ThermoGenesis Holdings, Inc. - Quarter Report: 2007 September (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the quarterly period ended September 30, 2007.
or
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the transition from to .
Commission File Number: 333-82900
ThermoGenesis Corp.
(Exact name of registrant as specified in its charter)
Delaware | 94-3018487 | |
(State of incorporation) | (I.R.S. Employer Identification No.) |
2711 Citrus Road
Rancho Cordova, California 95742
Rancho Cordova, California 95742
Address of principal executive offices) (Zip Code)
(916) 858-5100
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Class | Outstanding at November 5, 2007 | |
Common stock, $.001 par value | 55,701,175 |
ThermoGenesis Corp.
INDEX
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20 | ||||||||
21 | ||||||||
21 | ||||||||
21 | ||||||||
21 | ||||||||
21 | ||||||||
21 | ||||||||
21 | ||||||||
22 | ||||||||
EXHIBIT 31.1 | ||||||||
EXHIBIT 31.2 | ||||||||
EXHIBIT 32 |
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Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ThermoGenesis Corp.
Condensed Balance Sheets (Unaudited)
Condensed Balance Sheets (Unaudited)
September 30, | June 30, | |||||||
(in thousands, except share and per share amounts) | 2007 | 2007 | ||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 6,640 | $ | 5,730 | ||||
Short-term investments |
24,710 | 27,649 | ||||||
Accounts receivable, net of allowance for
doubtful accounts of $37 ($50 at June 30, 2007) |
2,967 | 3,226 | ||||||
Inventories, net |
5,780 | 5,046 | ||||||
Other current assets |
381 | 415 | ||||||
Total current assets |
40,478 | 42,066 | ||||||
Equipment at cost less accumulated depreciation of $2,635
($2,605 at June 30, 2007) |
1,621 | 1,602 | ||||||
Other assets |
109 | 122 | ||||||
$ | 42,208 | $ | 43,790 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 2,000 | $ | 2,074 | ||||
Accrued payroll and related expenses |
363 | 525 | ||||||
Deferred revenue |
767 | 761 | ||||||
Other current liabilities |
1,174 | 947 | ||||||
Total current liabilities |
4,304 | 4,307 | ||||||
Deferred revenue |
1,479 | 1,647 | ||||||
Long-term portion of capital lease obligations |
19 | 24 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $0.001 par value; 2,000,000 shares authorized; none outstanding |
| | ||||||
Common stock, $0.001 par value; 80,000,000 shares
authorized; 55,701,175 issued and outstanding
(55,500,524 at June 30, 2007) |
56 | 56 | ||||||
Paid in capital in excess of par |
119,278 | 118,384 | ||||||
Accumulated deficit |
(82,928 | ) | (80,628 | ) | ||||
Total stockholders equity |
36,406 | 37,812 | ||||||
$ | 42,208 | $ | 43,790 | |||||
See accompanying notes to financial statements.
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ThermoGenesis Corp.
Condensed Statements of Operations (Unaudited)
Condensed Statements of Operations (Unaudited)
Three Months Ended | ||||||||
September 30, | ||||||||
(in thousands, except share and per share amounts) | 2007 | 2006 | ||||||
Product and other revenues |
$ | 3,383 | $ | 3,819 | ||||
Milestone payments and license fees |
249 | 486 | ||||||
Net revenues |
3,632 | 4,305 | ||||||
Cost of product and other revenues |
2,355 | 2,529 | ||||||
Cost of
milestone payments and license fees |
68 | 64 | ||||||
Cost of revenues |
2,423 | 2,593 | ||||||
Gross profit |
1,209 | 1,712 | ||||||
Expenses: |
||||||||
Selling, general and administrative |
2,420 | 2,312 | ||||||
Research and development |
1,496 | 962 | ||||||
Total operating expenses |
3,916 | 3,274 | ||||||
Interest and other income, net |
407 | 466 | ||||||
Net loss |
$ | (2,300 | ) | $ | (1,096 | ) | ||
Per share data: |
||||||||
Basic and diluted net loss per common
share |
$ | (0.04 | ) | $ | (0.02 | ) | ||
Shares used in computing per share data |
55,659,508 | 54,903,767 | ||||||
See accompanying notes to financial statements.
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ThermoGenesis Corp.
