Thermogenesis Holdings Inc (THMO) 2010 Q1 法說會逐字稿

Hello. This is the Chorus Call operator. Welcome to the ThermoGenesis fiscal year 2010 first quarter results conference call. (Operator Instructions) For your information, this conference is being recorded. I would like to turn the conference over to Matt Plavan, Chief Operating and Financial Officer. Mr. Plavan.

Thank you and good afternoon, everyone. With me today is Mel Engle, the Company's Chief Executive Officer who will begin today's call with an update on key events during the quarter. I'll follow with a review of operational highlights and our financial results for the quarter, and then an update on our outlook for the balance of fiscal 2010.

Before I turn the call over to Mel however, I've got to kind of run through the standard Safe Harbor language. And let me do that quickly here. The statements made during this conference call are not historical facts, and are forward-looking statements. They're 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 SEC.

And I'll turn the call now over to Mel.

Thanks, Matt. And hello to everyone. Since our last call eight weeks ago, we have continued to make progress on the Company's key strategic initiatives, including quality, top line growth, market expansion for our offerings, and achieving manufacturing and operating efficiencies.

During the next few minutes, I will update you on our progress in these and other areas as well as highlight a couple of key events that have occurred since our fourth quarter conference call in September.

First of all, I am pleased with our ability to realize a return to revenue growth in the quarter. In fact, total revenues were up 15% over the first quarter of 2009. We benefited from a strong quarter of AXP disposable sales as well as new revenues from MXP and Res-Q, our products targeting the bone marrow stem cell market.

In addition, we continue to achieve good management of our operating expenses. These are all positive indications and lead us to believe we will reach breakeven through the third quarter and be profitable in the fourth quarter of 2010. It's about time.

We're on track with our plan to realize sales gains, and operating improvements, bring on world-class management, and continue to focus on quality and our passion for customer satisfaction. The stem cell market opportunity is vibrant and is attracting increased interest from both the clinical community and the healthcare industry driven by increased funding and positive clinical outcomes.

Mel, if I could just interject here for a moment, to highlight a recent announcement that I think is a really good illustration of the point you just made. And that's the announcement last month from the California Institute of Regenerative Medicine whereby they awarded 14 grants totaling $230 million to California universities and companies, mostly for adult stem cell research.

Now this is the institute that was approved in 2004 by California voters to fund about $3 billion over 10 years of research for embryonic stem cells and the development of therapies from the embryonic stem cells. So this is, I think, a very tangible illustration of the recognition of where the benefits in medicine currently are coming from, and that is adult stem cells.

Also compelling about that announcement I think was the fact that the institute is putting together teams that are accelerating how quickly they can bring these things to market. So the idea is shifting to adult stem cells and more quickly getting them to market. So, I just wanted to kind of throw that out there as I think of a near-term illustration of the point you just made.

Yes, that's a good point. Researchers are becoming more and more aware of the near-term benefit of adult stem cells. And that's the ballpark that we play in. Unfortunately, the Yankees won, but that's okay. Anyway.

Our mission is to design, develop, and commercialize medical products that enable the collection and processing of stem cells and other cellular tissues used in the practice of regenerative medicine. We provide the tools necessary for the collection, separation, and storage of stem cells from adult tissue sources, including cord blood and bone marrow. These tools are currently being used in both the laboratory and point of care settings.

We believe our products significantly enhance the safety and viability of stem cell and regenerative medical products and will ultimately expand the use and success of those products in clinical treatment through their ease of use and high cell recovery rates.

We continue to make major progress in the quality area from where we were earlier this calendar year, although we still have more to do. To that end, I was delighted with the addition of Jorge Artiles as ThermoGenesis' Vice President and Chief Quality and Regulatory Affairs Officer who joined us in mid-October. Jorge will report directly to me.

Jorge brings major and relevant company experience to ThermoGenesis, including Medtronic, Abbott Laboratories, Boston Science, and Baxter Healthcare, and has extensive expertise in areas such as quality system development and compliance, project management and process, and he's a rollup your sleeve get it done as a team kind of guy, and I'm confident he will be able to accelerate our quality efforts and help us to realize our objectives in this area. He's a great addition.

With Jorge and the addition of Hal Baker, who joined us about three months ago as Vice President of Sales, we have significantly strengthened our management team. Hal will be expanding his role in the near future, as he becomes ThermoGenesis' Vice President of Commercial Operations, where he'll be responsible for both the sales and marketing functions.

I'll let you step back and think about this for a minute. We have two world-class people joining the Company and they have an opportunity to get into the detail and see where ThermoGenesis is going. And myself included, we really believe in this Company and the bones that is has to move it forward. So now it's a matter of putting meat on the bones and moving down the track. So I think we're in good shape.

