Encorium Group reports 21.4% decrease in fourth-quarter net revenue

Apr 20 2010

Encorium Group, Inc. (Nasdaq: ENCO), a full service multinational clinical research organization (CRO) conducting studies in over 30 countries for many of the world's leading pharmaceutical and biotechnology companies, today announced its financial results for the fourth quarter and year ended December 31, 2009.

As previously announced, on July 16, 2009 the Company sold substantially all of the assets relating to its U.S. line of business to Pierrel Research USA, Inc., the result of which the Company no longer has any employees or significant operations in the United States.  Due to this sale, for the three and 12 months ended December 31, 2009 and 2008, the results of the U.S. business have been presented as discontinued operations in the Company's consolidated financial statements.

2009 Fourth Quarter Financial Results

Net revenue for the fourth quarter of 2009 was $4.4 million, a decrease of 21.4% from $5.6 million for the fourth quarter of 2008.  The decrease in net revenues was primarily attributable to overall reductions in clinical trial activity, approximately $491 thousand of revenue recognized on contracts that completed in 2008 off set by favorable foreign currency fluctuations of $480 thousand for the three months ended December 31, 2009.  The Company had a consolidated backlog at December 31, 2009 from continuing operations of $17.1 million which included approximately $12.3 million of new business wins in 2009 compared to a backlog of $23.8 million at December 31, 2008.

Direct expenses for the fourth quarter of 2009 were $3.3 million, or 74.9% of net revenues, compared to $3.6 million, or 64.4% of net revenues, for the comparable prior year period.  The decrease in direct expenses was primarily the result of reductions in staff and subcontractors utilized on active clinical studies being conducted and approximately $341 thousand of unfavorable foreign currency fluctuation.

Selling, general, and administrative expenses (SG&A) was $1.7 million, or 38.5% of net revenue, for the three months ended December 31, 2009, compared to $2.2 million, or 39.2% of net revenue, for the three months ended December 31, 2008.

Loss from continuing operations decreased to $558 thousand or $(0.18) per diluted share for the fourth quarter of 2009, from a net loss of $12.6 million, or $(4.92) per diluted share, in the fourth quarter of 2008.

2009 Full Year Financial Results

Net revenue for the twelve months ended December 31, 2009 decreased to $17.9 million as compared to $22.3 million for the twelve months ended December 31, 2008.  The decrease in revenue was primarily due to a decrease in the number of contracts and related contract values of active clinical studies along with $1.1 million of unfavorable currency fluctuations.  

Direct expenses for the year ended December 31, 2009 were $12.6 million compared to $14.6 million for the year ended December 31, 2008.  Despite reduced staffing and subcontractor costs and a favorable currency fluctuation of $1.1 million, direct expenses as a percent of net revenue increased to 70.3% from 65.6% in the prior year due to lower net revenues.  SG&A expenses for 2009 were $8.1 million, or 45.4% of net revenue, compared to $9.0 million, or 40.5% of net revenue, for 2008.  Of the $916 thousand decrease in SG&A, approximately $581 thousand was attributable to favorable foreign currency fluctuations, with the remainder a result of reductions in staff and overhead.  

Depreciation and amortization expense for 2009 declined to $380 thousand compared to $1.3 million for 2008, primarily as a result of intangibles related to the Encorium OY acquisition becoming fully amortized.  

The Company reported a net loss from continuing operations for the twelve months ended December 31, 2009 of $3.1 million, or $(1.16) per diluted share, as compared to a net loss from continuing operations of $16.9 million, or $(6.57) per diluted share for the twelve months ended December 31, 2008.  Included in the 2008 results is a non-cash $14.4 million, or ($0.70) per share, asset impairment charge related to the Company's intangible assets, which includes a $1.9 million non-cash interim asset impairment charge recorded by the Company during the third quarter of 2008 as well as the $12.5 million charge taken in the fourth quarter.  

Financial Position, Going Concern and Potential Delisting

Encorium's balance sheet at December 31, 2009 reflected cash and cash equivalents of $197 thousand and stockholders' equity of $2.3 million.  Our net cash used in operations for the year ended December 31, 2009 was approximately $8.0 million.  The Company's latest financials have been prepared on a going concern basis.  The report of Encorium's independent registered public accounting firm, included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 19, 2010, contains a paragraph that indicates that, while the Company's financial statements have been prepared on a going concern basis, there is substantial doubt about its ability to continue as a going concern, and that no adjustments have been made to the financial statements that might result from the outcome of this uncertainty.

We anticipate that will meet our cash requirements at least into March of 2011, assuming we are able to fully implement our current costs cutting initiatives, we are able to win additional contracts and we are able to maintain our current customer contracts.  In the event we are unable to do so, in order for the Company to continue as a going concern we will be required to obtain additional capital from external sources or significantly reduce our operating costs, which may include the cessation of operations in some countries.

Encorium currently fails to meet NASDAQ's $2.5 million minimum stockholders' equity requirement for continued listing and may not be able to meet the other listing requirements in the future.  The Company anticipates that a delisting action will be brought against it for failure to comply with the requirement.  If a delisting action is brought, the Company may request a hearing before the NASDAQ Listing Qualifications Panel.  Such request would stay any delisting determination by the NASDAQ Listing Qualifications Staff and the Company's common stock would remain listed on NASDAQ pending a formal determination by the Panel.  However, there can be no assurances that the Panel will grant such request.

Dr. Kai Lindevall, executive chairman stated, "We are very pleased with the cost cutting initiatives that we have put in place.  While additional financing is likely necessary, we believe our experience and capabilities in the vaccine field coupled with the recent new awards in this area demonstrate the long term potential we have to grow into a leading vaccine franchise with expertise in regulatory consultancy and strategic trial planning."