Theralase's Q2 Earnings: Edging Up On Revenue By 40% Quarter Over Quarter

Sep. 4.14 | About: Theralase Technologies (TLTFF)


Theralase hopes to displace its current device with the next-generation TLC-2000 biofeedback laser therapeutic device that will be launched in Q4 2014 in Canada.

The Phase I/II trials to treat bladder cancer in humans using their PDC technology are expected to commence in Q1 2015.

We maintain our Outperform rating and a target price of $1.00/share.

Theralase Technologies Inc. (OTCPK:TLTFF), headquartered in Ontario, Canada, is focused on the design, development, manufacturing and marketing of its patented super-pulsed laser technology platform that is used in a wide range of bio-stimulative and bio-destructive clinical applications in humans, as well as in animals. Theralase operates under two divisions; the Therapeutic Laser Technology (TLT) division, which is focused on the development and commercialization of laser-based non-invasive pain management devices and the Photo Dynamic Therapy (PDT) division, which is focused on discovery of small, light-activated molecules and laser systems that activate them with high anti-cancer effectiveness, microbial sterilization potency and bacterial infection control.

Theralase's current product line from the TLT division is the TLC-1000, and in Q42014 the company expects to launch the more advanced TLC-2000. The TLC-2000 has been designed to measure a patient's specific optical tissue characteristics and possesses the ability to precisely target injured tissue with clinically optimal doses of energy that is particular to the patient's condition. Theralase plans to phase out the TLC-1000 system and incentivize its customers to upgrade to the latest technology, the TLC-2000.

Theralase's Photo Dynamic Therapy division focuses on discovery of small, light-activated molecules and laser systems that activate them with high anticancer effectiveness, microbial sterilization potency and bacterial infection control. Photo Dynamic Compounds (PDCs) are drugs that are activated when exposed to visible light and become cytotoxic in oxygenated environments. The Theralase PDCs have the added capability to be activated by a wide range of laser wavelengths and also function effectively regardless of the oxygenation level present in the tissue under treatment, a major plus when dealing with cancerous tissue and certain bacteria, which tend to thrive in low oxygenated tissues.

Bladder cancer has been chosen as Theralase's principal cancer target for its lead PDC compound. Preclinical trials using different PDCs are currently underway and expected to be completed in late 2014. Theralase plans to commence a Phase I/IIa clinical trial in bladder cancer in first quarter 2015.

The commercial launch of the TLC-3000 PDC/Laser Technology Platform is likely to be at least a couple of years away. Between now and then, the company hopes to raise $10 to $20 million dollars of operating capital to complete Phase I/IIa clinical trials and then plans to pursue partnering arrangements in order to commercialize its anti-cancer PDC technology.

As of Q2 2014 the company has cash reserves of about $2.8 million and short-term liabilities of about $0.3M mostly comprise of trade payables. The company does not have material long-term financial liabilities. Theralase's TLC-1000 instrument has been the primary revenue-generating product for the company. Revenue has grown by 40% in Q2 2014 as compared to Q1 2014. However, for 2014 revenue growth has been slow overall primarily due to the time lag between investment in R&D for the PDT technology and business development of TLC-2000. Working capital improved by 146%, thus maintaining a sufficient capital base to support future R&D and business development activities.

Selling expenses for the first half of 2014 went up by more than 25% in Canada and the U.S., and the sales revenue increased by 19% and 7% in Canada and the U.S., respectively. For the first six months of 2014, selling expenses went up by 16% and sales revenue decreased 40% internationally as compared to the same period in 2013. Since Theralase continues to invest in marketing initiatives, sales personnel and advertisements for selling their new product, the TLC-2000 due in Q4 2014, into Canada initially and subsequently to USA and other international territories, we expect this trend in increased marketing and selling expenses to continue. R&D costs increased by 62% due to increase in business development costs related to the patented TLC-2000 super-pulsed laser technology product whose distribution to healthcare practitioners in Canada is expected in Q4 2014.

Last year, Theralase closed a non‐brokered private placement which raised gross proceeds of about $3.15M by issuing 21 million units to investors at a price of $0.15 per unit. Each unit consists of one common share in the capital of the company and one non‐transferable common share purchase warrant. After expenses Theralase's cash balance amounts to about $2.8M which is strong and sufficient to run operations for the remainder of 2014 as per our projected cash burn of $300,000 per quarter. Theralase revenues in Q2 2014 was better than we anticipated. We expect the revenue to continue growing modestly for Q3 2014 and then ramp up with the launch of the TLC-2000 in Canada in Q4 2014. Future dilution to investors could be reduced if TLC-2000 roll-out happens as expected, which will drive the top line sales.

Although Theralase is currently incurring net losses and sported net operating cash flow deficits, the company has continuously invested its financial resources in developing state of the art cold laser therapeutic products. The stock price was up by more than 225% in late 2013 and the stock price is showing little movement since. This is partly due to the focus on introducing the next generation device to the market and making significant progress on the trials concerning cancer therapy with the PDT technology.

Don't overlook these catalysts…

Anticipate launch of TLC-2000 in Q4 2014: We anticipate the launch of the TLC-2000 in Q4 2014. This next generation device is critical for Theralase to turn cash flow positive and will serve as the primary source of revenue until the launch of TLC-3000.

Products in pipeline: Theralase is currently completing preclinical research to validate its PDC technology (TLC-3000) in animal cancer model to support an Investigational New Drug (NYSE:IND) application to be submitted to the FDA in 1Q2015. This IND application will allow Theralase to commence a Phase I/IIa human clinical trial to treat bladder cancer.

Expect products to capitalize on biotech growth: The biotech sector continues to grow through the second and third quarter of 2014. The iShares NASDAQ index and the SPDR SNP Biotech ETF have shown a phenomenal return of more than 21% YTD. Although the market was spooked by comments by the Fed Chair Janet Yellen, it appears to have shrugged off comments and is on the upswing again.

Ask the question "When will it happen?" and not "What will happen?": It is a given that we expect a huge pop in revenue from the TLC-2000 device and subsequently from TLC-3000 device. However, much of the value for Theralase will be derived from launching the devices into market as per schedule.

Valuation and Recommendation

As per the company's most recent financial statement, management seems to be executing as per plan and we can expect the launch of the TLC 2000 in Q4 2014. We expect see a rise in the company's top line as the new device displaces TLC-1000 initially, the prior product, as well as other competing products subsequently. Theralase's stock is still under-valued compared to peers but the company has potential upside due to the anticipated launch of their devices. Some risks such as delay in clinical trials pertaining to the PDC technology are evident and cannot be ruled out, but the potential return may be quite significant. The company is still on a high cash burn, but seems poised for long-term growth when things turn positive after the launch of TLC-2000. We maintain our price target of $1.00/share with an outperform rating. (Our previous article on TLTFF can be accessed here.)

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I work as a Consultant Analyst for Zacks Investment Research. The article is written by me and is 100% my opinion. I receive compensation from Zacks for writing equity research reports and providing valuation analysis on this company's stock and expect to do so in the future. Zacks receives compensation from the company. Please see the Zacks Disclaimer for further information:

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.