Thermogenesis Holdings Inc (THMO) 2011 Q1 法說會逐字稿

Hello, and welcome to the ThermoGenesis Corporation first quarter 2011 results conference call.

(Operator instructions.)

Please note that today's event is being recorded.

At this time I would like to turn the conference call over to Matt Plavan, Chief Financial Officer and Executive Vice President of Business Development. Please proceed, Mr. Plavan.

Thank you, and good afternoon, everyone.

With me today is Mel Engle, Chairman and Chief Executive Officer. As we indicated in our earnings press release today, the Board of Directors last week named Mel Chairman of the Board in addition to his current position as Chief Executive Officer of ThermoGenesis.

We're happy to be with you today and to share our solid financial performance and demonstrable progress on key operational strategies thus far in fiscal 2011. Mel will discuss recent events, and I will follow with a review of our financial results. We will then open up the call to your questions.

Before turning the call over to Mel, let me remind you that 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 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 SEC filings.

I'd like to turn the call over to Mel.

Thanks, Matt, and good afternoon, everyone.

We're delighted to share the latest developments at ThermoGenesis with you, and, as you can see by our two releases today, we have a lot on the go. We'll talk about today top-line growth, a new Res-Q and MXP distribution deal in China and Hong Kong, the retention of an investment banking firm to identify business development opportunities with us, and the receipt of a government grant from the Department of Health and Human Services through the Patient Protection and Affordable Care Act.

Before I get into these topics, I would like to take just a moment to provide a context for the progress we have made over the past several quarters. Since joining the Company 18 months ago, I have been working with our management team in turning around and steering the Company to profitability in the near term and positioning ThermoGenesis for the long term as a leading provider of tools for the practice of regenerative medicine. The impact of our efforts has been reflected in our recent financial results, with particular success at increasing sales of our high-margin disposables. At the same time, we have continued to successfully manage operating expenses, which declined nearly 30% year over year, by streamlining the Company and outsourcing manufacturing.

Key contributors to our recent performance have been the great strides we have made in product quality as well as our relationships with our customers and distributors. In addition, we have greatly expanded our geographic and clinical indication footprint through our new distribution programs and achieved agreements with leaders in regenerative medicine to extend our technology into emerging indications such as platelet rich plasma, or PRP. And today we are genuinely excited about our new Chinese opportunity with Nanshan Memorial Medical Institute, and we refer to them as Nanshan, and our new investment banking relationship, but more about that later.

The programs we put in place over the past several quarters that contributed to our steady progress in fiscal 2010 continued to create value in the first quarter of fiscal 2011. We recorded year-over-year revenue growth of 35%. We also continued to successfully manage operating expenses, and for the fifth consecutive quarter we improved our bottom-line performance. We reported a net loss of $68,000, an improvement of $2.1 million year over year. As we indicated in our last call, expenses in the first quarter included approximately $160,000 in severance and restructuring costs and an early termination fee related to a facility lease. Without these expenses, we would have been profitable in the first quarter.

Our year-over-year revenue growth was driven by a 73% increase in AXP AutoXpress System bag set revenues. However, it should be noted that the AXP sales were higher than the prior year quarter by approximately $1.2 million, due primarily to GE Healthcare increasing their inventory levels to meet certain customer contractual requirements. We do not expect these inventory accumulations to continue. Net of the inventory build, sales would have been about $6 million, or an increase of about 15% versus a year ago. We continue to be pleased with the effectiveness of our AXP bag set quality initiatives and the benefits of the new customer service programs that we put into place during fiscal 2010.

We had solid activity in our BioArchive business. We sold seven BioArchive systems, versus five in the prior -- in the first quarter a year ago, and, importantly, these sales occurred in both the United States and key international markets such as Europe and Asia. We are seeing the benefits of our efforts to work with the BioArchive distributors in doing a more effective job of working the channel.

In China, Fenwal continues to advance registrations for the BioArchive and AXP. We believe we will begin to record revenues beginning in the second half of fiscal 2011. As we know, China represents a promising market opportunity as cord blood collection is being expanded throughout the country. In addition, we believe the country's vital economy creates a positive tailwind for us.

