Thermogenesis Holdings Inc (THMO) 2008 Q2 法說會逐字稿

Hello. This is the Chorus Call operator. Welcome to the ThermoGenesis Corporation fiscal year 2008 second quarter results conference call.

Some of the statements made during this conference which are not historical facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in those statements, including, but not limited to, certain delays beyond the Company's control with respect to market acceptance of new technologies and products, delays in testing and evaluation of products, initiation and successful completion of clinical trials for new claims on existing products, capital resources required to fully execute on business plans and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission.

(OPERATOR INSTRUCTIONS)

For your information, this conference is being recorded.

At this time I would like to turn the conference over to William Osgood, CEO.

Dr. Osgood, you may begin.

Thank you, and good afternoon, everyone, and thanks for joining us.

With me today is Matt Plavan, the Company's Chief Financial Officer. Matt will discuss our financial results after I review the highlights of the quarter.

The Company's second fiscal quarter was marked by a number of important accomplishments, not the least of which was our revenue performance. We reported record revenues of $5.5 million, in line with the range provided in our January 10 press release, 49% higher than the same quarter last year. We believe these results reflect the initial impact of our turnaround at the Company and the value of the new strategic direction I laid out for ThermoGenesis when I was named Chief Executive Officer.

The agenda for my presentation today has two main themes -- one, operational issues, and second, revenue growth initiatives.

We have four key initiatives in place for growing the top line, centered on cord blood banking, wound care, point-of-care bone marrow stem cell therapy and stem cell laboratory services for equine orthopedic injuries. This latter business is our new venture, Vantus, that we announced today and that I will discuss in more detail shortly.

But first let me give you an update on a number of operational issues, including the performance of GE Healthcare, AXP supply and quality, BioArchive enhancements, marketing direction, ThermoLine business exit and our search for additional board members.

We continue to discuss our issues with GE Healthcare, and we remain optimistic that we will achieve a positive outcome, even though this process is taking much longer than we anticipated. We will not speculate today as to how the agreement might evolve, but we want to reassure everyone that in resolving our issues we continue to believe that any change to the agreement will serve to improve our financial performance and enhance shareholder value.

Three months ago we felt we were making dramatic headway in addressing AXP supply and quality issues. This quarter's results reflect that confidence in our prime supplier, ASI -- and our prime supplier, ASI, is shipping high-quality bag sets in the range of 2,000 to 2,500 per week. In addition, about 1,000 bag sets were shipped from Nipro in December for a process validation testing, which is ongoing. These units are of high quality, and we are still on track for full production ramp from them during the current quarter. We are full throttle now, and we are already bringing on new AXP customers.

Some months ago I spoke of our plan to offer a modular BioArchive version for family banks. I want you to know that we have uncovered other opportunities that have greater near-term revenue-generating potential, so we have decided to put this project on hold. Through our market research for this project, however, we have learned of ways to add valuable features to the BioArchive without incurring the cost of a major development effort.

We have made real progress in building up the marketing capability required to execute our strategy and to drive our revenue growth initiatives. Two very experienced marketing professionals joined the Company this month. One will focus on growing our cord blood business and the other on commercializing our new bone marrow products and growing wound care revenues.

Our upgraded ThermoGenesis website is nearly ready for prime time, and it reflects the new image and direction for the Company. Company brochures and product sales collateral are being refreshed with the new look.

Finally, you can see our products in our new ThermoGenesis booth at the European Group for Blood and Marrow Transplantation meeting at Florence, Italy, in March; the International Society for Cellular Therapy at Miami in May; and the International Cord Blood Symposium at Los Angeles in June.

We are making good headway on divesting the ThermoLine Freezer and Thawer product line. We have had some very encouraging discussions with potential buyers, and we believe we remain on track to conclude this effort by the end of the current fiscal year.

The last operational issue I will discuss is adding new board members. I am pleased to report that the board search has been rekindled now that the holidays have passed, and we are in final discussions with two outstanding candidates.

Now I will go over our revenue growth initiatives that support our mission to be the leading supplier of innovative products and services that process and store adult stem cells for treatment of disease and injury. We have four key initiatives, as I mentioned previously, and they are centered on cord blood stem cell banking, autologous and homologous wound care products, point-of-care bone marrow stem cell processing commercialization and the veterinary stem cell laboratory services launch.

