Thermogenesis Holdings Inc (THMO) 2010 Q4 法說會逐字稿

Hello and welcome to the ThermoGenesis fiscal year 2010 fourth quarter results conference call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Matt Plavan, Chief Financial Officer. Please proceed, Mr. Plavan.

Thank you and good afternoon, everyone. With me today is Mel Engle, Chief Executive Officer of ThermoGenesis. As we announced in our fourth quarter pre-release in late July, ThermoGenesis finished fiscal 2010 with a very solid revenue performance and as evidenced by announcements over the past several weeks, we've continued to achieve important operational milestones during early fiscal 2011. Mel will review these key accomplishments and provide his perspectives on our outlook for fiscal 2011. I will then follow with a review of our fourth quarter financial results and provide some commentary on our expectations for fiscal 2011. We will then open up the call to your questions.

Before turning the call over to Mel, let me remind you that the statements made during this conference call are not historical facts and 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 the 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 business plans and other risks detailed from time to time in the Company's filings with the SEC. I'd like to turn the call over now to Mel.

Thanks, Matt and good afternoon. I look forward to reviewing with you today our many accomplishments since our last conference call, while providing thoughts on the outlook for ThermoGenesis in fiscal 2011. Overall, I am pleased with the progress we have made during the year not only with respect to a greatly improved financial performance but on achieving important milestones in the key parts of our business. We are excited about the Company's prospects for fiscal 2011 and I'll discuss our outlook for this year later in the call. In one of our conference calls and again at a financial conference, I was quoted as saying, It's about time the Company became profitable. I did say that and I meant it.

After 14 years of consistently reporting quarterly operating losses, the Company needed to take proactive steps to reach breakeven and then profitability. When I joined ThermoGenesis in the fourth quarter of fiscal year 2009, two of the Board of Directors' mandates were to turn the Company around and to make it profitable and position ThermoGenesis as a viable player in the regenerative medicine arena. We've come a long way since then. Given where the Company was at that time, it took a blend of general business changes, new products, new contracts, management upgrades and changes, product quality improvements and innovative customer and sales strategies to make this happen.

We have reported our steady progress on a quarterly basis during the year 2010. Our major financial and business accomplishments over the last year include, to begin with, sales grew 17% during this period. We reported quarter-over-quarter sales growth in three of the four quarters, the third quarter of fiscal 2010 being the exception. Disposable product sales and these are products with the highest gross margin, increased 35% over the last 12 months. Disposable products for fiscal 2010 were 62% of total sales and they were 54% of total sales in fiscal year 2009.

We signed new or extended agreements with GE Healthcare, Fenwal, CEI, Totipotent, CBR, and GID that expands our presence in new geographies and clinical indications. We initiated several R&D/engineering projects to exploit our core competency in cell separation technology especially in the bone marrow product area. For example, we identified what we believe to be a large opportunity in an additional application of bone marrow stem cell separation and as such, are pursuing IP we believe has particular value to hospitals and surgeons. The positive trends for bone marrow product sales during fiscal year 2010 are expected to continue in fiscal year 2011.

Sales of Res-Q and MXP were approximately $1 million in fiscal 2010 versus approximately $400,000 in fiscal 2009. GE Healthcare, CEI, Fenwal, and Totipotent all signed distribution deals in the products' first year of sale. We believe others will want to use Res-Q and point-of-care applications as well. We secured a second AXP bag set supplier that roughly doubles our production capacity. We implemented programs to streamline operations and to improve gross margins, including our outsourcing of the ThermoLine product manufacturing and our agreement with Asahi. As a result of the Asahi agreement, we cashed a $1 million check and set the foundation for the transitioning of CryoSeal manufacturing to them. We booked this payment to the balance sheet in June. We will record revenues and offset expenses against this amount in the future as incurred to support this agreement.

We initiated discussions with potential partners in China that are well positioned to distribute our bone marrow products to hospitals in a number of provinces. Based on our research in the market for bone marrow applications in China, we believe the potential is significant. Our discussions to date have been very positive. We significantly reduced operating expenses and are at 12% year-over-year and implemented a lay-off on July 1, 2010. We have reduced our annual operating expense run rate by approximately $2.5 million as we head into fiscal 2011. At the same time, we have maintained a solid cash position. Operating losses have dropped sequentially each quarter. Fourth quarter of 2009 was a loss of $3.1 million. The first quarter of fiscal 2010 was a loss of $2.2 million. The second quarter was $1.5 million. The third quarter was $1.4 million and the final quarter is $170,000. We anticipate based upon this track record to become profitable in 2011.

