Cesca Therapeutics Inc. (KOOL) CEO Chris Xu on Q2 2019 Results - Earnings Call Transcript

Aug. 13, 2019 9:52 PM ETThermoGenesis Holdings, Inc. (THMO)2 Comments1 Like
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Cesca Therapeutics Inc. (KOOL) Q2 2019 Earnings Conference Call August 13, 2019 4:30 PM ET

Company Participants

Paula Schwartz - Managing Director, Rx Communications

Chris Xu - Chairman & Chief Executive Officer

Jeff Cauble - Principal Accounting Officer

Conference Call Participants

Sean Lee - HC Wainwright


Good day, and welcome to the Cesca Therapeutics Conference Call and Webcast to Review Financial and Operating Results for the Second Quarter ended June 30, 2019. As a reminder, all participants will be in listen-only mode. There will be an opportunity to ask questions at the end of today's presentation. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to our host, Paula Schwartz of Rx Communications. Please go ahead.

Paula Schwartz

Thank you, operator.

This conference call contains forward-looking statements within the meaning of the federal securities laws. The company's actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that might cause actual results to differ materially from those in the forward-looking statements is contained in the company's periodic reports filed with the Securities and Exchange Commission. The information presented today is time sensitive and is accurate only as of the date of this call, August 13, 2019. If any portion of this call is being rebroadcast, retransmitted or redistributed at a later date, Cesca will not be reviewing or updating this material.

Participating on today's call are Dr. Chris Xu, Chief Executive Officer; and Jeff Cauble, Vice President of Finance and Principal Accounting Officer.

I'd now like to turn the call over to Chris. Please go ahead, Chris.

Chris Xu

Thank you, Paula, and thank you to everyone for joining the call this afternoon. We appreciate you taking the time to listening. As most of you are aware, one of our key performance objective for 2019 is to achieve positive cash flow from operations before the end of the year. This is a very important milestone for us, because it would represent the first time that Cesca has been operational cash flow positive in its over 10 years.

Although it is a challenge goal, we have planned to execute on it through a series of product launches, which increase our revenue, accompanied by aggressive management structure change and cost reductions to decrease expenditures. I'm pleased to report that since we implemented these measures, we have continued to see significant progresses through the end of the second quarter of this year both due to the cost reduction as well as from steady increased revenues from our existing and newly launched cellular processing product lines in our device division.

Just a reminder that Cesca currently has two business divisions; the device division is focused around development and commercialization of cutting-edge automated technologies for cellular processing, especially aimed at addressing the significant unmet manufacturing needs of the emerging chimeric antigen receptor T-cells or the CAR-T cell immunotherapy market. And the clinical division, which is focused on the research and development of autologous stem cell-based therapies for critical limb ischemia and other recent medicine applications.

In January of 2019, we completed the acquisition of the remaining 20% ownership of our device division, ThermoGenesis Corp., making it a wholly-owned subsidiary of Cesca. Our short-term priority is focused on growing revenues from our device division. A number of key achievements were matched during the quarter in pursuant of our goals. Revenue were increased 115% over the same period a year ago. Adjusted EBITDA, a metric that company used to approximate operational cash flow, were positive for the second quarter of 2019, which is the first time over more than 10 years.

Contributing to the increase in revenue are the new products that we have launched in the last 12 months. They include CAR-TXpress and related X series products for large scale manufacturing of CAR-T therapies, AutoXpress 2 or AXP 2, which is the second generation of best-setting AXP platform for stem-cell banking, and third, POCXpress or the PXP for rapid processing of autologous bone marrow derived stem cell at the proof-of-care, including surgical centers or clinics. And it has been over a decade since the company had introduced any new product. The products I have just listed are already making a mark on our revenue stream, and we'll continue to do so.

I will take a few minutes at this point to recap some of our recent operational highlights, after which I will turn the call over to Jeff for an overview of the financials. Most recently, post quarter end, we announced Cord Blood Registry or CBR, which is the largest cord blood banks in the United States, has begun to transition to the use of our next generation AXP-2 system for cord blood processing. Our relationship with CBR is a strong one and goes back 13 years for cord blood processing. Our relationship with CBR is a strong one and goes -- started back in 2006, when we execute an exclusive manufacturer and the supply agreement, enables their use of our original AXP system in related disposables. We are proud to continue to support the largest cord blood bank in the US with our newest technology and yet goes without saying that CBRs upgrade to AXP-2 is a further endorsement of the quality of our technology and systems.

In late June, we also entered into a strategic agreement with Singapore based Core Life Group, which is the leading provider for cord blood banking service in all of Asia, to implement the AXP-2 system in the Indian processing facility. In addition, we continue to supply our AXP technology to China Cord Blood Corporation, the largest cord blood bank in China. This entity is a very prominent client our AXP platform has maintained its market leadership position in the cord blood banking industry worldwide.

