nature of this business. In fact, some of the bids that we have won are reported to be quite sizable but we had to think to build capacity around them based on unpredictable timing of receiving cases.

Today, we are turning cases around in a matter of weeks whereas in early 2006, our turnaround time was in months. Consistent with that thinking and our ability to turnaround cases quickly, in Q1 of 2008, we elected the trim capacity at our Dallas facility. We believe with the operational efficiencies that we have been able to achieve coupled with further efficiencies that we anticipate implementing, right sizing that facility was indeed appropriate.

Let us now talk about national. In that facility where we primarily process CODIS samples, our Q4 CODIS business was significantly higher than that of the fourth quarter of 2006. Add to that, the CODIS business that we processed out of the ReliaGene facility and we saw it helping increase in overall CODIS business. We are also in a process of consolidating the ReliaGene CODIS business international and we expect that integration to be completed in the second quarter of 2008.

As I noted on our last quarterly conference call, we are experienced with the more competitive bidding environment. We are winning a significant share of the NIJ volume and on the unit basis, we believe our percentage of those awards have increased relative to 2006 that will bid at lower prices. We anticipate 2008 pricing to continue to be competitive and for the most part our strategy for CODIS will remain the same, focused on operational efficiencies coupled with disciplined bidding.

Let us now turn to our US paternity business. Q4 revenue for 2007 relative to Q4 2006 for our East Lansing facility increased largely as the result of increased volume. More importantly, the gross margin for that facility increased nicely relative to the comparable quarter in 2006. Pricing for the government bids that we service from East Lansing is becoming more competitive and as is the case with our other operations; we are continuing evaluating opportunities for improved efficiencies.

In 2008, we are also evaluating opportunities to more aggressively grow our private business which is serviced from our East Lansing operation. Regarding Dayton, the best way to describe what is happening there is “what a difference a year makes.” The Q4 2007 gross margin for that operation increased relative to Q4 2006 and in fact, improved every quarter throughout 2007.

As noted in the past, I believe the results of our Dayton operation are indicative of our approach to continually right size our facilities to be appropriate for making money based on market conditions.

Let us now look overseas. Overall revenue for our UK operation decreased in Q4 2007 relative to Q4 2006 largely as a result of a greater than 50% decrease in our agricultural volume revenue and to a lesser degree, a decrease on our immigration business. Those decreases were offset somewhat by an increase in our UK forensics and paternity business.

As Jim noted the decrease in our agriculture revenue which we considered to be a non-core business was due to lower volume resulting from the policy change of testing only male sheep under the UK government’s National Scrapie Plan.

Strategically, Q4 was a good quarter for our UK operation. We were notified that we won a significant portion of the tender. As previously noted, we believe our portion of that award could have several millions of dollars of revenue per year. We are particularly pleased with the level of volume crime and casework services that we won. We are now in the process of working with the authorities to sort out the details of that business and we expect it to begin materializing in the second quarter of this year.

Additionally, we are particularly excited about the potential opportunity afforded to us through the National Procurement Plan. So, all in all, I believe we are making very good progress on many fronts. However, the markets that we are addressing are surely in a state of transition and we are in what I would classify as a fluid period.

Let us start with the United States. In the United States, we have seen the market begin to consolidate and I believe we have demonstrated our ability to foresee that consolidation with our acquisition of ReliaGene. Secondly, we believe more and more states are going to all the rest of the legislation and we believe we would provide the long-term growth that is needed to that business. We further believe we are well positioned to capitalize on what I will call a huge opportunity.

We have seen our competitors chase after business at relatively low prices. We assume the resulting pricing pressure will continue as the market consolidates. Lastly regarding the US, we are consistently seeing press releases regarding how DNA identity testing is helping convict the guilty and free the innocent and for the most part, no one questions the power and validity of DNA identity testing. I know the words had works and we believe it is here to stay.

Let us now look at the UK. With the mega tender and soon to be implemented National Procurement Plan, the UK market is undergoing a major transition. We believe our success with the mega tender speaks volumes about our ability to compete in that marketplace. As in the United States, we believe we are well positioned to capitalize on the opportunity that this transition affords us.