Another accomplishment of fiscal 2010 was the strengthening of our senior leadership team through the addition of Hal Baker, Vice President of Commercial Operations, and Jorge Artiles, Vice President of Chief Quality and Regulatory Affairs Officer. In addition, [Ken Papah] was promoted to Vice President of Operations during the year. We also added two new Board members, Craig Moore and David Carter who are making valuable contributions to our efforts. Despite these marked improvements, the stock price on a pre-split basis has remained about the same as a year ago. In a "show me environment" we now have these demonstrated fiscal year 2010 results to take to the Street as we step up our efforts to increase the Company's presence among investors.

Turning to the fourth quarter, revenues were $7.2 million, a growth of 78% year-over-year and 51% sequentially. We were pleased with our bottom line performance in the quarter as we recorded a loss of just $171,000 versus a net loss of $3.1 million in the fourth quarter a year ago. At the time of our third quarter conference call, I expressed my angst about our revenue shortfall for that period. We continue to implement the strategic initiatives that provided the foundation for long term growth at the Company.

This has been borne out not only by the fourth quarter fiscal year 2010 results but also our operational accomplishments over the last four months. And these include--ramping up to full production of a second source supplier for our AXP bag sets; secondly, adding new customers and expanding in new geographies; thirdly, initiating new clinical evaluations; fourthly, and releasing positive data from the use of our devices and finally, reducing operating expenses and improving gross margins.

Cord blood. Despite the challenges of the macroeconomic environment, our AXP customer activity in the fourth quarter remained vibrant. Our largest customer, Cord Blood Registry or CBR has indicated that they are seeing continued growth in new clients and collection activity. Our relationship with CBR continues to prosper based on our ongoing ability to meet CBR's quality requirements and supply needs. The solid performance of our AXP bag set sales was enhanced by the completion of the scale up of the second bag set supplier at ATEK Medical.

ATEK is a well regarded industry leader in the production of state-of-the-art disposables and medical devices. We are working closely with ATEK to insure high quality, reliable production as we expand the AXP market. In addition, because bag set production is occurring at ATEK's FDA-approved facility in Costa Rica, we expect to achieve meaningful cost savings. With ATEK at full production, we have more than doubled our supplier's bag set production capacity which is essential for our fiscal 2011 growth as we initiate our new distribution programs for our cord blood offerings.

Also during the fourth quarter, we sold seven BioArchive systems versus three in the third quarter of fiscal 2010 and two in the fourth quarter a year ago. Based on the sales activity in the fourth quarter and positive results in the current quarter, we are hopeful that the pressures on capital equipment spending may be easing a bit. We have been particularly pleased with our success in Asia. Three of the seven BioArchive sales during the fourth quarter occurred in Asia. In addition as we announced at the end of August, we sold two BioArchive systems to HealthBanks Biotech Company, a leading operator of cord blood banks in Asia. They now have a total of 20 BioArchives in storage capacity for cryopreserving and archiving cord blood stem cells of 60,000 units. We are also increasing our focus on the private cord blood market and expect to see progress in that sector in the near future.

Let me now address developments with our new distributor agreements that are laying the groundwork for promising cord blood business in fiscal 2011. In India, Fenwal expects approval for the AXP and BioArchive by the end of the current calendar year. They anticipate some initial evaluations of the AXP will begin at several cord blood banks in the near future. In China, Fenwal expects to complete registration filings for the AXP and BioArchive in the next 60 to 90 days. The cord blood market indications in China continue to be very promising. The Chinese government recently announced it will expand cord blood collection to all of the country's 30 provinces. This decision combined with the country's economic growth portends of vibrant market opportunity for our cord blood products. With respect to CEI, they are starting to generate steady growth in the cord blood market in the key geographies of Mexico and Brazil and we expect to see increased revenues from their activities in the next year.

Bone marrow. Turning to our bone marrow stem cell business, due to the programs and product installations made in the fourth quarter, we should see increased growth from these offerings in fiscal 2011. Celling Technologies has roughly doubled the number of centers using one or both of our bone marrow offerings over the past six months. They have recently placed the products in a number of centers throughout the United States and Celling also has non-exclusive rights to Res-Q outside the US and have initiated efforts in several international markets including the hiring of sales manager in Europe. They are also in discussions with distribution partners in India and Turkey.