Now for a few numbers. The first quarter sales were $5.2 million, 15% ahead of last year's first quarter. Total disposable sales increased over 40% from the prior year period. This is an important trend. The neat thing about disposable sales is that they increase our overall gross margins and they are the razors in our razorblade recurring revenue model. Drilling down one more level, for an example, AXP disposables increased 40% over 2009 first quarter results. And BioArchive disposables increased 17% over 2009 first quarter results.

Our top line growth was also driven by contributions from our MXP system and Res-Q product lines, which serve the bone marrow stem cell separation market. Over the past several weeks, the MXP has been placed in several additional centers and its ability to deliver consistently high yields of cell recoveries continues to be validated in the clinical setting. This is good news.

Res-Q, our point of care disposable introduced in late July has continued to achieve increased market penetration in the bone marrow stem cell market. Celling Technologies, a division of SpineSmith, and our distributor for both the MXP and Res-Q, announced in a press release last month that the Res-Q has demonstrated positive outcomes in its initial applications and has indicated its research has confirmed the Res-Q System has the features and benefits to deliver consistently high yields of mononuclear cells providing clinicians the best opportunity for successful patient outcomes.

Celling Technologies' press release quoted Dr. Rumi of Round Rock Orthopedics in Texas as saying, and I quote, "The Res-Q System was able to yield a high concentration of mononuclear cells, which I believe is one of the key ingredients to bone growth. This technology and Celling's service team provided me with the confidence that the cells being processed and the sterility of the procurement is the best in the industry."

We are delighted with the initial market acceptance of bone marrow offerings and look for them to contribute incremental revenue growth during the course of the year. Celling Technologies recently established an Institute of Regenerative Medicine under which our organizations will share funding of clinical evaluations to demonstrate the clinical effectiveness of both the MXP and Res-Q systems with their orthopedic applications.

We expect the first of these evaluations to commence during the second quarter. This program initially represents a relatively modest financial commitment on our part for the ratchet mechanism for increased funding as sales grow. In addition, we'll be working with Celling Technologies to expand the geographic reach with these offerings, both in the US and international markets. Working together, we can grow this business.

An important revenue driver for us is in the implementation of an aggressive business development strategy that results in strategic partnerships and other relationships. I'm pleased to report that we've engaged in meaningful discussions with several potential partners, not only in bone marrow but also in adipose tissue, which is gaining increasing recognition as an important source of stem cells.

In addition, we continue to have productive discussions with other potential Res-Q distribution partners that can develop opportunities in the cardiovascular, critical limb, ischemia, trauma, and other markets. This effort is being led by John Chapman, a Ph.D., our Vice President of Scientific Affairs and Business Development.

Both John and Hal Baker are exploring partnership opportunities with major blood-based healthcare companies. Hal has been in the industry for many years and he's been utilizing his extensive contacts in the healthcare industry to identify potential partners. We are optimistic we will have some meaningful progress to report in this area soon.

In a similar vein, we continue to have discussions with GE Healthcare, not only regarding an extension of our current AXP distribution agreement, but also about expanded agreement that would have us working together in other areas.

Okay, shifting gears. Let me briefly address the status of our NASDAQ listing. As you know, our stock price is below $1.00. We believe we are on track to cross that $1.00 per share hurdle by hitting our operating milestones, including quarterly revenue growth, profitability, and achievement of our business development initiatives, all of which will signal accelerating growth rates for the Company. We are hopeful these efforts will naturally drive our shareholder value and our stock price above the minimum bid requirement of $1.00 within the regulatory timeline.

Furthermore, we have programs in place to expand the Company's visibility, beginning with increased investor outreach, such as our presentation at the Rodman and Renshaw conference in New York last month. We will also be looking to further our presence within the stem cell sector and among industry and business media. We believe we have a credible and achievable turn around plan in place that points to a promising outlook for the Company. We will look forward to sharing this with the investment community and will keep you apprised of our efforts in this area in future calls.

Okay. In closing, while I have touched on some of these today, I wanted to reiterate what we see as the following key operational milestones for the Company during the fiscal 2010 before turning the call back over to Matt.

First and foremost, continuing to achieve revenue growth and operating efficiencies that will enable us to reach breakeven in the third quarter and profitability in the fourth quarter for fiscal 2010. Very, very important milestone for us and we believe we can achieve it.

Second, achieving full penetration of Celling Technologies' customers with the MXP in Res-Q by the end of calendar 2009. As we have discussed today, we are seeing a very positive market response to these offerings.

Third, adding new distributors for AXP, MXP, and Res-Q and gaining a presence for the Res-Q beyond the orthopedic market. We have some highly promising discussions underway and hope to have some positive developments in this area by our next call.

Fourth, expanding the customer base for all of our offerings, particularly the AXP, MXP, and Res-Q.

And finally, fifth, improving our gross margins via internal efficiencies through (A) the ThermoLine manufacturing outsourcing by December of this year, (B) BioArchive manufacturing outsourcing in fiscal 2011, and (C) the divestiture of the CryoSeal business by March of 2010. Matt will speak to these in a moment.