Condensed Statements of Cash Flows (Unaudited)
Three Months Ended September 30, 2007 and 2006
Condensed Statements of Cash Flows (Unaudited)
Three Months Ended September 30, 2007 and 2006
(in thousands) | 2007 | 2006 | ||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (2,300 | ) | $ | (1,096 | ) | ||
Adjustments to reconcile net loss to net cash used
in operating activities: |
||||||||
Depreciation and amortization |
136 | 111 | ||||||
Stock based compensation expense |
628 | 342 | ||||||
Accretion of discount on short-term investments |
(295 | ) | (377 | ) | ||||
Net change in operating assets and liabilities: |
||||||||
Accounts receivable |
259 | 424 | ||||||
Inventories |
(716 | ) | (455 | ) | ||||
Other current assets |
34 | 44 | ||||||
Other assets |
13 | (8 | ) | |||||
Accounts payable |
(74 | ) | (13 | ) | ||||
Accrued payroll and related expenses |
(162 | ) | (116 | ) | ||||
Deferred revenue |
(162 | ) | (188 | ) | ||||
Other current liabilities |
227 | 298 | ||||||
Net cash used in operating activities |
(2,412 | ) | (1,034 | ) | ||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(173 | ) | (52 | ) | ||||
Purchase of investments |
(9,766 | ) | (7,848 | ) | ||||
Maturities of investments |
13,000 | 12,000 | ||||||
Net cash provided by investing activities |
3,061 | 4,100 | ||||||
Cash flows from financing activities: |
||||||||
Payments on capital lease obligations |
(5 | ) | (4 | ) | ||||
Exercise of stock options and warrants |
266 | 86 | ||||||
Net cash provided by financing activities |
261 | 82 | ||||||
Net increase in cash and cash equivalents |
910 | 3,148 | ||||||
Cash and cash equivalents at beginning of period |
5,730 | 3,527 | ||||||
Cash and cash equivalents at end of period |
$ | 6,640 | $ | 6,675 | ||||
Supplemental non-cash flow information: |
||||||||
Transfer of inventory to equipment |
| $ | 36 | |||||
Transfer of equipment to inventory |
$ | 18 | $ | 20 | ||||
See accompanying notes to financial statements
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ThermoGenesis Corp.
Notes to Condensed Financial Statements (Unaudited)
Notes to Condensed Financial Statements (Unaudited)
1. Summary of Significant Accounting Policies
Interim Reporting
The accompanying unaudited financial statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting principles for complete
financial statements. All sales, domestic and foreign, are made in U.S. dollars and therefore
currency fluctuations are believed to have no impact on ThermoGenesis Corps (the Company) net
revenues. In the opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating results for the three
month period ended September 30, 2007 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2008. These financial statements should be read in
conjunction with the financial statements and the notes thereto included in the Annual Report on
Form 10-K for the fiscal year ended June 30, 2007.
The balance sheet at June 30, 2007, has been derived from the audited financial statements at that
date but does not include all the information and footnotes required by U.S. generally accepted
accounting principles for complete financial statements.
Revenue Recognition
The Company recognizes revenue including multiple element arrangements, in accordance with the
provisions of the Securities and Exchange Commissions (SEC) Staff Accounting Bulletin (SAB)
No. 104, Revenue Recognition and the Financial Accounting Standards Boards (FASB) Emerging
Issues Task Force (EITF) 00-21, Revenue Agreements with Multiple Deliverables. Revenues from the
sale of the Companys products are recognized when persuasive evidence of an arrangement exists,
delivery has occurred (or services have been rendered), the price is fixed or determinable, and
collectibility is reasonably assured. The Company generally ships products F.O.B. shipping point
at its office. There is no conditional evaluation on any product sold and recognized as revenue.
All foreign sales are denominated in U.S. dollars. Amounts billed in excess of revenue recognized
are recorded as deferred revenue on the balance sheet.
The Companys foreign sales are generally through distributors. There is no right of return
provided for distributors. For sales of products made to distributors, the Company considers a
number of factors in determining whether revenue is recognized upon transfer of title to the
distributor, or when payment is received. These factors include, but are not limited to, whether
the payment terms offered to the distributor are considered to be non-standard, the distributor
history of adhering to the terms of its contractual arrangements with the Company, the level of
inventories maintained by the distributor, whether the Company has a pattern of granting
concessions for the benefit of the distributor, and whether there are other conditions that may
indicate that the sale to the distributor is not substantive. The Company currently recognizes
revenue primarily on the sell-in method with its distributors.
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ThermoGenesis Corp.
