ThermoGenesis Holdings, Inc.
Q4 2008 Earnings Call Transcript

Published: 10 Sep 2008

[Operator:]

Welcome to the ThermoGenesis fiscal year 2008 fourth quarter results conference call. Some of the statements made during this conference which are not historical facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the 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 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. (Operator Instructions) I would now like to turn the conference over to Dr. William Osgood, CEO.

[William Osgood:]

With me today is Matt Plavan, the company’s Chief Financial Officer. Matt will review our financial results and outlook for fiscal 2009. After I review the key events during the quarter and year and provide some perspectives on the year ahead. ThermoGenesis ended fiscal 2008 in very solid fashion with fourth quarter revenues of $7.2 million, more than double the fourth quarter revenues a year ago. This brought us to full year fiscal 2008 revenues of $21.9 million versus $16.8 million a year ago, for an increase of 31%. As Matt will discuss, our revenue growth in the quarter was driven principally by an increase in disposable revenue of $4.2 million and higher bi-archives system revenues. Importantly, we ended the year financially strong with over $25 million in cash and investments and virtually no debt. At the time of our fourth quarter conference call a year ago, I had been in the Chief Executive Officer role for about two months. During that call I outlined our new strategy and what I saw as key milestones for 2008. I would like to take a couple of minutes to review our progress over the last year and how these accomplishments are laying the groundwork for the year ahead. As I indicated at the time, I believe that ThermoGenesis possessed a number of key assets that could be leveraged to accelerate the growth of the company. These included our leading market position in the umbilical cord blood-banking sector; broad IP protection; solid balance sheet; the strength and dedication of our people and leadership team; and the ability to apply our cryopreservation in high-speed centrifugation technology to the emerging regenerative medicine markets. I also noted that after my brief time in leading the company it had become increasingly clear to me that shareholder value would be maximized by our ability to become a leader in the developing and commercializing innovative products and service solutions that process and store adult stem cells for later treatment of disease and injury. I also outlined a three-pronged strategy to support our vision

[Matthew Plavan:]

Starting from the top revenues for the fourth quarter of fiscal 2008 were $7.2 million, 104% increase versus the fourth quarter a year ago and compared to $5.6 million in the prior quarter. As Bill mentioned, total revenues for the year were $21.9 million versus $16.8 million in fiscal 2007, a 31% increase. In terms of the quarter our growth was driven by disposable revenues which increased to $4.2 million or almost triple those of $1.5 million a year ago and increased shipments of the BioArchive, nine versus three a year ago. For all of fiscal 2008 disposable revenues were $11.7 million or 53% of total revenues. This compares with $6.7 million or 40% of total revenues in the prior year. This increase is largely driven by a near three-fold increase in the sale of AXP bagsets over the year from 36,000 in fiscal 2007 to 99,000 in fiscal 2008. Total backlog at the end of the year was $2.3 million consistent with the $2.2 million of a year ago. As we had discussed with you in the past, we are focused on increasing our recurring revenues and leveraging the impact of higher margin disposals on our overall gross margin and in fact that is what we saw in the fourth quarter with gross margins of 33% as compared to the 26% gross margin in the fourth quarter a year ago. Over the past three years the percent of disposable revenue to total revenues has steadily increased from 32% to 40% in fiscal 2006 and 2007 respectively to 53% or over half of our revenues in fiscal 2008. Turning now to operating expenses in the quarter, they were $5 million versus $4 million a year ago and $4.5 million in the prior quarter, that being the third fiscal quarter. The increase in operating expenses for the fourth quarter this year is principally the result of increased R&D activity in support of the Vantus technology and the incremental costs associated with the newly created position of chief technology architect filled by our former Chief Executive Officer Phil Coelho. The net loss for the quarter was $2.5 million or $0.04 per share versus a net loss of $2.6 million or $0.05 per share in the same period a year ago. I want to speak briefly to our operating expenses for the fiscal year, beginning with research and development. For fiscal 2008 they were $7.2 million an increase of $3.1 million or 75% over the prior year, due primarily for the reasons I noted a moment ago, including stock compensation, salaries and consulting fees of approximately $1.8 million related to the CTA position which was effective August 1, 2007. Effective May 1, 2008 Phil resigned and became a consultant to the company. The other key components of the increase in R&D expenses included $620,000 in expense associated with the Vantus venture and $130,000 in payments made to UCD in connection with an agreement to develop stem cell treatments. We were able to hold the line on sales general administrative expenses as they rose a modest 6% over the prior year due mostly to increased legal costs primarily related to the discussions with GE Healthcare regarding the distribution agreement and consultation during the voluntary AXP recall effort. We are pleased that we effectively managed to a relatively minor increase in sales and G&A costs while having grown revenues 31% year-over-year. Turning now for a moment to liquidity and capital resources, we ended the year with cash and short-term investments of $25.3 million versus $33.4 million at the end of fiscal 2007. Working capital at the end of the period was $30 million versus $37.8 million at the end of fiscal 2007. We have minimal debt. Our use of cash for operations and capital expenses together was $3.6 million during the quarter versus $1.6 million in the prior quarter. The burn for the quarter was due mostly to the loss of $2.5 million combined with a net lag in receivables and build up of inventory together totaling a use of cash of $1.1 million. Before opening the call up to questions we’d like to provide some visibility into our expectations for fiscal 2009. Driven in large part by increased AXP disposable bagset sales as well as initial revenue contributions from the new MXP device and disposables, in addition to the Vantus launch and the launch of our new point of care system, which is the Rescue device, we expect overall revenue growth to be between 30 and 35% in fiscal 2009. We also expect continued gross margin improvement during the year with fourth quarter gross margins anticipated to exceed 40% and net operating expenses will be relatively comparable with fiscal 2008. As a result, as Bill had mentioned, we will exit the fourth fiscal quarter at break even. Thank you again for joining us on the call today and we will now open it up to questions.