Providing the devices and disposables to process and store units of umbilical cord blood stem cells is our base business. We believe the market potential for volume reduction and cryopreservation products in this market is about $50 million. Our objectives for this business are to increase BioArchive sales and convert manual volume reduction to AXP automation through crisp sales execution and improve margins through a reduction of the quality costs associated with the AXP system launch.

Based on our best information regarding worldwide cord blood collections, we believe we have close to 20% of the volume reduction market, which provides plenty of room for AXP revenue growth. Last quarter we brought on seven new AXP customers -- one in the U.S., two in Europe, two in the Middle East and two in Asia. This quarter we are targeting to add 11 additional accounts.

Turning to our surgical wound care technologies, we have completed our business development project and have a much better fix on the available market for the CryoSeal, which we believe is approximately $38 million, assuming we are registered in all major countries outside the U.S., including Japan. Three strategies were evaluated for CryoSeal. I call them divest, invest and focus.

We believe a divest strategy is not in the best interest of our shareholders at this time because we are starting to get real traction since the PMA approval, which will only increase the value of this business going forward. An invest strategy means development of the tabletop CryoSeal II device, which would potentially expand our available market. This would take several years, several million dollars for development and require us to fund expensive clinical trials. We don't believe this is a prudent approach, because it will draw resources away from our stem cell initiatives that we believe can add sizable incremental revenue sooner and with more certainty.

We do believe the best strategy is to focus on our current products, the PMA approval and our distributor relationships outside the U.S., specifically in Europe, Russia, South America and Asia. We have rationalized the business and reduced our SG&A expenses by more than a million dollars a year, enabling a positive contribution margin now. With a more focused approach, sales of the CryoSeal and TPD have increased almost 70% in the first six months of the year over the same period a year ago. We expect fiscal year-end sales will have significantly increased from the prior year.

We already have CryoSeal distributors in Europe, South America and Russia. Last quarter we brought on more than a half a dozen new customers in Romania, Russia, Greece and Israel. In addition, Asahi is moving ahead aggressively to register the CryoSeal in Japan, and we are evaluating potential distributors for Korea, Taiwan and Malaysia. And, finally, we are providing support to Sanguine's cardiac surgery clinical trial. To summarize, we are increasingly more confident our wound care products can provide a meaningful revenue contribution with the approach we are taking now.

Turning to what could be the greatest advancement in modern medical science, the future appears very promising for adult stem cell treatments for large patient populations [with] human diseases and injury. Clinical trials and patient therapies are underway around the world for treating myocardial and critical limb ischemia, using autologous bone marrow stem cells, and in some countries in South America and Asia these treatments are already becoming practice of medicine. In addition, bone marrow stem cells are being used by orthopedic surgeons to regenerate bone and cartilage in musculoskeletal repair.

We believe the market potential for bone marrow stem cell treatments dwarfs the existing cord blood market, because in the U.S. there are 17 million people with myocardial ischemia, 8 million with peripheral artery disease and 8 million people requiring orthopedic surgery each year, according to the American Heart Association and the U.S. Centers for Disease Control.

To size the market potential for our products in treating just ischemia conditions, we started with annualized U.S. data provided by the American Heart Association, which tells us there's 1.2 million new and recurring patients with heart attack and chest pain, 780,000 new and recurring stroke patients, 300,000 vascular bypass procedures for critical limb ischemia. Assuming $1,000 per procedure for disposable revenue, the U.S. market potential could be $2 billion and higher, assuming stem cell therapies become a standard of care for people with cardiovascular ischemia. This estimate does not include treating the 25 million patients who already have an ischemic condition.

Our first entry into this market is the AXP MarrowXpress, which is a modified version of the AXP AutoXpress used for volume reduction of cord blood. We have confirmed that our cell separation technology produces the right bone marrow cell composition at point of care in less than one hour. ThermoGenesis will sell and support the MarrowXpress with our existing sales staff and field support engineers. We are currently preparing the CE Mark application and 510(k) submission, and we expect initial commercialization activities to start next quarter.

One final comment on bone marrow. With a market potential this large, competition will be fierce. There are a number of companies and products entering this market, and a large number of clinical trials are underway. No one has the perfect product. We hope to get some early traction with MarrowXpress, learn and adapt as point-of-care stem cell treatments evolve and then add significant revenues with line extensions and complementary product additions.

I now want to speak about our newest effort announced today, the formation of Vantus veterinary stem cell laboratories. As I have mentioned in the past, we are very interested in the veterinary market because stem cell therapies are working, the regulatory hurdles are low and our AXP and BioArchive technologies, proven in clinical practice with humans, provide a major advantage over all other competitors in this space.

