Thermogenesis Holdings Inc (THMO) 2009 Q4 法說會逐字稿

Hello. This is the call operator. Welcome to the Thermogenesis fiscal year 2009 fourth quarter result conference call. (Operator Instructions). For your information, this conference is being recorded. I would now like to turn the conference over to Matthew Plavan, Chief Operating and Financial Officer. Mr. Plavan, the floor is yours, sir.

Thank you, Operator. Welcome, everyone, I want to start off with an apology for having been late on the call, and getting the release out later than we're used to. We had technical difficulties here, but I understand the release has been out since 5:00 eastern time and so we wanted to give folks a little bit of time from that point until now before we started the call. So I thank you for your patience and sincerely apologize for the delay.

With me today is Mel Engle, our Chief Executive Officer, who will review our key operating highlights for the quarter and provide our perspectives on fiscal 2010. I will then follow with a review of our financial performance in the quarter and our outlook for fiscal 2010.

Before I turn the call over to Mel, I want to note that some of the statements made during this conference call that are not historical facts and are forward-looking statements are subject to risks and uncertainties that could cause actual result 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. I'll turn it over to Mel now.

Thanks, Matt, and good afternoon to everyone. Good evening. I look forward to sharing with you today the progress we've made over the past several months including the successful rollout of MXP and our launch of Rescue as well as other strategic efforts we have under way to realize our turnaround objectives. During the next few minutes I'll update you on key operational and market development initiatives, many of which were outlined in our August 6 news release including quality, manufacturing, market expansion for our core offerings and clinical programs, and I'll also provide you our perspectives on key milestones for fiscal 2010.

As Matt will discuss in more detail during his comments, our financial performance for the fourth quarter and fiscal 2009 were in line with the expectations we outlined on August 6. As we indicated at that time, the primary contributors to our revenue performance were the capital expenditure environment, which negatively impacted the sales of our bioarchive systems, and the timing of AXP bags head orders from Ge Health Care. At the same time our bottom line performance was impacted by nonrecurring costs, many of which were noncash charges related to our quality improvement, manufacturing outsourcing, and divestiture initiatives.

You may remember that in our third-quarter conference call, which was the first that I had with the company, I outlined five key areas of focus for me and the management team. These included, first, developing a clear strategy for the company, where are we going. Secondly, achieving top-line growth and customer satisfaction. Third, creating an environment of teamwork and personal accountability. Fourth, realizing company prosperity both in the near and long term by driving for excellence in everything we do. And, finally, ensuring our offerings provide the highest possible quality through continuous improvement. While I'm pleased to say we are making -- we are continuing to zero in on these key business mandates and have begun to make noticeable headway.

I want to begin by addressing this last point which is called product quality. As I told you last time, I believe we're in a much better position with respect to quality than we were at the start of calendar year 2009, but that we still had more work to do in this area. Now for a little update. A key element of our quality initiative has been in the development of much closer working relationships with our suppliers. Many of our products are produced by outside third parties. We're beginning to establish more proactive and open channels of communications with them and have increased our on-site consultations. At the same time, we have begun an exhaustive review of our supplier contracts and have established heightened performance expectations. This program will not only have implications for our quality efforts but will help us to reduce our cost of goods.

The second element involves the creation of stronger relationships with our customers. Led by our revitalized sales and marketing teams, we have initiated a much more active customer and distributor engagement process, especially with GE Healthcare. This higher level of customer interface is providing valuable feedback not only on product quality issues but also with respect to future product enhancements and next generation offerings. While I am pleased with the progress we've made in the quality area, the management team and I view quality improvement as a continuous process and will continue to address this critical area as we go forward.

Next, I want to address the positive experience we've had with our two newest bone marrow stem-cell separation offerings, the MXP system and Rescue. Over the past several months, the MXP has achieved traction thanks to the efforts of selling technologies, a division of SpineSmith, LLC. The device is now being used in a half dozen high-volume surgery centers and is becoming recognized as a device of choice which offers superior outcomes versus the current standard of care.

In a press release issued about two weeks ago, selling technology has made note of the consistently higher yields of the mononuclear cell recoveries from bone marrow by MXP in excess of 90% and the easy data tracking through the proprietary data management software. The release also quoted Dr. Robert Johnson of Neurological Associates of San Antonio, a pioneer in the use of stem cell therapy and spine surgery who said, "The MXP device takes human error out of the process by using technology to drive better results. At the current stage of stem cell therapy, I believe the more stem cell recovery the better, and I want to offer the best technology to get those results." This type of testimonial from a leader in stem-cell therapy is critical to our market expansion efforts. To that end, selling technologies has indicated they expect to add a number of high-volume sites using the MXP by the end of the calendar year and also believe they will place the device in at least a couple of non-US centers over the next several months.