[Operator:]

(Operator Instructions) Your first question comes from Jon Hickman of MDB Capital Group.

[Jon Hickman:]

What can you tell me about Spine Smith. Do you know revenues anything like that? I take it their not public.

[William Osgood:]

They’re not.

[Jon Hickman:]

So can you tell us anything about their —.

[William Osgood:]

Well they are a privately held company. They are a distribution company. They also have a consortium of orthopedic surgeons that develop and use implants with stem cells. They are a service provider to orthopedic surgery groups to process themselves and they’re growing very rapidly. So, they are out on the frontier in a very innovative company, but what’s important to us is they’re more than a distributor, they’re distributor and clinicians and they want to develop products with us and that was what we found to be very attractive. And they are growing fast.

[Jon Hickman:]

Could you give us an example? I mean I know you’re postulating there, but like what is a product they could develop with you? I mean, I know how they can process bone marrow and get stem cells but what do you mean a product?

[William Osgood:]

We are all learning about regenerative medicine and now with selling and Spine Smith we are going to really learn about point of care applications and what we’ll get from that is an understanding of how to streamline and improve our products over time and evolve them so they really are the best fit for quick turn-around point of care solutions. The only way to do that is to get experience with them and that’s what we’ll get with this company.

[Jon Hickman:]

So that is more like a delivery mechanism type thing?

[William Osgood:]

Could be.

[Jon Hickman:]

Was their any upfront money here?

[William Osgood:]

No.

[Jon Hickman:]

So they are going to start using your product to process stem cells. They already process stem cells with a different method so they are going to start using yours?

[William Osgood:]

Correct.

[Jon Hickman:]

So whatever volume they have now, that will slowly move to your MarrowXpress?

[William Osgood:]

Correct.

[Jon Hickman:]

In your R&D, Matt can you go through that again? I mean Bill was the CTO and there was a lot of expenses for his options and he resigned, so you expect R&D to be flat going forward for fiscal 2009 I mean, help me out there. You’ve got Vantus, you’ve got all these other things you’re doing so…

[Matthew Plavan:]

Starting with our overall guidance, we expect to keep our total operating expenses flat. I think you’ll see some costs being reduced. Stock comp will probably come down pretty meaningfully. As Bill mentioned we have hired a VP of R&D so there are some other areas where costs will probably replace those costs that are going down, but overall we expect to keep our operating expenses flat.

[Jon Hickman:]

What was stock based compensation and deprecation in the quarter? Can you share that?

[Matthew Plavan:]

In the quarter stock comp was $300,000; depreciation was $200,000.

[Jon Hickman:]

Were there any one-time items in your SG&A that won’t be there going forward? Like is the recall completely cleaned up?

[Matthew Plavan:]

Yes, that was cleaned up in the third quarter. During the quarter there were a number of clean up items that were non-recurring but I wouldn’t want to give the impression that with those going away that we would see operating expenses declining. I think our expectations are going to remain relatively constant.

[Jon Hickman:]

With your expectation of Vantus starting to generate some revenues with the foaling season, which I think that coincides with your second fiscal quarter right?

[William Osgood:]

Third.

[Matthew Plavan:]

Yes it’s the third fiscal quarter.