We're very pleased with our progress to date and excited about the opportunities ahead of us, And thank you for joining us today and I look forward to speaking with you during the question and answer time period. I'll turn it over to Matt and he's going to go through the numbers. Thank you.

Thanks, Mel. I'll begin with the financial highlights. And since Mel, you've already covered revenues in pretty fair detail, I'm just going to move right to two other important metric areas we're watching, which is margins and our march towards profitability.

As we've said in previous calls, an important area of leverage for us in achieving profitability moving forward is the improvement of our gross margins. Overall gross margins for the quarter was 30%, which is a slight up tick from the prior year. However, as we continue with our outsourcing and quality improvement initiatives over the next several quarters, we expect to see improved efficiencies and better manufacturing yields, which will cause a reduction in our cost of goods sold as a percentage of revenue.

The reduction in these costs, coupled with a growing percent of high-margin disposables that you talked about earlier, Mel, should allow us to drive our overall gross margins meaningful higher by year-end, contributing nicely to profitability.

Shifting now to operating expenses, those were down 5% versus the prior quarter, coming in just under $3.8 million versus $4 million last year. We were pleased with this trend and are optimistic about (technical difficulty) down, especially during the back half of our fiscal year. Ultimately, we think the sustainable level for the foreseeable future is -- for operating expenses will be between about $3 million and $3.5 million per quarter, depending upon the level of development project costs flowing through in any particular quarter.

With the major drivers trending in the right direction, that is revenues up and costs down, we were able to reduce our net loss for the quarter to $2.2 million or $0.04 a share versus a net loss of $2.7 million or $0.05 a share in the first quarter a year ago. This also compares favorably to the loss from one quarter ago, $3.1 million. We expect the amount of our quarterly loss to continue to decline in a linear fashion over the course of the year as we move towards profitability.

Turning quickly now to the balance sheet, we ended the quarter with $13.1 million in cash and short-term investments. This compares with $15.6 million at the end of fiscal 2009. Our cash was -- of burn during the quarter $2.5 million and we expect the burn per quarter to be reduced proportionately to the reduction of our loss over the coming year. Lastly, we carry no debt, making for a continued strong balance sheet.

Now before turning the call over for Q&A, I'd like to provide a brief update on a couple of our key operating initiatives and our efforts to enhance our strategic focus on cell therapy.

First is our progress towards outsourcing the manufacture of the ThermoLine product. You may remember that's a legacy product that the Company has had for quite some time. As of today, the manufacturer of all the thawers has been transferred to our contract manufacturer, and we're on track to have all the freezers, which is the remainder of the products for that product line, fully transferred by the end of the quarter as planned. This means all future production of this product line will be outsourced effectively January 1.

Now as for the BioArchive product line, we expect to begin this process in the second half of the fiscal year with the transition to be completed in fiscal -- mid-fiscal year 2011. The benefits of these programs include a favorable impact on operating expenses, and the contribution margin of these revenue products.

And example of the savings and efficiency we expect to accrue to the Company includes a significant reduction in supply chain management from over 250 part suppliers to just two contract manufacturers. Not to mention we believe that we'll be able to realize a more reliable supply of offerings than was the case when we were manufacturing these devices in-house.

In furtherance of our efforts to streamline and focus is our progress towards the divestiture of the CryoSeal business. We are advancing discussions with a number of interested parties to acquire the business and we remain optimistic that we will complete our divestiture by the end of fiscal 2010. This too will have a positive effect on operating expenses and margins, with a little negative impact on revenue, as sales from this product line have become less than 2% of our overall revenues.

So in summary, our expectations are for sequential quarterly growth and revenues during the year through expanded market penetration of the AXP and ongoing rollouts of the MXP and the Res-Q while continuing to manage our expenses. It is possible that we will reach breakeven or be slightly profitable in the third quarter, but we're on track to do so, we believe, in the fourth quarter of fiscal 2010.

Thank you again for joining us today and now we'd like to turn the call over to the operator for questions.

(Operator instructions) The first question comes from Steve Brozak of WBB Securities. Please go ahead.

Hello, Steve.

Hello, Mr. Brozak? Your line is open. Please go ahead. (Operator instructions)

Well, how about those Yankees?

We'll pause as we assemble the roster. Just a moment. (Operator instructions) Just one moment please. At this time we'd like to turn the call back over to Matt Plavan for any closing comments.

I'm trying to think, Mel. Did you think you maybe (inaudible)?

I'd just like to thank everyone for being on the line and look forward to seeing you soon, and to be able to share the ThermoGenesis story as we turn this Company around. We're making some good progress and it's an important announcement today about the third quarter breakeven and the fourth quarter profitability. We believe those are in sight and achievable. So thanks a lot and we'll talk to you soon.

Thank you for participating in the ThermoGenesis conference call. This concludes today's events.