Matthew Plavan - Chief Executive Officer
Dan Bessey - Chief Financial Officer
Michael Menzies - Neidiger, Tucker and Bruner
ThermoGenesis Corp. (KOOL) F3Q2013 Results Earnings Call May 14, 2013 5:00 PM ET
This is the Chorus Call operator. Welcome to the ThermoGenesis Third Quarter Fiscal 2013 Conference Call and Webcast.
Before we begin the call, we remind you that the 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 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, the outcomes of potential litigation, capital resources to fully execute business plans and other risks detailed from time-to-time in the company’s filings with the SEC.
As a reminder, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. (Operator Instructions)
For your information, today’s conference is being recorded and a replay of this call will be available for seven days by dialing 1-877-344-7529 within the U.S. or 1-412-317-0088 outside of the U.S. and entering conference ID of 385107#.
I would now like to turn the conference call over to Matthew Plavan, Chief Executive Officer. Please proceed, Mr. Plavan.
Thank, Jamie, and good afternoon, everyone. Thank you for being here with us today. I’m very excited to be joined today by our new Chief Financial Officer, Mr. Dan Bessey. Dan came Board in March, bringing with him more than 20 years of strategic finance, Investor Relations and corporate development experience.
He was most recently CFO of SureWest Communications, a publicly traded communications company, where he played a leadership role in the transformation of SureWest to a major telecommunications provider. It was ultimately acquired in 2012 by Consolidated Communications as 77% premium to market.
The transformation of SureWest from the telecom provider to a broad based communications company over the past several years is in many ways and now, I guess, to the transformation we are pursuing at ThermoGenesis, from a leading cell processing and storage provider to regenerative medicine and services company.
Therefore I expect his contribution to our transformation to be invaluable. Speaking on behalf of the Board and management, we are delighted Dan is part of our team and he will be providing you with review of our financial results shortly.
Before moving into our updates for the quarter, I want to comment on what is certainly our most important milestone achievement in recent history. We are very pleased to announce that we have received registration approval for our AXP System from China’s State Food and Drug Administration. With this approval, the company has initiated commercial distribution of the AXP in China, one of the world’s fastest growing cord blood markets.
We believe our performance as a first mover for the automation of cord blood processing in China provides significant catalyst for the growth of our cord blood business. We’ve established a strong footprint in China, with our five-year exclusive distribution agreement with Golden Meditech for the AXP System in the People's Republic of China, which excludes Hong Kong and Taiwan, but it does include Singapore, Indonesia, India and the Philippines.
We are excited to begin developing the China cord blood market in earnest and in partnership with Golden Meditech we will use our efforts in China to launch into other growth areas in Asia. We anticipate receiving approvals in other Asian countries during the balance of calendar 2013.
Okay, turning now to the events and accomplishments of the quarter. Let me summarize the four main strategic objectives of our growth strategy for ThermoGenesis and the transformation of our business towards providing this regenerative medicine products and services.
First, focus our efforts, more specifically divest non-core products in order to ensure a single [minded] focus on business growth strategy. Second, driver growth in our cord blood, bone marrow and PRP businesses, which are the revenues we will leverage to generate cash flow from operations to drive our growth. Third, reduced and maintain our operating expanses to align our cost structure with our evolving revenues. And fourth, invest in our regenerative medicine business as the primary driver of our longer term growth, including product development initiatives and clinical programs.
And we are progressing in each of these areas in this past quarter. As for the divestitures, the sales of CryoSeal and ThermoLine product lines are formally transacted and accounted for. This allows for process and overhead streamlining.
With regard to growth in the base business, we are pleased to announce the addition of a marquee new AXP customer, Crioestaminal, a leading cord blood bank in Portugal. Crioestaminal is a pioneer in Portugal’s cord blood industry and one of Europe’s major cord blood banks. This was an important win for us, as we are replacing a competitor’s automated system at the facility and it increases our footprint in Europe which is an important market for us.