[Jon Hickman:]

The third fiscal quarter so is starts in March?

[William Osgood:]

January.

[Jon Hickman:]

You haven’t announced any contracts yet and you’re only three months away. Can you help us out there?

[William Osgood:]

We will announce them at the time. We have meetings going in Kentucky this week and we continue to progress in getting the commitments we’re looking for.

[Jon Hickman:]

I think you had a target of like you’re initial batch was going to be like 70 horses or something like that?

[William Osgood:]

Closer to 700 is our target.

[Jon Hickman:]

You think that’s doable even at this kind of latest stage, or don’t you think this is a late date?

[William Osgood:]

We are still confident that we are going to see some of the breeders start with a small number and then as they see how the process works they’ll start to add; so we’re expecting to see some upfront commitments, but we’re also expecting to see contracts come in during the foaling season.

[Jon Hickman:]

I want to talk about Rescue, but I’ll get back in queue.

[Operator:]

Your next question comes from Joe Pratt of W.D.

[Joe Pratt:]

Is there any way you can give us an idea on selling in terms of their market penetration capability? Do you measure it by the number of clinics they’re involved with or the number of folks in their sales force, how can we quantify that?

[William Osgood:]

When you’re pioneering markets that is always the question people want answered, but it’s a touch one to answer. These guys have a long track record in orthopedics, running distribution companies and growing businesses very big. They understand the stem cell market better than most of the companies out there because they are one of the pioneers. They have built, I think, an extraordinarily attractive business model and having distribution together with the actual practicing orthopedic surgeons who are using these products and they are going out and attacking BMP use a surgeon at a time. When you are pioneering it takes time and you have to slug it out, so they’re converting surgeons who are using BMP to stem cells. There was a recent article in the Wall Street Journal that certainly it helps their cause that was related to Medtronic and their products that use BMP. We are expecting these guys to move very rapidly and we plan to go with them as they evolve these markets, so we’re excited.

[Joe Pratt:]

What kind of trade group would they appear in and what particular trade show would they end up at?

[William Osgood:]

Any orthopedics show; they will be at NASS which is in Toronto in a couple months and North America Spine Meeting.

[Joe Pratt:]

Geographically are they focused just on North America or the lower 48?

[William Osgood:]

Initially they started in a regional area, but they are expanding very rapidly and right now we believe that they will be well positioned in North America here shortly and then they’ll go international.

[Operator:]

Your last question comes from John Hickman of MBD Capital.

[John Hickman:]

Rescue, how does that compare on a revenue basis to you versus the MarrowXpress?

[William Osgood:]

Rescues is an exciting product because it has four markets that it will address, two in the human side and two on the vets side. It’s an excellent product for volume reducing bone marrow in an operating room for immediate application back to the patient and it’s also excellent for processing peripheral blood in an operating room to isolate the platelets for use in wound care or wound healing. I can tell you my son calls me all the time, he is an anesthesiologist and he is telling me about how that more and more surgeons are using PRP directly in operations, but it also has the same two-market applications on the veterinary side both for treating immediate bone marrow treatments of tendon/ligament injuries at point of care and also from PRP from peripheral bud for treating wounds, so it has quite a bit of application. In terms of the size of the market we believe that it could be, it is interesting as we have tried to understand and have realized that there is a point of care market and there is a lab market and they are a little bit different and the needs are a little bit different and that’s why we had to come out with Rescue, is that the MXP is really best suited for laboratory applications, although it could be used for point of care, but the Rescue is a beautiful point of care for applications; so with the Rescue and the MSP we can cover the market needs very well. The Rescue is a different technology. It’s a far simpler. It’s a very elegant solution. It has very good margins and we’re very excited about it.

[John Hickman:]

So revenue wise you don’t care what you sell?

[William Osgood:]

We always want to sell more; of course we care.

[John Hickman:]

You don’t care whether you sell the MarrowXpress or Rescue?

[William Osgood:]

I think that we have found that there are some places that really prefer the MXP because it is a closed system. It’s got a little bit higher recoveries. It’s better suited for volume processing and there is other applications where people really prefer Rescue because it’s easier to use, it could be used in an operating room, and so I don’t, we haven’t really seen where there is a conflict and again it is because we have really started to get clear that there is a point of care market that is a lot different than a laboratory off, you know, away from the operating room type of market. It could be in the hospital or it could be a freestanding clinic, so I don’t think that conflict is going to occur.

[Operator:]

Thank you for participating in the ThermoGenesis conference call. This concludes today’s event.

[William Osgood:]

Thank you.