For the last six months we have been evaluating opportunities in treating orthopedic injuries in the performance horse market, working in close collaboration with the UC-Davis School of Veterinary Medicine, Center for Equine Health, and their stem cell regenerative medicine group. Based on our collective evaluation and assessment, including discussions with major breeders, we decided to launch a new company called Vantus, Inc., dedicated to serving the veterinary stem cell market. Vantus is a wholly owned subsidiary of ThermoGenesis that will provide stem cell collection, processing and storage services for treating Thoroughbreds, American Quarter Horses, Arabians and Warmbloods during their performance years.

Our business model is unique in three aspects. First, cord blood and placental tissue will be collected when the foal is born, and the stem cells will be processed and cryogenically stored, making the horse's stem cells available for treatments throughout its life. Having access to these cells will allow us to respond rapidly to an owner's need for prevention or curative stem cell treatments. Second, our primary customers will be breeders, which is a far more aggregated customer population than selling services directly to horse owners and veterinarians. Third, we are very close to formalizing a three-way stem cell research collaboration with the UC-Davis Medical and Veterinary Schools. We expect this collaboration to provide new stem cell treatments in the near future that will be commercialized through Vantus.

The market opportunity for equine stem cell services is quite large. If we look at banking alone, there are approximately 300,000 performance horse foals born per year worldwide. When we look at therapeutic services, the numbers get even larger. The population of active performance horses is over 2 million, we estimate. About 30% of this population suffers an injury every year that potentially can be treated with stem cell therapy. Knowing these horses are extremely valuable, many worth several million dollars, our market research confirms that major breeders and owners will value banking and having access to banked cells so that there is a timely administration of stem cell therapies.

You might be wondering how many breeders will bank cells. Think about family banking of cord blood -- of human cord blood. Approximately 3% of the 4 million births in the U.S. bank cord blood at family banks like Cord Blood Registry, ViaCord and Cryo-Cell. According to Cord Blood Registry, in certain high net worth geographic areas, between 40 and 50% of the births are storing stem cells. Therefore, it is reasonable to assume that a high percentage of the most expensive of all horses, performance horses, will have banked stem cells available for treatment during their lifetime.

Just to be clear, Vantus is a laboratory services company. Vantus labs will utilize the highly regarded and proven products that ThermoGenesis produces today. The AXP platform of products will be used for processing fetal tissue and fluids as well as bone marrow, and the BioArchive will be used for cryopreservation. The laboratory and company will be housed in one of our two leased buildings in Rancho Cordova to start. It will have a dedicated management team but share resources with ThermoGenesis where practical. We are currently refining our proprietary collection methods at a large breeder farm in California and at the UC-Davis Center for Equine Health. We are finalizing our processing and storage methodologies in laboratories at UC-Davis and at Vantus.

We expect to be in full operation commencing the 2009 foaling season, which begins in January of next year. This is a very tight timeline, as our marketing and promotion campaign will launch in the spring and major breeders must be under contract by early fall. We believe the worldwide market potential for stem cell collection, banking and therapeutics in this market will exceed $1 billion. This number comes from multiplying 300,000 performance foals per year times a rough estimate of $3,500 to collect, process and store equine cord blood and placental tissue stem cells.

It is important to point out that the experience we gain in the veterinary stem cell market and the products and services that will emerge from research and innovation in cell harvesting, processing, storage and therapeutic treatments will directly translate to treatment of human orthopedic conditions and speed our entry into this even larger market down the road. Finally, the veterinary surgeons we are working with believe our wound healing technologies will have application in other areas of the veterinary market and could add additional revenues to ThermoGenesis through Vantus. I hope you will come to share our enthusiasm and excitement about the potential for this venture to add top line revenue and earnings starting in fiscal 2009.

Let me summarize our revenue growth initiatives in this way. Our current business is comprised of human cord blood processing and storage plus wound care. Sales in these markets were $13.5 million in FY '07. The combined available market is $88 million, we believe, making our market share 15%, providing us a lot of room to grow, but with a low ceiling. We believe the market potential for our products in bone marrow stem cell processing could exceed several billion dollars for ischemia patients alone. We believe the market potential for our new veterinary stem cell laboratory services business could exceed $1 billion.