Internally, we are also one the go in the major transition regarding how we did business in the past and how we are and will be doing business in the future. The transition will likely be rough at times as evidenced by the effect of LGC’s desire to independently service the former FAL business which Orchid had serviced for years. We expect to cover that potential shortfall with new business won through the mega tender and potential business through the National Procurement Plan plus other initiatives that we have implemented.

Quite sincerely, we believe we are in a good position to seek and take former FAL business direct as well as when business currently serviced by others upon implementation of the National Procurement Plan but it is all a question of timing. Also, in the UK, we are expanding our servicing capabilities as we begin to provide a broader range of forensic services. That is if it is consistent with the demands and needs of the UK market.

We are also in the middle of experience what we believe to be a decline of our non-scrapie business while it generates a nice profit; it is not surprising that the scrapie business will some day come to an end as a breeding program achieved its objectives. I would also like to provide you with what I will call bay flying factors to help you better understand our business and the primary reason for providing you with this information is because I believe, we are in what I termed a fluid period with many different sources of potential change.

First, let us start with bay flying quarterly revenue. We would expect a floor in the $14 million to $15 million range per quarter. Secondly, our below line expenses or operating expenses including cost of service revenues are running in $6 million range per quarter and we expect it to stay in that range in 2008. As a point of reference, our Q1 corresponding operating expenses were $8.8 million. Lastly, as a floor, we will discuss our 2008 results next year at this time; we would expect the gross margin percentage for the year starting with the three.

So, what is the bottom line? First, we went through a rough fourth quarter in 2007. It will not surprise us if the first quarter of 2008 is also challenging. The reasons are simple. First of all, we are in a heightened state of transition of our UK operations with all that is going out with the mega tender, National Procurement Plan or cancel marked LGC relationship, decline of our scrapie business and our adding capacity for new forensic services. With that being said, we believe we have clearly demonstrated our ability to compete well in the UK market under the tender process and through other initiatives that we have implemented. I believe that we surprised the competition by demonstrating our ability to win business from the larger forensics companies and we expect to do well under National Procurement Plan.

Regarding the US, it has always been a competitive market and relative to our competition, we believe we are doing well. Today, I believe we have a relatively strong cash position. We have demonstrated our ability to seek, acquire and effectively integrate business into our operations and we have a logical and disciplined approach to capitalize on this growing market opportunity.

While I believe our US competitors and those in the UK for that matter are experiencing the same challenge in marketing condition that we are experiencing. Today, relatively speaking, I believe we are doing quite well.

So, in the end, will it be a smooth ride to profitability? I would like to say yes but it never is. At the same time, however, our year to year trend from 2006 to 2007 suggests that we have made great progress of moving toward profitability and with that, I would like the operator to please open the call for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes in the line of Robert Wilby with Banc of America Securities.

Robert Wilby - Banc of America Securities

I guess the market here is not quite ensuring your enthusiasm for the opportunity here. With the stocks sitting here read EBITDA multiples on the mile on our expectation under six times now. Is it time to move to the next phase here of maybe doing something with the cash here to take advantage of the stock if you are so confident in the opportunities here going forward?

Thomas Bologna

I think because we are in…what we believe, we are in a globe phase, and the prudent thing for us to do is to continually use our cash position to grow this business as we see fit. For example, the investment that we have been making in the UK and our building capacity for some of this mega tender business which we are very, very pleased with and the National Procurement Plan plus we always like to keep a good cash cushion in the company.

Robert Wilby - Banc of America Securities

So, I am trying to believe I mean you will be cash flow positive this year, the fourth quarter cash number was quite good or do you generate some cash, what precludes you for putting just a small amount into the stock? I would find it to be particularly accretive.

Thomas Bologna

That is something, that is a good question, that is something that we will discuss at the next board meeting but that being said, Robert, again our primary emphasis is to make sure we have a good cash position going forward and be in the position to capitalize on opportunities as they arise such as we were able to capitalize and ReliaGene and what have you.

Robert Wilby - Banc of America Securities

And you may have given it in the numbers, so, what did ReliaGene actually contribute in the quarter and the shortfall then in the scrapie, I mean what was the deal there?

Thomas Bologna

The scrapie was quite significant and as we noted in some of the analysis regarding ReliaGene, they were running at about a $7 million annual rate and they have obviously done a very, very good job of cleaning up some of the backlogs especially as we integrate those businesses so I would say if you look at that on a monthly basis and scrapie that out to a couple of months and then subtract maybe 20% to 25% because of the transition, that will probably give you a pretty good indication.