Notes to Condensed Financial Statements (Unaudited) (Continued)
Notes to Condensed Financial Statements (Unaudited) (Continued)
1. Summary of Significant Accounting Policies (Continued)
Revenue Recognition (Continued)
Revenue arrangements with multiple elements are divided into separate units of accounting if
certain criteria are met, including whether the delivered item has value to the customer on a
stand-alone basis and whether there is objective and reliable evidence of the fair value of the
undelivered items. Revenue is recognized as specific elements indicated in sales contracts are
executed. If an element is essential to the functionality of an arrangement, the entire
arrangements revenue is deferred until that essential element is delivered. The fair value of
each undelivered element that is not essential to the functionality of the system is deferred until
performance or delivery occurs. The fair value of an undelivered element is based on vendor
specific objective evidence or third party evidence of fair value as appropriate. Costs associated
with inconsequential or perfunctory elements in multiple element arrangements are accrued at the
time of revenue recognition. The Company accounts for training and installation as a separate
element of a multiple element arrangement. The Company therefore recognizes the fair value of
training and installation services upon their completion when the Company is obligated to perform
such services.
Service revenue generated from contracts for providing maintenance of equipment is amortized over
the life of the agreement. All other service revenue is recognized at the time the service is
completed.
Milestone payments the Company receives under collaborative arrangements are recognized as revenue
upon achievement of the milestone events, which represent the culmination of the earnings process,
and when collectibility is reasonably assured. Milestone payments are triggered by the results of
the Companys development efforts. Accordingly, the milestone payments are substantially at risk
at the inception of the contract, and the amounts of the payments assigned thereto are commensurate
with the milestone achieved. Upon the achievement of a milestone event, which may include
acceptance by the counterparty, the Company has no future performance obligations related to that
milestone as the milestone payments received by the Company are nonrefundable. The direct costs,
primarily labor, of product development contracts are deferred until the development revenue is
recognized.
For licensing agreements pursuant to which the Company receives up-front licensing fees for
products or technologies that will be provided by the Company over the term of the arrangements,
the Company defers the up-front fees and recognizes the fees as revenue on a straight-line method
over the term of the respective license. For license agreements that require no continuing
performance on the Companys part, license fee revenue is recognized immediately upon grant of the
license.
Shipping and handling fees billed to customers are included in product and other revenues, while
the related costs are included in cost of product and other revenues.
Segment Reporting
The Company operates in a single segment providing medical devices and disposables to hospitals and
blood banks throughout the world which utilize the equipment to process blood components.
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ThermoGenesis Corp.
Notes to Condensed Financial Statements (Unaudited) (Continued)
Notes to Condensed Financial Statements (Unaudited) (Continued)
1. Summary of Significant Accounting Policies (Continued)
Net Loss per Share
Net loss per share is computed by dividing the net loss to common stockholders by the weighted
average number of common shares outstanding. The calculation of the basic and diluted earnings per
share is the same for all periods presented, as the effect of the potential common stock
equivalents is anti-dilutive due to the Companys net loss position for all periods presented.
Anti-dilutive securities, which consist of stock options, warrants and common stock restricted
awards that were not included in diluted net loss per common share were 3,557,270 and 2,953,633 as
of September 30, 2007 and 2006.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 157,
Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework
for measuring fair value under GAAP and expands disclosure about fair value measurements. SFAS No.
157 applies under other accounting standards that require or permit fair value measurements.
Accordingly, SFAS No. 157 does not require any new fair value measurement. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the impact of the provisions of SFAS No. 157 on its financial
statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS No. 159). SFAS No. 159 allows entities to voluntarily choose to
measure many financial assets and financial liabilities at fair value. SFAS No. 159 is effective
for financial statements issued for fiscal years beginning after November 15, 2007. The Company is
currently evaluating the impact of the provisions of SFAS No. 159 on its financial statements.
2. Investments
The following is a summary of held-to-maturity securities:
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
(in thousands) | Cost | Gains | Losses | Fair Value | ||||||||||||
September 30, 2007 |
||||||||||||||||
Mortgage-backed securities
of government sponsored
enterprises |
$ | 24,710 | $ | 24 | $ | 2 | $ | 24,732 | ||||||||
Maturity Date: |
||||||||||||||||
Less than 90 days |
$ | 11,904 | $ | 11,915 | ||||||||||||
Due in 91-365 days |
12,806 | 12,817 | ||||||||||||||
$ | 24,710 | $ | 24,732 | |||||||||||||
June 30, 2007 |
||||||||||||||||
Mortgage-backed securities
of government sponsored
enterprises |
$ | 27,649 | $ | 2 | $ | 10 | $ | 27,641 | ||||||||
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ThermoGenesis Corp.