In our other business arena, Res-Q distribution partner for orthopedics, Celling Technologies, is making good headway with their existing customers, and we are seeing some encouraging trends with this business. Celling has initiated efforts in several international markets for the hiring of a sales manager in Europe and has had discussions with potential distribution partners. They have started the product registration process for Res-Q and MXP in several foreign countries.

By the way, during the quarter Celling Technologies enrolled the first patients in their clinical evaluation of Res-Q. This is a prospective 30-patient study that will compare the efficacy of different concentrations of mononuclear cells, or MNCs, prepared with Res-Q in spinal fusion. The purpose of our clinical evaluation efforts is to generate additional data in support of marketing efforts and to support future clinical activity and regulatory submissions.

Our newest distribution efforts in the bone marrow sector continue to move forward. In addition to our Nanshan announcement, within the past couple of weeks GE Healthcare commenced their formal full-market launch for Res-Q, and we expect initial order activity during the current quarter. They are initially targeting the cardiology market, but they will seek to leverage these efforts in other indications.

Totipotent has started its sales preparation efforts in India for Res-Q and MXP as it awaits registration approval, and CEI is nearing completion of the regulation process for Res-Q and MXP in Mexico and Brazil, which are the most promising near-term Latin America markets, and they believe they will have approval by the end of December. They are also pursuing product registration and approvals in other key Latin America countries.

With respect to our critical limb ischemia, or CLI, study in India that we are conducting with Totipotent, the IRB process is underway, and we hope to enroll our initial patients within the next several weeks. This is a pilot 15-patient study designed to establish safety and efficacy of Res-Q for use in treating CLI patients.

Based on a request for additional data, we filed an updated 510(k) submission seeking market clearance from the FDA for the use of our Res-Q technology in the preparation of platelet rich plasma, or PRP, from peripheral blood. While the timing of this process is not within our control, we are hopeful that we'll have approval by our next quarterly earnings conference call.

This 510(k) submission followed the announcement of our license and distribution agreement for Res-Q with BioParadox, Inc., a newly formed regenerative medicine company focusing on the point-of-care cardiovascular therapies. Under this agreement we are granting BioParadox exclusive worldwide rights for the use of Res-Q technology to automate the preparation of PRP from peripheral blood for use in cardiovascular therapy. This is subject to BioParadox meeting certain milestones, including initiating and completing clinical trials.

Today we also announced a four-year distribution agreement with Nanshan covering China and Hong Kong for our bone marrow products, Res-Q and MXP. This agreement represents an accomplishment of a major milestone for our strategy to expand the geographic region of our offerings into a very exciting market opportunity for the company. Nanshan is a regenerative medicine company based in China with offices in the United States. They distribute medical products and have operated multiple large healthcare facilities, included hospitals, stem cell banks and research centers.

A primary strategic advantage for us in partnering with Nanshan is Daopei Lu association, our association with him. Dr. Lu is a leading influencer in stem cell research in China. He is a founder of Nanshan and serves as their Medical Director. Dr. Lu is a world-renowned hematologist and is an expert in the field of hematopoietic stem cell transplants. He is a pioneer in bone marrow stem cell transplantation and therapy in China. We believe Dr. Lu's reputation as a leader in hematological medicine and stem cell research combined with the strong in-country presence of Nanshan will greatly enhance ThermoGenesis' ability to achieve government approvals and market adoption of our bone marrow technologies.

During Phase 1 of the distribution agreement, following regulatory approval, Nanshan will target over 20 high-volume procedure hospital facilities and five major Chinese provinces. Phases 2 and 3 will include additional hospitals within these provinces and the expansion into additional medical centers in other provinces. As part of this agreement, ThermoGenesis will initially grant Nanshan restricted stock equal to 0.5% of the total outstanding common shares of the Company, or approximately 70,000 shares, in exchange for setup investments by Nanshan and infrastructure and organizational build-out dedicated to the distribution of the ThermoGenesis products. The contract calls for the issuance of additional restricted stock upon the completion of certain revenue milestones over the term of the contract. The maximum number of restricted shares issuable over the four years of the agreement totals 876,000 shares, and it's based upon the milestone achievement of $43 million in sales.