Therefore, our strategy is to solidify our current businesses, grow them, make them profitable, and then take our technologies into new and emerging markets that are many orders of magnitude larger in market potential. We believe this strategy can provide ThermoGenesis a long and steep trajectory starting now.

Thank you for your time today, and I will turn the call over to Matt Plavan.

Thank you, Bill, and good afternoon, everyone.

Revenues for the second quarter of fiscal 2008 were $5.5 million -- as Bill indicated, substantially higher than those of either the same quarter in the prior year or the most recent quarter. They also represent sequential growth in revenues, as we had forecasted in our last conference call. Disposable revenues increased to $2.6 million, versus $1.8 million in the same period a year ago, an increase of 44%. For the first six months of 2008, our total revenues were $9.1 million, versus $8 million in the first six months of 2007. Disposable revenues during the first six-month period were $4.5 million, compared with $2.8 million in the first six months of fiscal 2007, a 61% increase.

For the first half of the fiscal year, disposables were 49% of total revenues, versus 35% in the same period a year ago. This trend is important for two reasons. One, we're focused on increasing our base of recurring revenues as well as leveraging the impact of the higher margin disposables on our gross -- overall gross margin. Total cancellable backlog at the end of the second quarter was $3.9 million, versus $2.6 million in the same period a year ago, a 50% increase. In addition, we added to our backlog in January, bringing the total cancellable backlog as of the end of January to $5.9 million.

Gross margin for the quarter was 35%, versus 21% in the second quarter a year ago. The increase in gross profit is primarily due to costs of $500,000 that were charged in the second quarter of the prior year for the destruction of lots and the product testing as part of the quality assurance program of the AXP bag set disposables. There were no similar charges in the second quarter of fiscal 2008. Additionally, as our production volume of the AXP bag set disposables increased, we absorbed more overhead costs.

Operating expenses were $4 million, versus $3.3 million a year ago and $3.9 million in the first quarter. SG&A expenses were $2.4 million, while research and development expenses were $1.6 million.

The net loss for the quarter was $1.7 million, or $0.03 per share, versus a net loss of $2 million, or $0.04 per share, in the same period a year ago.

Our balance sheet remains in very solid condition, with cash and short-term investments of $30.5 million and working capital of $34.7 million at the end of the second quarter. This compares with $33.4 million and $37.8 million, respectively, at the end of fiscal 2007. We continue to have minimal debt, and our use of cash for operations was $1.1 million during the quarter.

Before opening the call to your questions, I want to reiterate our outlook for fiscal 2008 that we provided in the last conference call. We continue to expect sequential quarterly revenue growth, and through the fulfillment of our backlog and a full AXP ramp-up, expect revenues in the fourth quarter to exceed $7 million. Assuming we are successful in growing our revenues based on that outlook, we would expect to have a more stable manufacturing environment, have a better understanding of the Vantus startup costs and fiscal 2009 revenues, and thus better visibility into the timing of our gross margin improvements necessary to drive profitability. As such, we would be in a better position at that time to provide more specific guidance on the timing of achieving profitability and cash break-even.

Thank you for joining us today, and we'd like to now call -- turn the call back over to the moderator for questions.

(OPERATOR INSTRUCTIONS)

And our first question comes from Jon Hickman, from MDB Capital. Please go ahead with your question or comment.

Thank you. Can you hear me?

We can hear you, Jon.

Okay. I have a couple of questions. What is UC-Davis' ownership in Vantus?

They have no ownership in Vantus. Based on the -- the University doesn't allow their participation in commercial ventures. We have a research collaboration with them, and so the Company owns the -- ThermoGenesis owns it 100%.

You just pay them for their research efforts?

Correct.

R&D?

Yes, we would be -- we would be paying them, yes, research grants, services and potential license fees for therapeutics down the road.

So this Vantus venture, how big -- you know, you say you're working with a California breeder right now?

Yes.

How many horses does he breed every year?

There are in the U.S. 35,000 foals a year. California is the number three state, at about 4,000. Of course, the big state is Kentucky. The reason we're working with the California breeder is to kind of get all our processes down, and our methodologies. And then our marketing will focus on Kentucky in the summer.

I thought you said there was 300,000 performance horses born every year.

Yes, that's -- I'm sorry, that's Thoroughbreds. There's 118,000 Thoroughbreds, 165,000 American Quarter Horses, about 3,000 Arabians, so close to 300,000. You're right.

Okay.

Worldwide.