Robert Wilby - Banc of America Securities

Okay and then that baseline revenue guidance which was half full, we appreciate that, what did that exactly assume from the mega tender contribution? Was there anything in there?

Thomas Bologna

Yes, it assumed some contribution from the mega tender with that business beginning in the second quarter of this year.

Robert Wilby - Banc of America Securities

You did have some comment on the mega tender, what you thought it could conservatively contribute though did you not [30:20] for ’08?

Thomas Bologna

Yes, we believe it will be several million dollars and we believe on a per yearly basis, some of the numbers that you suggested are consisted with our thinking.

Robert Wilby - Banc of America Securities

Okay and can you speak, Tom, just to… there is not great sources out there I mean can you look at ’08 and review and just tell us how many pieces actually came out in the forensics arena in the US and what is your wing rates were, how that maybe different year over year?

Thomas Bologna

Yes, I think you meant 2007.

Robert Wilby - Banc of America Securities

Yes, 2007.

Thomas Bologna

As far as the NIJ award to state awards I mean quite honestly we believe we are doing quite well. Clearly, however, the pricing is becoming more competitive and we are clearly trying to stay away from chasing relatively low margin business. The reason we have to taper for some of this is because quite sincerely, we want some very, very big award here in the United States. I mean, the estimated volume generated with those awards is very, very high.

Higher than I would ever want to quote because I am not sure they will really materialize and that has been the challenge we have been having here. I mean we are talking awards of winning several million of dollars but per year but, will that materialize? That remains to be seen. That is why our focus has been on bringing our cost down as much as we can and getting our turnaround times to be much better and at the same time, work the bottom line and I think that is clearly evidenced by what is happening in Dallas.

The truth of the matter is back in the 2005, early 2006 timeframe, a lot of capacity was being built in Dallas but as a result of our operating inefficiencies, turning cases around in matter of week versus month has clearly changed the whole dynamics of that business and we have to continually keep working that way.

Robert Wilby - Banc of America Securities

Okay and I guess as I wanted to use the baseline revenue forecast that you did throughout, I mean it does not really suggest much growth year over year even with the ReliaGene in there so how conservative of a swing did you take at that baseline number, I know you to be ultra conservative here I mean are we talking millions of dollars potentially light on a quarterly basis or is this really spot on with where you think you are going to be?

Thomas Bologna

Well I think it is to try and give as good indication as I can, I would say it is what we feel comfortable as a baseline because of all of the different things that are happening in this marketplace. For example, in 2007, we won a lot of CODIS work but the prices had been lower and in 2008, we believe that the National Procurement Plan will be implemented and revenue can be perhaps realized as early as in the fourth quarter of this year but more than likely probably the first quarter of 2009 and those are big swings.

I mean the good news about our business is when we win some of these awards and we win them at good margins, it really spikes us up rather nicely. However, when we walk away from this low margin business, we have to continually right size our facilities accordingly. That is why the real name of the game for us is the continually work our operating efficiencies and little by little as this industry consolidates and with our ability to foresee that consolidation, which is another reason why we want to keep good cash position, to really get this business moving very, very quickly.

Robert Wilby - Banc of America Securities

Certainly supervising that time, I just, I look at the ReliaGene deal at $7 million and the mega tender potentially adding several million in revenues and the only thing I have really seen you loosing here is scrapie and then just some general commentary on market related issues perhaps nicking you on revenues somewhat as well. This just looks like an extremely conservative forecast for you unless the bottoms are falling out at these markets which I do not think is your implication.

Thomas Bologna

Let me just add one further point to that and it is important if we look at our LGC business I mean LGC was an awarded phase, we have the subcontract arrangement with FAL that was acquired by LGC in 2005. So, now was a good chunk of our forensics business over the years and that is why after months and months of negotiation and we have been holding for the most part a good chunk of that business, we believe it is at risk at this point in time with two key police forces.

So, that obviously would have a negative impact then we know that was a big percentage of our UK business but we are not overly concerned about that in the long term but in the short term it does become an issue because we are in a transition whereby we have obviously done very well on the mega tender. We are optimistic about the National Procurement Plan but we are at risk of loosing a good chunk of business through the LGC relationship.