This win demonstrate the value of our integrated distribution strategy implemented last fall, which is a customer centric approach then a corporate marketing service and support for our cord blood products. As a result of this strategy, we are in a queue for several other new customers in Europe and hope to have one or more announcements in this regard in the next several weeks.
And with respect to leaving within our mean, we continue to better leverage our cost structure. In addition to increasing our core revenues year-over-year we reduced our operating loss in the quarter by approximately $500,000 excluding the gain on sales of assets and our cash balance remained consistent with the prior quarter.
And I should note, excuse me, the 22% of our $2.8 million in total operating expenses were non-core operating costs, including litigation related expenses and those incurred to support our longer term growth initiatives.
During the third quarter, we continue to advance our product development and clinical programs, the fourth element of our growth strategy. With respect to investing in our technical platforms we continue to develop additional functionality applications for our AXP and MXP platforms as a result of our clinical studies and point-of-care programs with our partners including Celling Technologies and TotipotentRX, as well as working closely with our cord blood customers. We believe these insights and resulting development activities should result in near-term product enhancement releases.
And with regard to our growing focus on clinical programs, our stated strategy has been to extend our presence in the point-of-care market by increasing our participation in clinical studies that feature our technologies in order to further demonstrate their safety and efficacy for use in cell therapies.
As you know, we have clinical studies and various key indications including critical Limb Ischemia or CLI and non-union fractures. Together with our clinical partners we have completed a Phase I and Phase Ib study in CLI, you may recall the data from CLI Phase I trial with the University of Naples were published last quarter.
And as a reminder, in the study, the MXP was used to produce the cell concentrate and the trial was design to demonstrate safety and to confirm the longer term beneficial effects of autologous bone marrow cell transplant in peripheral artery disease patients with CLI, who in this case were not candidates for or had not benefited from revascularization surgery, which is a highly invasive procedure.
The data show that one year following administration of the cells that 10 of the 13 patients showed improve blood flow and as a whole, the cohorts blood flow doubled, which is very compelling early results.
Our Phase Ib CLI study conducted with our other partner, TotipotentRX in India treated 15 patients, which also compelling interim results. These were very sick patients, were specific or significant prior medical interventions had failed to achieve revascularization and each were within 24 hours of limb amputation.
Remarkably in the six month follow-up over 80% of these patients were amputation free. What is clear about these studies is that we are seeing substantial revascularization through autologous cell therapies and that these results are durable where there are no other treatments available. With such compelling early results, we’re currently designing, evaluating and preparing to implement a Phase II CLI study.
Secondly, we’ve completed a Phase I study of non-union fractures with our partner, TotipotentRX in U.S. and India. This Phase I study totaled 19 enrolled patients, of which five were last follow-up, each of whom had failed numerous prior surgical attempts at bone fusion. The study showed significant improvements in healing and pain scores as well as the 71% union rate within 18 weeks.
So again based on these results, we’re planning a Phase II study for non-union fractures in conjunction with our partner. Two other indications representing potentially significant revenue opportunities for us in the use of PRP in the treatment of osteoarthritis and bone marrow concentrate used to generate spinal fusion. Those are two areas of -- other areas of focus for us. So we’re expecting to launch a pilot trial for one of -- or both of these indications within the calendar year.
Finally, we remain very active with our business development and strategic partner efforts as we look to expand beyond our current offerings through the development of our acquisition of cell collection administrations tools, point-of-care cell diagnostics and proprietary kits and protocols and the securing of the placement of our devices and clinical studies or trials for indications beyond those that we’re already serving.
Again that will facilitate our objective of increasing our share, the revenue stream by providing more comprehensive solutions. So in addition to the indications, I have already mentioned such a spine, orthopedic and vascular, we’re exploring opportunities in acute myocardial infarction, non-healing ulcers and then sourcing cells possibly from adipose and other tissues.
