Thermogenesis Holdings Inc (THMO) 2012 Q2 法說會逐字稿

Good afternoon. This is the Chorus Call operator. Welcome to the ThermoGenesis Second Quarter Fiscal 2012 Results Conference Call. Before we begin the call, we would like to remind you that the statements during this conference call are not historical facts and are forward-looking statements, are subject to risks and uncertainties that could cause actual results to differ materially from these expressed in these 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; initiating and successful completion of clinical evaluations and trials for new claims on existing products; regulatory approvals where required; capital resources required to fully execute business plans; and other risks detailed from time to time in the Company's filings with the SEC. (Operator Instructions) For your information, today's conference is being recorded. I would now like to turn the call over to Matthew Plavan, Chief Executive Officer. Please proceed, Mr. Plavan.

Good afternoon, everyone, and thank you for joining us. I am excited to be talking with you today and I look forward to focusing on four major areas during this call. First, our significant operational and strategic milestones; second, the positive changes we have made at ThermoGenesis, specifically, the reorganization that we announced last week -- I want to express my appreciation to our board for their confidence in me to lead this Company into the future, and to our employees, who have continued to demonstrate a high level of dedication during this transition; third, our pipeline of new business opportunities; and fourth, positioning ourselves to achieve near-term goals and long-term success.

Beginning with our significant operational accomplishments and strategic milestones during the quarter. First, the Arthrex deal. Over the course of our discussions with Arthrex, this agreement has evolved into much more than a standard distribution deal for ThermoGenesis. We are very excited to have a first tier partner with heat domain experience, marketing our technology in the sports medicine market. Arthrex is a private company with revenues north of $1 billion, having grown from just over $540 million in 2007.

For us, the Arthrex deal represents an example of what we do best -- innovating and commercializing enabling technologies for surgeons and clinicians. This deal involves funded product development, new on-label indications for use, and two private labeled proprietary products. This deal aligns with our growth strategy and we believe it represents the blueprint for several more deals to come.

Details of the contract include a five-year term under which Arthrex will market a private labeled Res-Q system -- actually, two of them. One for the use in preparation of autologous platelet-rich plasma, or PRP, that is sourced from whole blood, and the other is to produce bone marrow concentrate from bone marrow. Incidentally, this represents our first active PRP distribution channel. Under this agreement we have developed two line extensions of the Res-Q that incorporate modifications to produce this proprietary composition of PRP and bone marrow specifically formulated for Arthrex in collaboration with their staff physicians. These products will be used at the point of care in various global markets. Arthrex has a significant share in both the PRP and bone marrow markets, and we look forward to building this program out with them. We expect to record initial revenues from this agreement in our fourth fiscal quarter, and we will provide updates on our progress in future calls.

We also announced a selection of our BioArchive system by the Canadian Blood Services for a new public cord blood bank that will begin operations in Canada about a year from now. CBS plans to open its first facility in Ottawa, followed by three additional collection sites and a second storage facility in Canada over the ensuing two years. This is an important validation, again, of the best-in-class quality of the BioArchive Cryopreservation System.

Additionally, we have received approval of our AXP System from India's Ministries of Health, enabling us to initiate commercial sales in the country. We are working with Fenwal, our AXP distributor in India on a market launch, and we will keep you apprised of our developments with this effort as it unfolds.

Also, we recently released data from two of our Res-Q clinical evaluations at the leading stem cell conference in New York. The data showed initial positive outcomes from our critical limb ischemia trial in India, and an investigator-driven trial under an IRB for long bone fracture at the University of California-Davis.

Moreover, we continue to progress our business development initiatives, advancing opportunities closer to the completion and bringing new potential business opportunities into our funnel. A key aspect of our growth strategy, these deals target new customer acquisitions, new development partnerships, and broader distribution of our products.

In support of these efforts, I am pleased to note that ThermoGenesis was awarded patents for the inventions in our proprietary AXP bag set by China, Japan, and most recently, Mexico. In the US, our inventive claims founded in the Res-Q products were recently allowed by the US Patent Office. I will provide context for these accomplishments and other pending developments after I review our financial results for the quarter.

Revenues for the second quarter of fiscal 2012 were $4.8 million versus $5.9 million in the second quarter a year ago, and $4.9 million in the prior quarter. Key factors impacting our revenue included lower sales of BioArchive systems, two versus six a year ago, as the constrained capital equipment environment continued to negatively impact that part of our business.

In addition, we experienced lower licensing of royalty revenues as well as declining ThermoLine sales as we continue to wind down this product line that is no longer considered to be core to our strategy.

We did experience a small increase in disposable revenues year-over-year as they accounted for 73% of our total revenues in the quarter.