Now, what I might add is… as we go forward, our relationship with the police forces in the UK is exceptional and the reason is very simple. Our turnaround times are phenomenal. Our levels of service are second to none and it really was not a mistake in my comments. We literally turn samples around in three days and in many times, only two. That is on unheard of anywhere else so that is probably the biggest risk factor we have going forward and we just want to make everyone aware of that as we have in the past. So, I think that maybe where the discrepancy is a bit.

Robert Wilby - Banc of America Securities

Okay and LGC was not part of the mega tender whatsoever, correct? They won nothing.

Thomas Bologna

No, they were part of the mega tender also. They won some. I think the real surprise for the mega tender was how much we won. We won, we did very well in the volume crime and frankly, even what we call service group casework which is not only the DNA work but other work that is related to that DNA and that is why we have been building up capacity over this last year and really in our fourth quarter and we will also get ahead of a bit on our first quarter, we have been building that capacity in anticipation of the mega tender that we have to absorb all of that cost and in fact, the was even to look at the LGC statements, they have incurred the same problem.

What I think has happened, well to one thing I know for sure that happened with LGC is they got a management change. So, their position is a little bit different. The second thing is they have been building capacity also and now that we won this mega tender, perhaps we want to leave it more than everybody anticipated. Again but that is pure speculation on my part.

Robert Wilby - Banc of America Securities

Okay, so I guess that EBITDA I mean maybe a comment more for the board of anything else I mean the results are fine, the cost structure improvement has been good, the opportunity is out there, the market is just completely ignoring or not understanding the message here and I do think this year by back even if it is even smaller piece of the cash that is there, what you expect to generate this year is probably well served to put into the stock to show some confidence in that outlook and ongoing turnaround but that is my view.

Thomas Bologna

And we obviously, I share your thoughts regarding where this market is going and the only thing I can highlight is… I believe it was in the fourth quarter when there was an opportunity I had bought some stocks myself but the wind that was fall short for me to do that but obviously I am quite interested in this business.

Robert Wilby - Banc of America Securities

Great. Thank you.


Your next question comes from the line of John Rosenberg with Geneve Capital Group.

John Rosenberg – Geneve Capital Group

I actually shared a lot of questions with your prior caller but a couple of things, if I can get some caller on you said that the gain in the fourth quarter was in the sale of some NOLs, what your NOL position now is or whereabouts in approximate basis?

Thomas Bologna

Jim will comment but I believe that we have about $242 million?

James Smith

At the end of the third quarter, in our 10-Q, we disclosed that we had approximately $242 million and what you are going to anticipate is if you take our loss for the year, you generally can just add that to it, when we release the 10-K and then within the filing date requirement and disclosed that but that is approximately a rough number.

John Rosenberg – Geneve Capital Group

Okay, maybe I misheard on the call but there was something about the sale of those.

James Smith

Yes, what we have done for the last several years is that the state of New Jersey has economic development program whereby it allows companies in a certain industry sectors to tell an affect state tax loss carry forwards to its added discount and we realized cash from them.

John Rosenberg – Geneve Capital Group

Okay I did not, thank you very much. I was not familiar with that.

James Smith

Yes, two things that is peculiar to New Jersey but exactly I think, the bigger point is and that is why we focus so much on our operating line. Once we hit our operating income and once we get that pots of that, I think it is safe to say that we will not be paying the taxes so that is a drop right to the bottom line.

John Rosenberg – Geneve Capital Group

Yes, I know. Thank you. Tom, you have talked a lot about… over the last couple of quarters about the improving operations, not chasing low margin business and I do want to note that you definitely have fourth quarter hiccup aside. You have had a very, you guys had a very positive effect; your turnaround has gone very well and it has been very impressive. At some point as your market further consolidates, can you perhaps instead of just chasing revenue could you add more business and achieve greater contribution market margins? Are there any scale advantages that we might be able to see as you accrue more business particularly in the US?

Thomas Bologna

Yes, I mean most definitely we do believe this business is very scaleable and it has been evidenced by our acquiring ReliaGene and integrating it into our fourth facilities, I mean for the most part with not much additional cost, all of that is dropping to the bottom line so we feel really good about that. The hard part about this business quite sincerely is to stay disciplined knowing when to take business and when not to take business.