Worldwide. So I've given you the U.S. market. Yes.

Okay, so this breeder in California that you're working with now, you would expect them to become a customer?

Yes.

Okay.

It turned out that it's -- actually, it's pretty -- we were pleasantly surprised at the ease in which we can collect this material. So they've already expressed interest in starting to bank with us right away.

Okay. So can I -- a financial question for Matt. So if your revenues exceed $7 million in the fourth quarter, does that -- that doesn't get you to profitability? Is that what you just said?

Well, no, actually, I didn't specify what revenue number got us to profitability, but right now a number of factors will come into play as to when we will actually cross over to becoming profitable. But our expectation is somewhere between $7 million and $8 million in quarterly revenue would be a good place for us to make that crossover.

Okay. I noticed there was a fairly big jump in your R&D, and I guess that's related to this Vantus. How big are you going to let that -- I mean, what's your budget here?

Actually, that increase was primarily driven by the transition of Phil Coelho from the executive suite into the scientific affairs, research and development. And so there was a pretty substantial stock compensation charge that followed him into that line item. So if you extract that, R&D was essentially flat year over year, or period over period.

Did you break that out for us, your stock-based compensation?

Yes, if you look at the -- well, in the press release you'll see a line item.

Okay.

Stock-based compensation was $1.1 million for the six months ended December 31, 2007, as compared to $582,000 in the first six months of the prior year.

Okay. Should I get back in queue? Are there any other questions? Then I'll -- I mean, I have --

Yes, that would be a great idea, if you wouldn't mind. Thanks.

Our next question comes from Jack Robinson, from Winslow. Please go ahead with your question or comment.

Bill, thanks a lot. Congratulations for breaking through the $5 million mark.

Thanks, Jack.

I (inaudible) the call, and I picked up that you were giving market sizes. Was it for each of your four growth areas?

Yes.

Could you just go over that once again?

Yes. We've said for a long time, for our current products, BioArchive and AXP, given the worldwide collections, we believe it's about a $50 million market potential for AXP/BioArchive. We believe -- we've done a pretty extensive business development project to really sort out what we can -- what the real CryoSeal market is, and we believe it is around $38 million or $40 million. And given that we're sitting under $2 million, we think we can really make some headway in that market.

Once you get into the regen medicine markets, the numbers become huge, because the patient populations are so large. And so it's -- on the one hand, you hate to throw around multibillion dollar numbers, but that is the case. I mean, if these stem cell therapies work as they're starting to work and become standard of care with ischemia conditions, the market for people that have products like ours is going to be several billion dollars.

In the veterinary stem cell services business, we believe there is a big kind of gaping hole opportunity there in the banking arena. It was just too big to pass up. And we have the right technologies and products, and if we use the same kind of economic model that a family banker uses, we can see that market at a billion dollars, and we could see Vantus potentially being the size of a CBR.

So you're saying we don't have to put down any more top notch racehorses?

Oh, well, I'm not a horse owner, but horse owners tell me their horses are always injured.

And so just when -- the regen market -- when is that addressable by the Company?

On the bone marrow side for adults, we are already very close to having product being used. I think I'd be more confident in saying it'll be in commercial operation in the next couple -- next few months. And so I see that happening pretty quickly. But I don't think the volume, the revenue, is going to be astronomic. Not for a while.

And that's why, I mean, a lot of us had talked about that regen medicine is -- you're not really sure when that's going to happen and when the revenue ramp is going to happen, and we need something in between. And we believe veterinary medicine is the way to get revenues growing fast now, get us a bridge to human regen medicine, and then even leverage the veterinary play back into the human market on the orthopedic side. So the thing that I like about the veterinary venture is we can start seeing revenues next fiscal year.

Which starts in July.

Correct.

Great. Thank you.

And our next question comes from Joe Pratt, from A.G. Edwards.

Hi, Bob. I have two questions. The archive unit sales are going up from 3 to 8 to 11 here. But is that being actualized on by your sales force or General Electric? It's a little fuzzy here as to whether or not General Electric is being productive for you.

We had a -- I mean, we had a good BioArchive quarter last quarter, but we had very disappointing quarters before that. We had, what, three, four, five, and then we went to eight. Those were not all General Electric's BioArchives. Their average that they've been selling is still below the (inaudible) run rate that we were running before GE, and we still have concerns. So I think the other side of your question is, we are continuing to more actively engage with GE and with our customers to help them close business.