With respect to the Rescue product, we initiated a controlled launch of the product care product bone marrow device through selling technologies also at the end of July and the initial responses have been positive. It has been used in a number of procedures with good results and, in fact, today we actually have a backlog of orders from selling for Rescue that we're in the process of fulfilling. With that said, we expect that the revenue contributions from the Rescue and MXP in fiscal 2010 will be incremental and will ramp up over time. We are pleased with the initial experience with both of these devices.

In the bone marrow area our objective will be to continue fostering the market development programs of selling technologies. Expanded collaboration with selling technologies we announced last month includes the launch of a clinical evaluation program for which we will share funding. I want to note that this initially represents a relatively modest financial commitment for Thermogenesis with a ratchet mechanism to increase funding as MXP and Rescue sales continue to rise. We believe this program which will compare bone growth in patients treated with MXP or Rescue versus those treated with the current standard of care over one year will provide data that can help us accelerate market expansion for these offerings. In addition, we will be working with selling technologies to expand beyond their Texas base of business. Selling technologies expects to have the MXP device will be fully operational in two to three additional states by December of 2009. In addition, selling technologies expects to have implemented the rescue in over 20 surgery sites -- suites by December 2009 also.

We are exploring other Rescue distribution partners in addition to selling technologies, and they must likely will be involved with the regenerative medicine in the cardiovascular, critical limb ischemia or trauma markets. The good news for Thermogenesis is that we believe that Rescue base technology will be transferable to these new applications without major additional research and development costs. We were pleased to announce the addition of the New England cord blood bank as a AXP customer. Headquartered in Boston, this 15-year-old private cord blood bank serves the greater New England area. In total, we added nine new AXP customers during fiscal 2009. We also have several high-volume sites evaluating the AXP and are hopeful we will add at least a couple of them during the next several months.

Our relationship with GE Healthcare remains very positive. My team and I met with their management team last month, and they're very excited about the market opportunity for the AXP as well as the potential for expanding our collaborative efforts. We believe their programs with companies such as [Sitari] and [Jeron] demonstrate their interest and commitment to cell therapy and portend the possibility of an expanded relationship between our two organizations in the future.

With respect to the bio archive, we sold three systems in the fourth quarter of FY 2009 versus nine in the fourth quarter of FY 2008 and five in the third quarter of FY 2009. Clearly, the capital environment is having an impact on this aspect of our business. Our initial sense of the market as we begin fiscal 2010 is somewhat similar to our expectation is for bioarchive is for slow growth over 2009. Although we don't expect a dramatic improvement, we do believe we'll see a turnaround in this business as we go through fiscal 2010.

Certainly contributing to our optimism at Thermogenesis are the great strides we have been making in the sales and marketing arenas. As we announced in early August, Hal Baker has joined the company as Vice President of Sales. Hal brings to Thermogenesis more than two decades of global sales and marketing experience in the health care sector, including an extensive track record in the cord blood stem cell market and with managing complex distributor relationships and strengthening sales organizations. Even though he's only been here not even a month, Hal has come out of the starting blocks very quickly and has implemented a number of positive changes to our sales strategy.

We are also pleased with the impact of our new marketing programs. In addition to the customer outreach initiatives I mentioned earlier, we're implementing a customer centric process to better integrate customer needs and requirements with all of our products, product development and product extensions. Customers are beginning to participate in active coordination with our marketing team on all product initiatives to include training and website development.

Changing to an international note. The MXP trial at the University of Naples in Italy is studying the effect of bone marrow derived mononuclear cells on patients with critical limb ischemia, or CLI. This week, Professor [Seka] performed his first and second of 30 scheduled clinical applications for CLI using our MXP device for harvesting and processing bone marrow stem cells. Over the next three to six months, his results will be followed and the MXP will then be registered in Italy where five clinical centers treating CLI will use the MXP and intended disposable bag sets to treat CLI. Patient suffering from CLI face a higher probability of amputation and possibly death and the study will focus of bone marrow derived stem cells to restore blood flow to the affected limb.

As I touched on earlier, we have achieved important progress in our restructuring and reorganization programs. In addition to the quality and sales and marketing initiatives I've discussed today, we're moving forward on our plans to streamline the organization which include the outsourcing of device manufacturing and programs to manage costs. Before addressing some key operational milestones for fiscal 2010, I would also like to acknowledge the efforts of our employee over the past year.