The way we go out to business is we look at it on several factors and not only on a marginal revenue basis but what does it really contribute? Because we believe at the end, the management of our cash in getting to continually operate in efficiencies what really determine who the winner is in the long term and we know this business is growing specially in the United States, as all domestic legislation just keeps moving along very, very nicely and in the UK, we are particularly excited because our decision to take this business direct last year coincides very nicely with the National Procurement Plan, the genuine process so we now have better control of our destiny.

Whereas in the past when we were dealing with let us say like FAL or LGC, it was out of our control and quite honestly, one of the challenges we do have in the UK with LGC is rather interesting because the awards that we are servicing, those awards were won by FAL and for which we were the subcontractor but the actual award, the contractual award were between the police forces and FAL and now, LGC.

So, to some degree, a bit of it is out of our control. I would say we have got an outstanding job in maintaining that business for as long as we have because this contract essentially ended last year but again going forward, I think it could be a little bit more predictable for us or at least the downside risk would be mitigated.

John Rosenberg – Geneve Capital Group

Could you give us any more color on NIJ business or potential wins, anything of that nature that just does not… as your last as probably Bob will comment, that does not seem to be much visibility into that for us and is there any way…, you talk about your success in winning this business, is there any way you could furnish the shareholders with some types of metrics that we could more closely look at along those lines? I realized for a number of reasons, you cannot disclose contract by contract and that is very understandable but perhaps volumes of business or some things that we could get a better idea of how you are doing in this market and how the market is growing, if it is growing?

Thomas Bologna

Yes, I mean overall I am trying to think how we could do that. Let me think about that, I mean…

John Rosenberg – Geneve Capital Group

That is right. It might be useful to your shareholders. I think just stocks, you guys, are operating in a bit of information void and that might be very helpful.

Thomas Bologna

I mean quite sincerely we have tried to do that like some of my comments regarding our CODIS business, how we have been gaining share on that and you will also note in my comments I was rather specific, I have said with NIJ awards which of course does not include state awards. It is a pretty complex situation. The hard part about this is even when we win this awards and some of them I will say are quite sizable. It is very difficult for us to project what that volume will and in fact, being in the end and to compound it further, it is when that business actually comes in.

For example, our Dallas operation is a perfect example. We won a lot of awards. Our turnaround time is very, very quickly now. The stuff comes and it goes out rather quickly but at the same time is when do those cases really come to us? When can we service them? And in many cases, we turnaround the work so quickly, it goes back to the states, they need to check that work before they will send us new cases.

So, it is almost like our success with turnaround time to some degree hurts us here in the State as we are in the UK, I mean, let us say they complete that the way it is done but I understand your request and let me look into a little bit more.

John Rosenberg – Geneve Capital Group

Okay, well perhaps if you disclose quarterly or even yearly volumes by different types of tests broken out geographically.

Thomas Bologna

That would be quite difficult to do because I can tell you most of our competitors listen to this calls and they are privately held companies.

John Rosenberg – Geneve Capital Group

Okay, I understand that. Well then let me, thank you for the information you have given and let me reiterate two things. First off that you have done a very impressive job in the turnaround of this company and we can see that in the gross margins and with the cash flow position but I would also request that you consider a share repurchase… to reward some of your long term shareholders seeing what is happening to the stock over the last couple of weeks and the market really not reflecting it and as your last caller indicated it would be very accretive and send a signal that you are very confident in this business.

Thomas Bologna

Okay, I will take that advice then.

John Rosenberg – Geneve Capital Group

Thanks very much.


Your next question comes from the line of Robert Wilby with Banc of America Securities.

Thomas Bologna



Robert, your line is open.

Thomas Bologna

I am afraid I am not hearing Bob’s question.


And there are no further questions. Do you have any closing remarks?

Thomas Bologna

Well, what I would like to say is I sincerely appreciate your kind words especially under such a fluid state that we are in but that being said, you have our word: we will continually do our best here and we expect and we hope to get this business to where we want it to go as evidenced from the changes and the results of those changes in 2007 from 2006. Thanks again.


And that concludes today’s conference call. You may now disconnect.

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