The newest distributors for our bone marrow products are also making progress. GE Healthcare for example, is expected to commence initial order activity the next couple of months. GE is targeting the cardiology market initially but may leverage this presence into other areas. Totipotent has completed product registration filings for Res-Q and MXP in India and hopes to receive approval by the end of calendar 2010. In the meantime, they have initiated sales activities in their market. CEI is in the process of completing their registration process in both Mexico and Brazil, the most promising near term markets in Latin America, and expects these approvals by the end of calendar 2010. They will continue to advance the approval process in the other markets in that region over the next 12 months.

An integral element of our growth strategy for expanding the market for Res-Q and MXP are product studies that provide validation for their performance and enable us to disseminate data to the clinical community. We have four clinical evaluations currently underway or expected to begin shortly using Res-Q and MXP technologies. Two evaluations are designed to evaluate our cell concentrates used to treat critical limb ischemia or CLI. One is a study in Naples, Italy, which we've discussed in prior calls. The second which is expected to begin enrollment very soon is a pilot 15 patient CLI study in India being conducted by Totipotent and ThermoGenesis. It is designed to establish safety and efficacy of Res-Q for the use in treating CLI patients in that country.

Two other US-based evaluations, exploring the promotion of bone fusion in the spine and in non-union fractures are also anticipated. The first is a prospective 30-patient study being conducted by Celling Technologies. It will compare the efficacy of different concentrations of mononuclear cells, or MNCs, prepared with Res-Q in spinal fusion. The other is a 30-patient study being conducted by UC Davis which is designed to establish the use of Res-Q in treating non-union fractures. Enrollment in these two clinical evaluations is expected to begin shortly.

At the International Stem Cell Therapy, or ISCT, European Meeting and Trade Show in Italy this week, James Poser, PhD, who is the Executive Vice President of Regulatory Medicine for Celling Technologies, discussed data they've generated from hospital usage of Res-Q. He noted Res-Q was easy for surgeons to use at the point-of-care and the consistently high numbers of stem cells were concentrated for spinal fusion procedures. Also at the ISCT meeting, on behalf of Dr. Gilda Cobellis, [Dr. Marone] presented clinical outcomes for nine patients who have undergone two bone marrow treatments with MXP system at our CLI trial in Naples, Italy. The clinicians are using the MXP to process bone marrow aspirate to prepare stem cell concentrates which are then injected into the ischemic tissue with a goal of restoring blood circulation.

The outcomes from this trial continue to be positive, showing increase profusion in the treated limbs which is an important measure of blood circulation. Dr. Marone also indicated that the MXP significantly reduced the amount of time required to process bone marrow concentrate in the operating room, a critical aspect of the procedure. More than 50 clinicians attended these ISTC presentations and the data were very well received. With respect to our 5-10-K submission to the FDA seeking market clearance for the use of our Res-Q technology in the preparation of platelet rich plasma or PRP, from peripheral blood, the FDA has requested additional data. We're completing these studies and expect to file an update submission soon. We have demonstrated good outcomes in our laboratories using the Res-Q technology for the preparation of PRP and our ongoing market research suggests that this could be an important market opportunity for the Company.

Before turning to a discussion of our key goals and objectives for fiscal 2011, I want to speak to the one-for-four reverse stock split authorized by our Board of Directors last month that took effect at the close of business on August 26. We appreciate stockholders support for this transaction. As we indicated in the past, this action was necessary given the timeline we were operating under with respect to maintaining our NASDAQ listing. As you saw from yesterday's press release, we are now in compliance with the NASDAQ listing standards included in the minimum price requirement. In terms of the future, our key objectives include--first, in addition to growing revenue in fiscal 2011, we expect to implement a number of our initiatives during the year that will exceed accelerated top line growth in fiscal year 2012 and beyond. These include the work we're doing to expand our presence in China and India.

Second, we're deploying scientific and engineering assets in the bone marrow area to create products to supplement Res-Q. Third, we will enhance our regulatory activities as we seek to expedite clinical studies and dissemination of data in the market with bone marrow products. Fourth, we plan to lower our manufacturing costs for BioArchive and their disposables, and fifth we believe our leverage for profitability during this period is substantial. As we add new revenues in most cases, the only incremental cost added will be the direct cost of the product, thus because we are targeting increasingly higher margin disposable products, we expect each new revenue dollar to add substantially to the bottom line and provide for greater discretionary product development spending opportunities.