It's been a year of many changes and I've indicated at the outset of my comments one of my primary goals has been to create a culture of personal responsibility and teamwork at Thermogenesis. The enthusiasm and dedication to our vision amongst our employees has been very encouraging, and they are aligned with our strategies to get there. With respect to our goals for fiscal 2010, on our last call I outlined what I saw as key drivers of our ability to achieve sales potential, and they included, first, achieving a strong performance with our existing products and our existing markets. Secondly, entering new markets. Thirdly, creating new product flow and, finally, implementing an aggressive business development strategy.

As I think I've addressed today, we have made good headway in a number of areas, particularly with our initial success of the MXP and Rescue. With these strategic factors in mind we see the following as key operational milestones for the company during the new year, fiscal 2010. One, completing the outsourcing of our ThermoLine manufacturing activities by December of this year, which Matt will discuss later in the call. We will continue to sell the thermoline offerings, but believe that the outsourcing and manufacturing effort will enhance the contributions of these revenues to the bottom line. In addition, we expect to have completed the outsourcing program for the bioarchive by the end of the year, June 30, 2010. Secondly, divestiture of the CryoSeal business by the third quarter of fiscal 2010 is a major goal for us. Thirdly, achieving full penetration of selling technologies customers with the MXP and/or Rescue by the end of calendar year 2009. Four, attending new distributors -- adding new distributors for the AXP, MXP and Rescue and identifying new indications for the Rescue, as I mentioned earlier. Fifth, expanding the customer base for all of our offerings, particularly the AXP, MXP and Rescue. Finally, the sixth, continuing to achieve operating efficiencies which in conjunction with revenue growth will drive us to profitability in 2010.

The regenerative medicine market has undergone a dramatic shift in the past year due in part to the change in political environment as well as increasing activity within the private sector in terms of partnerships, clinical programs and product development. We believe these market drivers combined with improving clinical outcomes, the growing endorsement of stem cell therapy in general by clinicians and new sources of stem cells will create increased sales activity. We're well positioned with both our current offerings and potential new products to capitalize on this market opportunity. Thank you for joining us today and I look forward to talking with you during the Q&A session. I'll now ask Matt to address our financial results and outlook. Matt?

Thank you, Mel. Let me start at the top of the P&L with revenues. Revenues for the fourth quarter of fiscal 2009 were $4 million versus $7.2 million in the fourth quarter a year ago. This brought total fiscal 2009 revenues to $19.8 million, in line with expectations outlined in our press release of August 6. This compares with revenues of $21.9 million in fiscal 2008. As we discussed in our August 6 release, factors impacting our revenues in the fourth quarter included delays in customer capital equipment purchases, which Mel had referred to, of our bioarchive system and reduced AXP bag sets resulting from the timing of orders from General Electric Healthcare. As we indicated in the release, we expect to recover these bag set orders over the first two quarters of fiscal 2010.

As Mel mentioned, we sold three bioarchives in the quarter versus nine a year ago and AXP volume in the fourth quarter was 11,300 bag sets and this compares with 43,000 bag sets in the fourth quarter a year ago and 23,600 bag sets in the prior quarter. Just as a reminder, roughly half of the 43,000 bag sets that we sold in the prior year fourth quarter included the fulfillment of backlog that had been growing for several quarters due to production capacity constraint during fiscal 2008. Offsetting these decreases was an increase in revenues due to the launch of the MXP in fiscal 2009, and an increase in ThermoLine freezer sales, primarily due to the sale of 10 freezers to two different customers. Also as Mel mentioned earlier, our goal is to outsource the manufacture of the thermoline freezers and thawers. As of today, we have successfully transferred that manufacturing for the thermoline thawers and expect to have completed the freezer transfer which is the balance of those products within our goal of December 31.

For the fourth quarter of fiscal 2009, we reported a net loss of $3.1 million which is within the range we discussed in our August 6 release and comes to a loss of $0.05 per share. Excluding the nonrecurring charges in the quarter, we would have reported a net loss of approximately $1.3 million or $0.02 per share. In the fourth quarter of fiscal 2008, we reported a net loss of $2.5 million or $0.04 per share.

Turning to the balance sheet, we ended fiscal 2009 with $15.6 million in cash and short-term investments. This compares with $17.7 million at the end of the third quarter and $25.3 million at the end of fiscal 2008. This is in line with the outlook we provided on August 6 and our use of cash during the quarter was approximately $2 million.

I now want to turn to some key financial metrics for the fiscal year. Our gross profit was $5.7 million or 29% of net revenues for fiscal 2009 as compared to $7 million or 32% of net revenues in fiscal 2008. The lower gross profit was due to lower sales volume of disposable products and 700,000 in additional inventory allowances and reserves for obsolete inventory at AXP bag set suppliers, AXP device inventory given the planned transition to an upgraded AXP device, and excess CryoSeal inventory. These were offset by lower costs by the bioarchive and CryoSeal products and lower AXP bag set material costs. During the course of the year, we've discussed our efforts to manage operating expenses, and we reduced our operating expenses by approximately $3 million versus the last year. Total operating expenses in fiscal 2009 were $14.5 million versus $17.3 million in fiscal 2008.