In our last couple of calls, we’ve mentioned the claim filed, last filed by Harvest Technologies relating to the patent for the rescue system. A month ago, we filed an answer and counter claims in responses to their complaint. Our counter claims are based on antitrust and other alleged improper conduct, life harvest and further seek declarations that the rescue system is not infringed on their patents and that their patents are in fact invalid.
I can’t speak to this issue in any further detail at this point. I assure you that we are vigorously defending our intellectual property and our products against the Harvest claims while aggressively pursuing our separate claims against them.
Additionally, I do want to emphasize that our ability to grow our share in the PRP and bone marrow processing market extends to expanding the application based on both the MXP and the AXP platform as well as new product innovations that are currently under evaluation. To fully exploit this market opportunity, our strategy has been and continues to be to leverage multiple platforms.
So in summary, we believe there are significant opportunities to drive shareholder value by fully leveraging the potential of our technologies in regenerative medicine. We also believe as do all those who are in our market space that regenerative medicine is poised to really revolutionize healthcare.
The reasons for this is pretty simple, the uncontrolled rise in the cost of care in the U.S. is reaching epidemic proportions because of our rapidly aging population and few treatments that are available to target the root causes of chronic diseases. Furthermore, the reimbursement systems involving away from just paying for procedures to paying for clinical results.
These dynamics are really paving the way for regenerative therapies as they do in fact target the cause of chronic disease and the early clinical results as we talked about in our experience and we’ve seen in the market with other companies, the results are very, very positive. In fact, the lines for regenerative medicine estimates the potential reduction in the cost of chronic care just in the U.S. from these regenerative medicine procedures could be as great as $250 billion a year.
And we believe that the concurrent revenue opportunity for these therapies could be as much as $20 billion a year. Thus companies that are positioned to offer these regenerative products and services which we are, represents some of the most exciting investment prospects in the market today.
The outcomes emerging from early trials, particularly in the used systems of therapies in indications such as orthopedic spine and cardiovascular are highly encouraging. However, the key to the long-term success of regenerative medicine will be even near-term progression of our clinical results to proven and consistent curative outcomes.
In addition, these treatments have got to be made commercially viable. And we believe the course that we have set for ourselves and the progress that we are making towards them puts us on a right track and the best trajectory to achieve both of these essential goals.
Thank you for joining us today. I would like to turn the call now over to Dan to cover our financial results for the quarter. Dan?
Thank you, Matt and hello everyone. Let me first say that I’m excited to join the team of ThermoGenesis. The regenerative medicine space is exploding with opportunities, revolutionize the healthcare industry, and I believe our company is uniquely positioned to drive shareholder value by taking advantage of the supporting trend. I have been impressed with its technology and the dedication of the senior team employees in achieving the company’s vision. And I look forward to speaking with you today and in the future.
Now to the financial results, we are very pleased with the result of the third quarter 2013 and our progress in transforming ThermoGenesis into a regenerative medicine company. Our revenues for the third quarter of 2013 were $4.9 million, comparable to the third quarter a year ago and a prior quarter.
However, please keep in mind that our revenues in the third quarter a year ago included $1 million from our now divested CryoSeal and ThermoLine product lines. Excluding the revenues from these divested product lines, our revenues increased over $700,000 year-over-year or 19%. Revenues in our core blood product lines increased by $500,000, due to the sale of AXP disposables and our manual bag sets.
Revenues from our bone marrow and PRP platforms, which are use to isolate stem and progenitor cells from bone marrow and core blood increased by $200,000, driven by an increase in sales to our partner, Celling Biosciences.
Gross profit for the quarter was $1.7 million, compared to $1.2 million a year ago and $2 million last quarter. Our margins were 34% for the quarter versus 24% a year ago and 41% in the prior quarter. The year-over-year increase in gross profit and associated margins reflect the divestitures of the CryoSeal and ThermoLine product lines, which carry a lower gross margins in our core products.