Incidentally, with the continuing impact the debt crisis is having on funding for public cord blood banks and the availability of credit to new and existing business, we are focusing our efforts much more aggressively on targeting cord blood banks using competitive technologies in an effort to expand our market share. We are making good progress in this regard and we hope it will bear fruit over the next couple of quarters.

Gross margins for the quarter were 36% versus 40% in the second quarter a year ago, and 41% in the prior quarter. The primary factor negatively impacting gross margins this quarter is temporary. CryoSeal manufacturing inefficiencies occurred during the device build to fulfill the terms of our agreement with Asahi. You may recall we are also divesting the CryoSeal business. This is not something that we have been building for some time, so when it came time to put some of these devices together, it took us longer than it normally does. After all these devices are built and sold in the third quarter, we do not expect this to recur; this just represents the last build of the product.

Operating expenses in the quarter were $3 million versus $3.1 million a year ago, and $3.2 million in the prior quarter. In comparing our year-over-year results, we reduced SG&A costs by nearly $350,000 due primarily to a decrease in stock compensation expense, including the amortization of the stock grants to Nanshan and the absence of fees paid to investment bankers. This decline was offset by a similar dollar amount increase in research and development due to additional staffing and funding of our clinical evaluation initiatives. The loss for the quarter was $1.4 million, or $0.08 a share compared to a net loss of $486,000, or $0.03 a share in the same period a year ago.

Turning to the balance sheet, our cash position at the end of the quarter was $8.7 million versus $12.3 million at the end of fiscal 2011. Use of cash from operations in the first six months of the fiscal year was $3.1 million. Of this amount, accounts receivable utilized $1 million of cash, primarily due to three accounts with large past due balances which have now been collected.

Our backlog at the end of the quarter was $2.6 million, which consisted primarily of $2.2 million of orders for the CryoSeal devices and disposables that I referred to earlier. We intend to fulfill the device orders of $750,000; however, I note that the CryoSeal disposable order of $1.4 million is in question due to the flooding and complete destruction of the facility in Thailand that manufactures the CP-3, or the disposables for the CryoSeal on our behalf.

Now, turning to our announcement 10 days ago regarding changes we made in corporate management responsibilities. As we indicated, we streamlined management and staffing, including the elimination of nine positions to better align our resources with realizing progress towards our strategic goals. I'll speak to the major factors that drove this decision in a moment, but the overall objective was to recalibrate our resources to current revenues and the likely timing of new market opportunities, while at the same time not putting our customer relationships, product quality or market development programs at risk. As we have indicated in the release, we will report approximately $500,000 in one-time expenses related to this action in the third quarter, although we believe the changes we have made will reduce operating expenses, approximately $2 million on an annual basis.

I also wanted to take a minute to highlight the other three members of our senior team, each of whom I and the board believe are ideally qualified for the roles they now have. Starting with Hal Baker, who joined the Company in 2009 as Vice President of Sales, Hal is currently serving as Vice President of Operations, which includes sales and customer support, but now also includes marketing following the reorganization. Prior to joining ThermoGenesis, Hal had over 20 years of global sales and marketing experience in the healthcare sectors, introducing products, leading teams in the cord blood stem cell market, managing distribution relationships, and building sales force organizations. Hal was senior vice president, US Commercial Operations and senior vice president, Global Sales with Pall Corporation, the $2 billion filtration and separations product manufacturer. He also served as director, global marketing with Gambro Healthcare, a provider of automated blood and stem cell collection technologies. Hal has been instrumental in the expansion of our distribution and customer relationships over the past three years, a process that continues today. I have high confidence in Hal's strategic insights in commercial operations leadership.

Turning to our operations leadership, Ken Pappa, who has been with ThermoGenesis since 2006, and has been serving as vice president of Operations and Engineering, has been named vice president of Quality and Operations. Ken has successfully led our operations and engineering efforts, having greatly improved efficiency of our operations, and has played an important role in our quality programs. Prior to joining ThermoGenesis, Ken had 20 years' experience in operations and manufacturing, having held senior management positions with leading organizations including Hewlett-Packard and Agilent Technologies. His proven leadership capabilities, ability to effect integrated teams and his discipline around process control will further enhance our quality and overall effectiveness.

The third member is Kevin Cooksy, Vice President of Corporate Development and Scientific Affairs and Regulatory. Kevin, who has been my right hand in Business Development since joining the Company last year was integrally involved in the Arthrex deal, and he will assume the leadership role in that area. He joined us last year with over a decade of experience as a versatile executive with demonstrated success in formulating and driving corporate growth initiatives for diverse life science entities including Agilent Technologies and Nectar Therapeutics. He is a bench-trained scientist with complementing legal credentials, which make him imminently qualified to lead our scientific affairs and regulatory efforts.

I am excited to be leading this highly motivated, effective and well equipped executive team. We are sized to our current revenues and new opportunities that we aspire to, and we are better positioned to be responsive to our customers, business partners and employees.