In closing, I believe ThermoGenesis is a much stronger Company today than it was a year ago. We have improved our product quality in yields and have enhanced our customer and distributor relationships. With our expanded distribution network we believe we have the resources in place to achieve sustained revenue growth with market presence in new geographies and new indications. We have strong technology and are focused on those markets in which we can realize both near term and long term success. I want to express my appreciation to our employees for their efforts during fiscal 2010 and to those of you on the call for your continued interest and support. We look forward to an exciting and successful fiscal 2011. Thank you again for joining us today and I'll now turn the call over to Matt for a discussion of our financial results.

Thank you, Mel. As mel noted, our revenues for the fourth quarter of fiscal 2010 were $7.2 million versus $4 million in the fourth quarter of fiscal 2009. The primary contributors to our growth in revenues included roughly a tripling of AXP bag set revenues and the strong BioArchive device activity mentioned earlier in the call. Our backlog at the end of the quarter was $600,000 reflecting primarily AXP and BioArchive disposable orders.

Now if I can just take a moment to editorialize a bit. I'd like to emphasize just how important and exciting this past quarter was for us. The fourth quarter represents the first real demonstration of our turn towards sustained profitability. By comparison, the one quarter we reached $7 million in revenue back in 2008, we had posted a loss of $2.5 million, so I think that puts this quarter and the strength of our bottom line in perspective.

Today, on the same revenue, we're basically breakeven. This comparison reveals the extent to which we have retooled and streamlined the Company for profitability and growth. Fourth quarter of 2010 illustrates that we are now positioned to take advantage of the substantial margin leverage of each new revenue dollar in fiscal 2011 and beyond as Mel alluded to earlier. With respect to our year-over-year comparison, key highlights include the sales of our core offerings, including the AXP, BioArchive, Res-Q, and MXP, those increased 22%.

AXP revenues were 40% of total revenues in fiscal 2010 versus 35% in fiscal 2009. Sales of the AXP disposables increased 39% year-over-year and overall disposable revenues were $14.3 million or 62% of total revenues versus $10.6 million or 54% of total revenues in fiscal 2009. AXP disposable revenues increases are due to increases in the number of cord blood units collected and stored as well as an increase in our customer base.

Turning to gross margins. Gross margins for the quarter were 35%. This compares to gross margin of 10% in the fourth quarter a year ago when we recorded a number of non-recurring charges related to quality improvement, manufacturing outsourcing, and divestiture initiatives. Gross margins in the prior quarter were 29%. The improvements in gross margin sequentially reflect lower warranty, scrap, and rework costs due to improving quality and manufacturing processes. Continuing these improvements is a key strategy for us in fiscal 2011. We continue to successfully manage our operating expenses as they were $2.7 million versus $3.5 million in the fourth quarter a year ago and $2.8 million in the prior quarter. Full year operating expenses reflect a 12% reduction versus fiscal 2009.

As we announced on July 19, we implemented a reduction in our staffing effective July 1, to further streamline our operations and lower our operating expense run rate to drive profitability during fiscal 2011. Our net loss for the quarter was just $171,000 or $0.01 per share versus a loss of $3.1 million or $0.22 per share in the fourth quarter a year ago. Per share numbers for both periods are split adjusted for our recent reverse stock split. We ended the year with $10.7 million in cash and short-term investments. This compares with $10.1 million at the end of the third quarter and $15.6 million at the end of fiscal 2009. The balance for the end of fiscal 2010 includes a $1 million cash payment received by the Company in conjunction with the amended CryoSeal Fibrin Sealant System wound care product distribution and license agreement with Asahi that Mel had spoke of earlier.

With respect to our financial outlook for 2011, we expect to experience double digit revenue growth year-over-year with growth in both our cord blood and bone marrow product lines. We also expect steady improvement in our gross margins throughout the year and continued leverage of our operating expenses. In combination, these trends should result in a profit for the year with increasing profits by quarter expected. With respect to our prior guidance, specific to the first quarter of fiscal 2011 for profitability, we will record two non-recurring charges.

These charges are expected to total approximately $200,000 and include the severance and restructuring costs associated with our lay-off, July 1, 2010, and an early termination fee for facility leads we are vacating. These two actions are part of our overall cost reduction program. And net of these one-time charges, we expect to be profitable for the quarter. So, that's it for my comments. Thank you for joining us today and now we would like to open up the call for questions. Operator?

(Operator Instructions) I would now like to turn the conference back over to Mr. Engle for any closing remarks.

Thank you for your participation on the call today even though it sounds like it's in a listening mode, so we will be getting out to visit most of you in the next week or so, and throughout the rest of the next several months. And so we will have more opportunity to answer questions at that time, so thank you for your participation on the call and we'll say goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.