But is this relationship with GE going to come to a head here, or is it going to kind of muddle along for the rest of the year?

I really -- I would like to stay away from anything specific, but I will say that it's not going to muddle along.

Okay. Second question, on the Vantus, how -- let me turn this off -- how -- can that forestall or hold out, push out, your profitability?

I don't believe so, and the reason is, is that we're able to get into this venture with a very modest upfront investment. We're able to leverage our existing products, our existing facilities, a number of people in the organization. And the year that we will -- fiscal 2009 is where we're going to have some capital expenditures, but they're going to be offset with revenues generated from the foaling season that starts January 2009. So our model, our business model says that it is not going to negatively impact profitability.

But it's expensive in business in general to build one's own sales force. Isn't this building a new separate sales force?

We will be marketing to specific breeders, and there are -- there's the 80/20 rule in breeders. We know the breeders we need to work with. We have fabulous connections to breeders all over the world through our -- the people we're working with at UC-Davis, and Greg Ferraro, who heads up the Center for Equine Health. We believe that we'll have a very focused and targeted marketing program. But a lot of the business will come from our own relationships.

And how many good salesmen worldwide would it take to cover your equine markets?

Well, we're not going to -- we're going to roll it out. I mean, we're -- like I mentioned, we're like proving our processes in California. We're going to market heavily in Kentucky. Once you're in Kentucky you're up and down the whole East Coast, which is the -- where most of the -- at least the Thoroughbreds, the great percentage of them, are born. I think once we start to get that under our belt then you're going to see us expand into other -- South America and then go to Dubai. But right now we need to get the U.S. market under our belt.

Thank you.

And our next question comes from Jon Hickman, from MDB Capital.

Yes, just to follow up on the regenerative side, how long do you think it's going to take you to get the 510(k) for the -- you're calling it the MarrowXpress?

MarrowXpress. Once a 510(k) application is made, there's a 90-day clock. I never will ever predict when the FDA will decide. What we will do is tell you when we have submitted the application. We're currently working on it now. And we'll tell you when we receive the clearance.

So this product is -- the bag sets and stuff are basically the same. You can make them, Nipro or ASI can make them.

The device is different, because the requirements for processing cord blood are different than bone marrow. So it is a different version. And the bag sets are also different. But they are similar enough that we will be able to build them in the same locations.

Okay. Now, just one last question about your bag sets. There have been -- I mean, with the redesign with Nipro, so what do you think your target gross margin is going to be once you're up and running? I mean, could you get the kind of efficiencies, or do you think you're going to get the kind of efficiencies that you had expected? Bag sets still too hard to make? Can you comment on that?

Yes, my target gross margin is 60%. I think that's what you have to have on disposables in the medical device business. That's where we're going to get this margin. It's tough to get there when you've got a new product and you bring on a new supplier, but we have a path to get there, and that's our goal.

And you think that's doable.

Yes, I do.

Okay. That's it for me.

Thanks, Jon.

Our next question comes from Joe Pratt, from A.G. Edwards.

Just, do you have a prediction here, or a schedule, for upcoming presentations, Bob, by you or the Company in the next month or two, in particular on the East Coast?

Are you talking about trade shows?

No.

Oh, you're talking about --

Wall Street stuff.

Oh.

We expect to be out -- we're targeting mid-March right now.

Which show would that be?

Oh, no, we were just thinking of getting out and seeing people in mid-March.

Okay.

Whether we can wrap that around a show or not.

And heading toward the East Coast.

Yes.

Okay. And you mentioned earlier in the call the trade shows, so we can hear that on the archived portion of the call.

There is a stem cell meeting in New York that I'm going to attend. That's towards the end of February. It's a -- if you want to meet up then I can send you some information on it.

Yes, just send me an email on that, please.

All right.

Our next question comes from Al Kildani, from SF Capital.

Hi. I missed -- I know you said you're going to be hiring a management for Avantus, and, I'm sorry, I missed it, are those people in place or identified yet?

There's a core team of people that are working on this project internally. My key hire is the president for this company. I have a candidate for that, and we'll proceed in the right way. We have brought on two lab people, but to make it as simple as I can, we're a company that wants to grow, and people have really -- I think the productivity of the people in this company has gone up about a magnitude with the different environment here, and we're able to get a lot more done. So I'm not anticipating a lot of -- I'm trying to keep the overhead managed in every respect so that this company comes online without a cash drain.

How soon can the Vantus effort contribute meaningful revenues?