In the second quarter, we also received additional approval for the AXP-2 system in Thailand and Canada, allowing us to further expand our product and service territories. For our point-of-care cellular processing product line, or our PXP system, it is the market leading product. The PXP allows the rapid isolation of a highly purified stem cell concentrate from bone marrow for reading into medicine applications. In the second quarter, we announced the registration of the PXP system in Thailand and Canada, allowing us to increase our customer base in these important markets.

Immuno-therapeutics remains one of the hottest research areas and the words clinical research activity, oncology, cell-based cancer immunotherapies continue to be robust. According to clinicaltrials.gov, the number of ongoing and pending clinical trials in the CAR-T cell therapy space has passed 100 worldwide, which is nearly double last year's level. However, the low manufacturing efficiency and the high manufacturing costs remain to be the most significant barrier to expanding the use of these promising therapies. In 2018, Cesca introduced the CAR-TXpress system, a proprietary semi-automated, fully closed manufacturing platform for CAR T-cell processing. CAR-TXpress platform, which incorporates our proprietary XBACS or buoyancy activated cell sorting technology is easy to use and provides high throughput for CAR T-cell processing.

We estimate that CAR-T Xpress could potentially reduce up to two-thirds of the manufacturing cost of current CAR-T drugs. In April, we were pleased to announce the release of our Enhanced X-MINI CD3 Selection Kit, which is part of that reagent kit for the CAR-TXpress platform for the biomedical research market. Expanding user ability to select CD3 target cells from peripheral blood mononuclear cells as well as from whole blood. Additional reagent kits are scheduled to be released later this year to enable the selection of other cell types for various applications. Further expanding the application of our proprietary CAR-TXpress platform. By the end of second quarter more than 20 institutional users has utilized our CAR-TXpress platform or purchased X series products. We expect that demand will continue to grow as more and more institutes begin to use our technology.

According to global research and consulting firm Frost & Sullivan, as noted in the article published in biopharmareports.com in March of this year, the worldwide market for cell therapy is expected to reach $8.21 billion by 2025. And notably, the article goes on to state that in addition to CAR-T, the demand for stem cell therapy is driving growth, and that development of manufacturing and technology is the key reason to anticipate growth in the sector.

Given this dynamic environment, continued industrial emphasis on the importance of more efficient and accurate manufacturing and the tangible benefit that we bring to the table in this regard, will remain highly optimistic that we can effectively tap these markets and continue to view demand for our proprietary automated products and systems. On a compliance level during the second quarter, we undertook a 1-for-10 reverse stock split. And having maintained the requirement for a closing bid price, we're successful in remaining a NASDAQ-listing compliance. While decisions such as a reverse stock split are never easy, we felt strongly that it was the right strategy. Given the measures we took to increase the revenue and reduce costs, we are wholly committed to [indiscernible] for Cesca's shareholder, as we move ahead in 2019 and beyond.

And with that, let me turn the call over to Jeff to share the key financial results from the second quarter. Jeff?

Jeff Cauble

Thank you, Chris. I have some exciting financial results to share with you today.

Net revenues for the three months ended June 30, 2019 were $4.3 million as compared to $2 million for the second quarter in 2018, an increase of 113%. Our revenues were driven by increases in both the AXP and CAR-TXpress product lines. AXP revenue increased due to disposable sales of 550 more cases to our distributor in China and 450 more cases sold to domestic end users in the second quarter of 2019, as compared to the second quarter of last year. Additionally, we saw increased sales of AXP devices as customers upgraded to AXP-2 in the current year. CAR-TXpress sales were also higher in the current quarter as compared to the same quarter from last year.

Gross profit for three months ended June 30, 2019 was $2 million or approximately 45% of net revenue as compared to $363,000 or 18% of net revenue for the comparable period of 2018. Gross profit margin increase was primarily due to increased sales, lower disposable costs from contract manufacturers and reduced overhead expenses as a result of the June 2018 reorganization. Sales and marketing expenses for the three months ended June 30, 2019 were $384,000 compared to $359,000 for the comparable period in 2018. The slight increase was driven by stock compensation expense for new options granted to ThermoGenesis employees during the current quarter.

Research and development expenses for the three months ended June 30, 2019 were $611,000 compared to $908,000 for the comparable period of 2018. The decrease was primarily due to a decline in personnel costs related to the June 2018 reorg. General and administrative expenses for the three months ended June 30, 2019 were $1.2 million compared to $2.4 million for the comparable period in 2018. The decrease was driven by a reduction in personnel costs associated with the June 2018 reorganization and other headcount reductions in 2018. Additionally, this quarter last year had several one-time and reorganization charges that were not incurred in the current year.

Interest expense increased to $1.2 million for the three months ended June 30, 2019 as compared to $733,000 for the three months ended June 30, 2018, an increase of 65%. The increase is due to interest charges and amortization of the debt discount related to the January 2019 convertible promissory note, an additional interest and amortization of the debt discount related to the revolving credit agreement on Boyalife.