Turning now to selling, general, and administrative expenses. Those were $9.2 million in the fiscal 2009 as compared to $10.2 million a year ago or a decrease of $900,000 or 9%. The decrease is primarily due to lower salaries and benefits of about $580,000 as there were four management positions open throughout the year. These decreases were offset by an increase in severance expense of about $500,000 in fiscal 2009 due primarily to the severance accruals for the company's former chief executive officer and vice presidents of sales and marketing. Other key factors impacting our operating expenses include lower legal fees of approximately $325,000 due to primarily to legal fees that were incurred in fiscal 2008 associated with the general electric distribution agreement negotiations and for consultation during the voluntary recall effort. And recruiting expenses decreased $275,000 in fiscal 2009 as they were caught -- as there were costs in fiscal 2008 related to searches for new Board members and executive officers. Additionally and lastly, stock compensation expense decreased $220,000.

Now turning to research and development expenses for fiscal 2009. Those were $5.2 million as compared to $7.2 million for fiscal 2008, a decrease of $2 million or 27%. The decrease is primarily due to a decrease in stock compensation expense of $1.2 million as the restricted stock awarded to the company's former chief technology architect fully vested in April of 2008 as well as a decrease of $330,000 in expenses associated with the Advantis subsidiary and a reduction of $460,000 in expenses for new product development. Although we did see a spike in R&D costs in the fourth quarter due to the launch of the rescue as we've discussed, the overall new product development costs were down year over year.

Now with respect to fiscal 2010, we reiterate our outlook we provided on August 6 that through the expansion of both our cord blood business and the MXP and Rescue products we will be positioned to achieve meaningful revenue growth during the year, and given our expectations for revenue and operating expenses, we believe we have the resources necessary to drive the company through break even in the second half of fiscal 2010. In closing, I want to mention that we will be participating in the Rodman and Renshaw annual global investment conference in New York City. Our presentation is at 9:35 a.m. eastern daylight time Friday, September 11, and we will be webcast on the Company's website. I want to thank you for joining us again and apologize for the delay. We will now open the call up to your questions.

Thank you, sir. (Operator Instructions) We do have a question from [Jerry Carnell]. Please go ahead.

Yes. Can you explain the difference in gross margins between the MXP and the Rescue and the difference in the size of the markets of each one of them?

Well, they both have high gross margins. They're a little difference in the gross margins to the company. And the market for the MXP is primarily directed toward the laboratory market and the Rescue is directed more towards the point of care market. Overall, the bone marrow market at this stage is fairly young but the expectations is that it will grow significantly. Which of those two products will garner member market share? I think it's too early for us to say now, Jerry.

I mean, how big are these markets?

Well, today nearly every clinical trial -- there's probably 5,000 clinical trials underway now where the stem cells are sourced from bone marrow. There are probably 35,000 or better stem cell surgeries right now being -- using stem cells from bone marrow. So it is not a huge market today but it is, I would say, the primary source of stem cells for cell therapy in the market today. And there really are not folks out there such as [Robin Young] and others in the stem cell space that are quantifying the size of the market today. So I, unfortunately, can't give you a specific number.

Which between the MXP and the Rescue are going to drive the top line revenue to where we will be profitable in the second half?

Jerry, we don't -- we're looking for an uptick in both of those products. And right now the business that SpineSmith sees for both products is strong. And I think we have to wait and see which of the two products comes out on top during the year.

SpineSmith is leading with the MXP and the Rescue is coming on later. I think it's nice to have a two-horse race in this sector. They seem to be wanting to have both of them in their ordering quantities. So it's still very early in this race but I think it's nice that we are the preferred provider of the bone marrow system for them as they are going across the country with their technology. So I think it's a little early to tell.

I think Rescue has some legs on it because of the applications that it can be used with outside of simply orthopedics. We're excited about the fact that Rescue can be used in cardiovascular, it can be used with PRP, it can be used with other applications and without having to actually redesign the product into a new unit. So we can leverage that investment forward. So I think it's outside of orthopedics, I think that Rescue haul-in will have a very good future.

Thank you very much.

Gentlemen, there appear to be no further questions at this time.

I'd like to thank everyone for participating on the call, apologize for the technical difficulties at the beginning. These things happen. But anyway, appreciate you enjoying the 9-9-2009 day with us as well. Thanks a lot, and we'll talk to you soon.

Thank you, gentlemen. And thank you, everyone, for participating in the Thermogenesis conference call. This concludes today's event. Thank you.