I'd like to pause for a moment and acknowledge Matt Plavan for his tireless efforts to successfully negotiate and conclude the Nanshan agreement. Matt has done an excellent job as the head of our business development function.

With the Nanshan agreement and those we signed earlier this calendar year with GE Healthcare, Totipotent, CEI and now have a -- we now have a global presence for our bone marrow product line to complement our exclusive program in orthopedic indications in the US with Celling Technologies.

In October, the Company engaged an investment bank for strategic advisory services to evaluate opportunities to accelerate our business development reach activities. We are excited about the growth potential in the regenerative medicine market and believe there may be incremental growth prospects beyond those organic to our business. We believe the time is right for the Company to pursue prudent business development opportunities with the help of an outside advisor.

We will be aggressive in expanding our business. Our strategic direction includes partnering, expansion of our product offerings and additional geographic reach. We believe this effort will yield a bigger and stronger ThermoGenesis over the long term.

The Company also announced today that effective October 29 it has been awarded $244,000 in federal grant funding from the Department of Health and Human Services through the Patient Protection and Affordable Care act. Grants were available for up to 50% of expenses directly related to qualifying products or therapies designed to treat or prevent diseases or other chronic indications. Our award was for the development and commercialization of our Res-Q platform technology. We're very excited to have been awarded this grant, because it is an important validation by the Department of Health and Human Services of our Res-Q technology as an effective platform for the delivery of life-saving therapeutics.

In closing, we're off to a great start for fiscal 2011, with nice revenue growth and reaching close to break-even. We continue to realize progress with both our longstanding and new distribution partners and with our programs to expand the geographic and clinical indications for our offerings. The signing of the Nanshan deal sets us solidly in the emerging Chinese market.

The accomplishments of the first quarter have advanced the key pillars of our growth strategy, which include, first, growing revenues in the near term but also putting programs in place that will accelerate top-line growth in fiscal 2012 and beyond, such as the Nanshan deal in China; second, leveraging our IP, scientific and engineering assets to create products that augment Res-Q in the bone marrow sector; third, enhancing our regulatory and clinical evaluation efforts to increase awareness within the clinical community of the value of our bone marrow products.; fourth, continuing to improve gross margins and lower manufacturing costs; fifth, realizing increased leverage to improve bottom-line performance; sixth, and not least, investing in the Company by bringing on an investment banking firm in an advisory capacity to help us accelerate our business development efforts.

Thank you again for joining us today, and I'll turn the call over to Matt.

Thank you, Mel, and thank you for the kind words regarding Nanshan. I, too, am very excited about that deal. That means a lot to ThermoGenesis.

As Mel noted, our revenues for the first quarter of fiscal 2011 were $7 million, compared to $5.2 million in the first quarter of 2010. Our revenue performance reflects growth in both our cord blood and bone marrow product lines. Gross margins for the quarter were 37%, which compared to gross margin of 30% in just the first quarter a year ago and 35% in the prior quarter. The year-over-year improvement in gross margin reflects increased disposable sales, which were 63% of revenues in the quarter, and a decrease in warranty costs. As we have indicated in prior calls, continuing to achieve gross margin improvement is a major focus for us.

Our operating expenses in the quarter were $2.7 million versus $3.8 million in the first quarter a year ago and flat with the prior quarter. Our expenses for the first quarter of this year included approximately $160,000 in costs related to severance and restructuring activities we effected on July 1 and an early termination fee related to a facility lease. These costs are offset by reductions in our personnel expenses versus the first quarter of last year, as our headcount at the end of the first quarter of fiscal 2011 was 67, versus 82 in the first quarter of fiscal 2010. We expect our quarterly core operating expenses through the balance of the year will be equal to or lower than those of the first quarter of 2011.

Our net loss for the quarter was $68,000, or $0.00 per share, versus a net loss of $2.2 million, or $0.16 per share, in the first quarter a year ago. Without the severance and lease termination charges I referenced a moment ago the Company would have had a profitable quarter. By the way, per share numbers for both periods are split adjusted for our reverse split that was effected in August of 2010.

We ended the year with $10.2 million in cash. This compares with $10.7 million at the end of fiscal 2010, and we continue to have no debt.