Net loss for the three months ended June 30, 2019 contributed to common stockholders with $1.3 million or $0.47 per share based on approximately 2.8 million weighted average basic and diluted common shares outstanding. This compares to a comprehensive net loss attributable to the common stockholders of 27 million or $17.49 per share based on approximately 1.5 million weighted average basic and deleted common shares outstanding for the three months ended June 30, 2018. At June 30, 2019, the company had cash and cash equivalents totaling $2.4 million compared with approximately the same number at December 31, 2018.

Finally, I'd like to conclude with the most significant financial information. As Chris previously discussed, the company was adjusted EBITDA positive for the second quarter of 2019. For the quarter, the company had adjusted EBITDA income of $53,000. This compares to an adjusted EBITDA loss of $3 million in the second quarter of last year. The increase in adjusted EBITDA in the current period is primarily due to the increased revenue, lower disposable costs from contract manufacturers and decreased personnel expenses due to the cost-cutting initiatives and reorganization completed in 2018.

This concludes our prepared remarks. So, now, we'd like to open the call to your questions. Operator?

Question-and-Answer Session


We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Sean Lee with HC Wainwright. Please go ahead.

Sean Lee

Good afternoon, guys. Congratulations on a great quarter, and thank you for taking my questions. My first question is on your AXP-2 devices. You mentioned that, now your largest US customers is switching to this for their new cord blood storage needs. How much of that can we -- how much of revenue can we expect from that business?

Chris Xu

Thank you for your question, Sean. So, the largest customer is CBR, who is using our AXP system for their processing. Our launch of AXP-2, which replace the existing AXP systems they had. So, from a customer base or from a volume-wise -- base speaking, we not changing how many customers were processed a year. However, the new technology will enable them do that better and more efficiently. So, it involves a technology shift from CBR which they have to invest in the capital equipment. But in term of a disposable perspective going year by year, I think that will remain as therapeutics continues. And so, at this point, we've had CBR convert and then some of our other smaller customers who still have many customers that are planning to convert to AXP 2-in the coming quarter to, let's say the next 12 to 18 months. And with that, we expect really that from a revenue standpoint, what you get is that they're buying the new hardware involved. So it should be a couple of $100,000 at least each quarter for the next few quarters as they upgrade to the new hardware.

Sean Lee

I see, thank you for the additional clarity. My second question is on the gross margins. I noticed that you guys have been exceeding 40% gross margins for two quarters in a row now. Could you give us a bit more color on the pushes and pulls on that?

Jeff Cauble

Yes. I mean, it really comes down to kind of the areas that I talked about a little bit. I mean, number one, what makes a big difference in that is we did recently -- for 2019 negotiate some lower pricing from our contract manufacturers for disposables. So we're paying about 25% less for each product that we purchase. I mean, that's one big piece. And the other big piece is really all the cost-cutting initiatives we did last year. So we did take a lot of costs out of our overhead pool and have been able to increase sales without having to add back to those costs. So, the combination of the two has really helped drive the higher margins.

Chris Xu

This is Chris again. Just add one more sentence to Jeff's comment. Jeff is totally correct. By the cost cut, we would really reduce the overhead. But also remember that in the past 12 months, we launch up a series of new products, and those products are all having much higher margin or anticipated margin as compared to our first product, which is AXP. So, bottom line, it is in line of our strategic goal to achieve operational cash flow positive by increasing new products with a higher margin and reduced cost of overhead.

Sean Lee

Great. So, I think that we can expect this margin to either remain at this level or improve over the next year.

Chris Xu

We hope too.

Sean Lee

Great. And my final question is, what would you say are the key milestones that investors could expect in the next six to 12 months?

Chris Xu

Sure. So, one of the most critical milestones is to turn this company into operational cash flow positive. This although sounds simple, but giving back, looking through the history of the company, as I have invested so much into R&D, and it would be a very significant milestone. On top of that, we'll continue to focus on various different product line with different strategy. And we are looking at both distributing to a broader network of customers and also tapping to higher and higher margin of service area. So, as we have repeated in several early call this year that the company is committed to enter into CBR service, which is really taking advantage of our proprietary technology. So, our proprietary technology can be considered as a product, and also it can be used as a proprietary service. So by combining of both, we are very committed to grow the company at a higher speed for the next month, next year and many years to come.

Sean Lee

Great, that's all the questions I have. Thanks again for taking my question.

Chris Xu

Thanks, Sean.

Jeff Cauble

Thank you.


[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Chris Xu for any closing remarks. Please go ahead.

Chris Xu

Thank you, operator. We look forward to updating you on our progress in the coming months. And thank you to everyone who participated on today's call and for your interest in Cesca Therapeutics. Thank you.


The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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