Turning now to the Company's near term outlook. It is important that I first address the issues that will provide some context for the board's decision to reorganize and right size. Despite doing everything within our control to advance the registration process for our cord blood and bone marrow products in China, there is much in the process we do not control. While we are highly confident our products will receive Chinese SFDA approval, and there are statutory process timelines for approval of specific submissions, these timelines are subject to delays by the SFDA, which makes predictability of the timing of approval difficult. These delays can be as inconsequential as simple questions of clarification, or more significant, as taking exception to an FDA-approved test protocol. Therefore, while we are tracking expected approval dates for our products according to the remainder of these statutory timeline and we have not yet received further word from these agencies regarding more delays, it is prudent for us to prepare for that scenario.

According to the current timelines per the SFDA, our products are scheduled to be approved as of the following dates -- the AXP by the second quarter of calendar 2012; the BioArchive by the third quarter of calendar 2012; and then for the Res-Q by the end of calendar year 2012. Given the uncertainty of these approvals and the approval process, and the continued softness in our US and European cord blood business, our board recognized that the Company needed to implement this major reorganization to (1) help us better manage our cash resources; (2) ensure the sustainability in the near term; and (3) best position as for growth in the long term.

Now I'd like to take a moment to speak to our strategy for growth and how it continues to evolve. As I am sure you know, our fundamental strategy for growth continues to be leveraging our core competencies in engineering and scientific innovation to develop automated GMP products that enable clinicians to practice cell therapy for their patients at the point of PR in the lab. Our ultimate goal is to cover the entire continuum of this practice, which includes cell collection from any viable source, cell processing and storage, cell expansion and cell delivery.

Our growth strategy has three primary phases. Phase 1 is to leverage our existing base platforms into new indications and new markets. Phase 2 is in collaboration with our partners through our business development initiatives, identify new platform applications for new cell sources such as cord tissue or adipose tissue, and evaluate other areas within the continuum of cell therapy where we are not currently participating, such as cell collection, cell expansion, and cell delivery. And phase 3 is through demonstrated expertise, market successes and clinical data development in each of the five steps in the practice of cell therapy, being the collection, separation, storage, expansion and delivery, become the premier solutions provider for clinicians practicing cell therapy medicine.

An important evolution in our strategy is our progression from being just an enabling tools provider to being a clinically data driven enabling tools provider. To the extent the output of our product is used in vivo at the point of care, we expect the FDA to increasingly require indication-specific approvals for use. Therefore, we have begun developing a more robust clinical dataset supporting the safety and efficacy of our products in multiple point of care applications, as illustrated with the CLI and long bone fracture studies.

As I mentioned earlier, the Arthrex deal personifies the execution of this strategy as we have developed a custom solution that will have on-label 510(k) indications for use in PRP and bone marrow concentrate. Following this approach, in collaboration with our strategic partners, we open the door to the third phase of our strategy, and that is to participate meaningfully in the therapeutics market through royalty or revenue-sharing arrangements with our partners without taking on the full cost and clinical risk of being a purely therapeutic place.

We are deep into phase 1 of our strategy and through our business development efforts we are in parallel entering phase 2. With regard to our progress during the quarter and strategy execution in our business development initiatives, in addition to closing the Arthrex deal, we made good progress albeit still in the early stages with other parties in significant medical areas such as spine and cardiovascular cell therapy treatments. We expect a shorter pathway to commercialization for our incremental spine applications than those in cardiac due to the typically more rigorous clinical requirements for cardiac procedures.

We also remain focused on developing revenue-generating relationships in what we call the cell factory space, where we believe our current product portfolio and processing expertise offers our partners significant flexibility in optimizing the cell processing and scale-up and maximizing throughput and the quality of the end cell products for organizations that are looking for allogeneic cell factory, cell therapy products.

By taking into account all that I have just shared with you, our outlook for the business and the future of ThermoGenesis is positive. We have right-sized the business to provide added protection to our cash resources. At the same time we are striving to grow the cord blood business by converting banks that are currently using manual systems and by increasing our share of the automated market.

In addition, we continue to progress our initiatives for new bone marrow and PRP revenue sources such as our Arthrex deal. As for the timing of new revenues over the next few quarters, we are heavily dependent upon the timing of both our registrations and the closure of new business in China. As we begin to grow the top line again in the near term, we expect our new revenues to both contribute to margin and enable us to fund new innovation, further progressing our strategy for sustained long-term growth.

In closing, we have made significant operational accomplishments and achieved important strategic milestones. We have effected positive changes within the organization to better streamline our resources and align our management for optimum performance against our near term goals and objectives. Our pipeline of new business opportunities is robust and active, and we are positioning ourselves to achieve our near-term goals and our long-term success.

Thank you for joining me today. We look forward to continuing the execution of our growth strategy and reporting out our progress to you. I'll now turn the call over to the operator for questions.