With respect to our financial outlook for fiscal 2011, we continue to expect double-digit growth in revenues for the year, with increases in both our cord blood and bone marrow product lines. Moving forward, we see our break-even point as being between $6.3 million and $6.6 million in quarterly revenues. We also expect steady improvement in our gross margins during the year and continued leverage of our core operating expenses. Although we will continue to manage our core operating expenses, our commitment to engage an investment banker will increase our overall operating expenses in the near term. Absent these costs, we expect to be profitable on a quarterly basis and for the year.

We thank you again for joining us today, and now we'll open the call up for questions.

(Operator instructions.)

And our first question comes from Spencer Larson, from Moors & Cabot. Please go ahead with your question.

Hi, guys. Congratulations on a good quarter.

Thank you.

A couple of questions. One is with regards to the potential investment banker, what are you considering in terms of product or company additions?

We're looking at the regenerative medicine space as the starting point for our overall work with the bankers. I'm not exactly sure of what that means in terms of specific companies. But we're going to be looking at the entire space as to see where the most effective fit would be with our company and any targets.

Okay. And then the second question would be with regards to the bags revenues, I'm assuming that as you sell more machines the bag revenues go up. Do you have any sort of numbers both with regards to bag sales this quarter versus last or a growth rate attached just to the bag sales?

You're correct that the more installations we have the impact is positive on the overall use of the disposables. It is difficult to predict a disposable per device, however, and when we look out for the balance of 2011, where we expect the majority of the growth to come in the disposable business for the AXP, certainly, is from these international markets that we have tapped into with our new distribution arrangements in India and China and elsewhere. And certainly we continue to seek growth in the States, as well. But in terms of the number of devices and the impact that has on disposables, that's a little more difficult to get your arms around.

But, I mean, for this quarter, was there any growth rate in the bag sales this quarter versus last?

Yes, it was about 15%.

Okay, good. And do you expect that to continue with some -- at a rate similar to that?

Well, we expect that to actually improve meaningfully due to the new territories coming online in the back half of the year. So most of the growth in bag sets to date has been primarily domestic sales, and now that we have expanded internationally we think that that'll help accelerate the growth for the AXP bag sales.

And the reason why -- let me jump in here for a second to add a little bit of color on that, and that is that we're waiting on regulatory approval in China and in India, and they've been working on that now for nine months or so, and that takes a while to actually happen, and once we do get that approval we'll be able to begin selling.

Right. And, as I recall, you have now both a primary producer as well as a secondary producer of the bag sets.

Yes.

That's correct.

Okay. And the last question was with regards to the restricted stock that you've -- is there any price attached to it, or is it just a free grant based on the $43 million in sales? And I'm assuming that's over the four-year period. Is it an earn-out on a per-year basis for sales derived during the year, or is it something that accrues to them at the end of the four years?

Well, it is restricted stock that is granted. Every quarter we evaluate their progress against revenue milestones, and depending on that progress they either will or will not be granted this restricted stock. The restriction and the rules of the restrictions are based on Rule 144, so they have approximately six months of restriction of each of those grants. And so they will be issued at the end of each quarter as restricted stock, so whatever the price of the stock is at that point in time is what the essential compensation will be to them.

But -- and I'm assuming therefore it's in 16 different tranches. It's a quarterly thing over four years?

Correct.

Okay. And, but it's basically a zero cost basis.

Well, there's -- for us there will be a noncash compensation charge. Zero cost to them, though.

Right. Okay.

Now, just to add just two cents on that is that this is all based upon milestone achievement. So, as sales are accomplished, then that's when the stock is released. If the sales milestones are not accomplished, then they're not. So we really see this as a leverage for and the advantage of obviously the incentive for the Company, and for them, too.

Yes. No, I understand the transaction. I just wanted to understand the details, like if it helps you get those kind of revenues, then it's a fairly good price to pay. I'm done with the questions. Good luck to you guys. Thank you for entertaining my questions.

Thank you, Spencer.

(Operator instructions.)

This concludes today's question-and-answer session. I would like to turn the conference call back over to Mr. Mel Engle for any closing remarks.

Thank you, everyone, for being on the call today. We look forward to meeting up with you in the near future.

The conference is now concluded. We thank you for attending today's presentation. You may now disconnect your telephone lines.