Excluding the impact of ThermoLine and CryoSeal product lines, our gross profit for the quarter increased approximately $100,000 over the prior year due to the mix of revenues in the current quarter. Sequentially, our gross profit decreased by $350,000, as a result of higher sales of manual bag sets which carry a lower margin and costs associated with various changes to our manufacturing process to support product quality and improvement.
Operating expenses were $2.8 million for the quarter versus $2.9 million a year ago and $2.5 million in the prior quarter. Operating expenses for the quarter include a benefit of $161,000 relating to a gain on the sale from the ThermoLine transaction.
Also included in the current quarter were $619,000 and non-core operating costs associated with the Res-Q IP litigation and advisory services related to strategic initiatives. Excluding the effects of the gain on ThermoLine and these non-core operating costs, our operating expenses decreased by $600,000 year-over-year due to the successful execution of our cost management strategies to properly align with our revenue streams.
As a result of revenue increases in both our cord blood and bone marrow product lines as well as decreases in our operating cost structure, we were able to decrease our net loss for the quarter to $1.1 million from $1.8 million a year ago. Sequentially, our net loss for the third quarter increased from $600,000 in the second quarter due primarily to the non-core operating cost associated with our strategic and legal initiatives. Excluding these costs as well as the ThermoLine gain, our net loss remained relatively stable sequentially at $700,000.
With respect to our balance sheet, we ended the quarter with $7.5 million in cash comparable to the prior quarter and compared to $7.9 million at the end of fiscal 2012. Our cash from operations was break-even for the third quarter due to our operating results as well as the collection of a sizeable customer receivable during the quarter. Please keep in mind that our cash from operations will fluctuate from quarter-to-quarter based on normal changes in our working capital.
In closing, we are pleased with the financial results for the quarter and we’re confident we have the financial strength and wherewithal to support the strategic direction of the company.
Now I’ll turn the call back to Matt for his closing comments.
Thanks Dan. In closing, I just want to say we remain very optimistic about the outlook for the company as we target new revenue opportunities in the cord blood space and move towards regenerative medicine that can add meaningful revenues over the next -- the near term. And at the same time, we continue to identify ways and keep our minds on streamlining and operating efficiently and evaluating ways to do distribution more effectively throughout the world and improving our operating efficiencies and managing our cash resources more carefully.
We believe in doing so we will continue to unlock shareholder value in this company and drive this company to a regenerative medicine company that is properly valued for the assets and capabilities that we possess today and we think we’re going to grow into the future. So we thank you for joining us and I’ll turn the call back over to our operator to open it up for questions.
(Operator Instructions) Our first question comes from Michael Menzies from Neidiger, Tucker and Bruner. Please go ahead with your question.
Michael Menzies - Neidiger, Tucker and Bruner
Hi Matt, could you update us please with regard to the forward distribution potential in PRP?
Yeah, Mike, that’s good question. Our arrangement with Arthrex is the one you are referring to and the use of the rescue. We have especially designed that product for Arthrex to sell into the PRP market, and with the Harvest litigation unresolved we’re on standby until we have better visibility into the outcome but provided that that’s resolved favorably in the near term. Our expectation is that Arthrex could be up and running shortly thereafter.
Michael Menzies - Neidiger, Tucker and Bruner
And what is your estimated timetable with regard to any disposition of the Harvest claim?
Well, that’s difficult to predict, Mike. I think most recently they asked for an extension in responding to our counterclaim. I think that puts us out a couple weeks and we’ll just wait to see what the response is and have to take it from there.
Michael Menzies - Neidiger, Tucker and Bruner
Good. Thank you.
(Operator Instructions) And sir at this time, I am showing no additional questions.
Okay. Well, we thank everyone for joining and we look forward to updating you on our progress in the future.
Ladies and gentlemen, that concludes today’s conference call. We do thank you for attending. You may now disconnect your telephone lines.
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