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Glen [De Gallo] of DSS. Please go ahead with your question.

Yes, thank you for taking my question. I have a couple questions for you. One, in terms of revenues and expenses with India and China, what are you expecting going forward, assuming there is approval in China? Two, why have you not looked at exploring options to sell the Company since revenues have been flat? And then the third question would be in terms of stock offerings in the future, to raise capital, what are you looking to do since you are probably drawing down about $3 million a quarter. If you could just explore a little bit on that, I would appreciate it. Thank you.

Sure. I'll start with the last question. You mentioned that we're drawing down about $3 million a quarter. Actually, the numbers I just reported, there was a $3 million use of cash in the first six months of this year, of which I noted approximately $1 million of that was due to aged receivables not being collected timely. So, the reality is we're really burning right now around $1 million a quarter, and that was before we reorganized. I think with the reorganization we are probably looking at something more like $0.5 million, give or take $100,000 a quarter in terms of burn. So, we have significantly reduced the burn.

Back to your first question about India and China, you asked about revenue and expenses. India, as you know, we're trying to sell both cord blood and our bone marrow products into that market. India still represents a meaningful market for us, but what we have learned over the last year in partnership with our distributors there, Totipotent on the bone marrow side and Fenwal on the cord blood side, is that India is likely to unfold slowly as a market. The dynamics are such that cost is a major issue. And so I think we're setting the expectation now that, although it remains to be, we think, ultimately a big market, it is going to take longer to unfold.

In terms of the cost associated with it, I think we've incurred most of the market entry costs right now, having gotten approval for AXP and the Res-Q already, so now it's just a matter of moving into some of the hospital chains that we have relationships with and figuring out how to grow that business.

So, China, on the other hand, is a market that is going to unfold much more quickly than India. And as I talked about in my prepared remarks, certainly the registration is the first step. But separate from registration clearly is the sales cycle. And I will say that during the quarter, I feel good about the progress we made in continuing to identify new customers and partners that we expect to work with in growing that business -- entering that market and growing it following registration, and the costs associated with that. There will be costs of setting up in country, but I think that those will not be material in terms of the next year.

Lastly, you asked about capital raises. We are always evaluating what our working capital needs are and what our growth capital opportunities are, and right now we're assessing our needs and we will be continuously assessing those needs. And whether we raise money will really just depend on whether we think we have sufficient resources to make it into the coming -- the near term based upon how we see these new revenues unfolding. Or if we come across new business development opportunities that we think are in the best interest of our shareholders to seize now versus later.

So, when it comes to the capital raise issue, you just have to continuously evaluate what your needs are and keep in mind that the terms that you can raise money at are something you want to keep in mind, and how much you need all depends on how quickly your business is growing.

What about the exploring selling the Company?

Well, we are looking to grow this business and implement our growth strategy. Our ultimate goal, really, is to enhance shareholder value. Right now we think that the strategy and the growth plans that we have will be the way that we maximize shareholder value. And so we are not actively pursuing the sale of the Company.

Okay, thank you.

Our next question comes from Mike [Menzies] from Nedgar, Tucker and Verner. Please go ahead with your question.

Good afternoon. Two quick questions. I believe we have now traded above $1 for 10 consecutive days. Has that eliminated our delisting exposure?

That's a good question, Mike. The NASDAQ listing requirement is based on the closing bid, and I believe that technically today was our ninth day. But if I'm wrong and it was the 10th, great. The actual rule is that your closing bid be above $1 for 10 consecutive days. NASDAQ does reserve the right, if they feel that there is a probability or a high probability that the stock is not going to sustain above $1 for the foreseeable future, they could ask for a longer period of time of being above $1. But I think that we are very, very close, and if we are successful in regaining our status, then we go back to we're out of the 180-day grace period.

Great, thanks. The second question with the significant reduction in expenses, can you guide us towards when you might be able to realize profitability?

You know, as I'm sure you heard in my prepared calls, there are a number of -- well, it's a very dynamic market right now, and we simply don't have the visibility to accurately predict what specific quarter we think that's going to happen in. And I really don't think it behooves me to speculate precisely when it is going to occur. I have confidence that there are enough positive new business opportunities between Arthrex-like business, getting into China in the new markets, that we will be growing our revenues in the not too distant future and as a result, as I mentioned, we're going to have the opportunity to not only invest in the business, but keep marching towards profitability. But I don't want to get into guidance on profit given where we are in the market. I just don't think it's prudent.

Thank you.

Our next question comes from Randall Stevens from RS Capital Partners.

Hi, Randall.

And he has removed himself from the question queue. (Operator Instructions) And at this time I'm showing no additional questions. I'd like to turn the conference call back over to Mr. Plavan for any closing remarks.

Thank you, everyone, for your time today, and I look forward to talking to you in the future.

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