January quarter of 2009. All these performance horses foal from January to April, typically. It's a very seasonal business, if you will, for that aspect of the revenue stream, and that's where we will start seeing revenue.

Okay. And then with some of these new initiatives now on the table, can you comment on your cash position and how -- whether it will be sufficient to execute on these strategies?

Yes, we spoke about this a little bit earlier. Current cash position, or at least at December 31, was just a little over $30 million, and our guidance from a revenue standpoint so far is exceeding $7 million in Q4. I followed on with that comment to mention that our expectation right now is when we're somewhere between $7 million and $8 million on a quarterly revenue we ought to be approaching cash break-even and profitability.

There are a couple of factors that will weigh into affecting the exact timing of that, including stock compensation charges and just how many foals we're able to generate revenue on in this first calendar quarter, but we don't expect Vantus to have a significant impact on our cash burn, and in fact expect to be in a better position, say, at the end of Q4, to be a little more specific about when we think we're going to see profitability. But we have no concern over our existing cash balance getting us to where we need to be.

Great. Okay. Thank you.

Our next question comes from Michael [Prouting], from [10-K Capital].

Good afternoon.

Good afternoon.

I had a couple of questions. Could you just repeat again the backlog you said as of I believe it was the end of January?

$5.9 million.

Okay. What were the principal drivers of the increase versus the end of December?

Additional orders for AXP bag sets and a couple of BioArchive orders.

Okay. So that trend should be sustainable, then?

Trend of backlog, or --

Growth in backlog, yes.

Well, you know, that's ebbing and flowing every day in and out, so I don't know that I would say that the backlog would continue to grow. In fact, our goal is to fulfill orders in a timely fashion. So if we're able to do that going forward I would expect the backlog to either remain stable or go down.

Also I think it's important to know that GE places quarterly orders. So they placed a quarterly order, and they'll place another one this quarter. But they're not all for immediate delivery. They're for delivery in the quarter.

Oh, I see. When does GE typically place their orders, then, during the quarter?

When did they place the last one? It's not an exact same date. It depends on what the backlog is.

Yes.

Okay. So that -- the $5.9 million number, then, that does not include GE's order for the current quarter.

It includes the GE quarter for this quarter, for this --

For the bag sets.

-- for the bag sets.

Oh, I see. Okay. All right. Okay. And then as far as the GE relationship is concerned, can you give a little bit more color there around what your hopes or expectations might be?

I'm not able to at this time. As soon as I can give you some information about how that relationship changes, if it does, I will. It just is not appropriate right now for me to do that.

Okay. If that relationship were to change in some kind of way, is it your expectation that you would find another party to take over that responsibility, or how should we think about that?

We would -- let's assume hypothetically that we were not doing business with GE, we would -- we'd sell all of our products direct in the U.S., maybe in some major countries in Europe, and we'd reestablish our distributors that we had before the GE relationship.

And what would be the -- I guess what would be the cost in terms of -- in terms of expenses and/or cash associated with that, then?

I don't think we can really get into that, because there's a number of ways the -- I don't know what your assumptions around how the relationship evolves would be, but I would just draw you back to something that Bill said earlier in the call, is that we won't speculate today as to how the agreement might evolve, but we wanted to reassure everyone that in resolving our issues we continue to believe that any change to this agreement will serve to improve our financial performance and enhance our shareholder value. I think that's really the -- what you should keep in mind.

Okay. All right. Okay. That's helpful, to understand that. And then, it sounds from what you're saying -- I know you're doing your best to avoid any guidance on this, but it sounds from what you're saying that, at least on a cash basis, you ought to be cash flow positive in the coming quarter.

No. I think what we were trying to convey is that there are a number of moving parts, between Vantus, between bringing up new manufacturers. It's just not prudent for us at this time to be specific as to which quarter in which we will cross over into profitability or cash break-even. However, we do see it in the fairly near term, and fiscal '09. We would be disappointed leaving calendar '09 not being profitable as a company. But we don't want to get more specific than that, for good reason.

Okay. And then final question, once you achieve profitability on a cash flow basis and then subsequently on a GAAP basis, would you expect to remain profitable on both a cash flow basis and respectively a GAAP basis?

We would expect to.

Okay. Thanks.

(OPERATOR INSTRUCTIONS)

And, sir, at this time I'm showing no additional questions.

Okay. Thank you very much. Appreciate the time. And we'll talk to you next quarter.