Notes to Condensed Financial Statements (Unaudited) (Continued)
Notes to Condensed Financial Statements (Unaudited) (Continued)
2. Investments (Continued)
The aggregate amount of unrealized losses and fair value of short term investments, which are not
deemed to be other-than-temporarily impaired and less than twelve months are:
Aggregate | Unrealized | |||||||
Fair Value | Loss | |||||||
September 30, 2007 |
||||||||
Mortgage-backed securities of
government sponsored enterprises |
$ | 6,914 | $ | 2 | ||||
Management has concluded that the unrealized losses on these investments are temporary, as the
duration of the decline in the value of the investments has been short; the extent of the decline,
both in dollars and percentage of cost is not considered significant; and the Company has the
ability and intent to hold the investments until at least substantially all of the cost of the
investments is recorded.
3. Inventories
Inventories consisted of the following at:
(in thousands) | September 30, 2007 | June 30, 2007 | ||||||
Raw materials |
$ | 2,395 | $ | 2,380 | ||||
Work in process |
1,749 | 1,334 | ||||||
Finished goods |
2,557 | 2,247 | ||||||
Reserve |
(921 | ) | (915 | ) | ||||
$ | 5,780 | $ | 5,046 | |||||
Included in the Companys inventory reserve at September 30, 2007 and June 30, 2007 were $639 and
$638, respectively, related to CryoSeal® FS System inventory products, which are based on
inventory levels in excess of forecasted demand for the product. The remainder of the reserve
relates to inventory for other product lines which have been identified as slow-moving or
potentially obsolete.
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ThermoGenesis Corp.
Notes to Condensed Financial Statements (Unaudited) (Continued)
Notes to Condensed Financial Statements (Unaudited) (Continued)
4. Commitments and Contingencies
Warranty
The Company offers a one-year warranty for parts only on all of its non-disposable products. In
addition, the Companys one-year warranty for the BioArchive® System includes labor and
travel. The Company periodically assesses the adequacy of its recorded warranty liabilities and
adjusts the amounts as necessary.
Changes in the Companys product liability during the period are as follows:
(in thousands) | ||||
July 1, 2007 balance |
$ | 302 | ||
Warranties issued during the period |
44 | |||
Settlements made during the period |
(23 | ) | ||
Changes in liability for pre-existing warranties during the period,
including expirations |
104 | |||
Balance at September 30, 2007 |
$ | 427 | ||
5. Stockholders Equity
Stock Based Compensation
The Company recorded stock-based compensation of $628,000 and $339,000 for the three months ended
September 30, 2007 and 2006.
The following is a summary of option activity for the Companys stock option plans:
Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
(in thousands, except shares, | Number of | Exercise | Contractual | Intrinsic | ||||||||||||
share price and term) | Shares | Price | Life | Value | ||||||||||||
Outstanding at June 30, 2007 |
2,470,917 | $ | 2.89 | 2.6 | $ | 1,046 | ||||||||||
Granted |
958,000 | $ | 2.34 | |||||||||||||
Forfeited or Expired |
(245,496 | ) | $ | 3.40 | ||||||||||||
Exercised |
(200,651 | ) | $ | 1.33 | ||||||||||||
Outstanding at September 30,
2007 |
2,982,770 | $ | 2.78 | 2.9 | $ | 132 | ||||||||||
Vested and Expected to Vest at
September 30, 2007 |
2,914,728 | $ | 2.77 | 2.9 | $ | 132 | ||||||||||
Exercisable at September 30,
2007 |
1,596,068 | $ | 2.65 | 2.3 | $ | 130 | ||||||||||
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ThermoGenesis Corp.
Notes to Condensed Financial Statements (Unaudited) (Continued)
Notes to Condensed Financial Statements (Unaudited) (Continued)
5. Stockholders Equity (Continued)
Stock Based Compensation (Continued)
The aggregate intrinsic value is calculated as the difference between the exercise price of the
underlying awards and the quoted price of the Companys common stock for the 1,158,000 options that
were in-the-money at September 30, 2007. During the three months ended September 30, 2007 and
2006, the aggregate intrinsic value of options exercised under the Companys stock option plans
were $248 and $81, respectively, determined as of the date of option exercise.
6. Income Taxes
Effective July 1, 2007, we adopted the provisions of Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), an interpretation of
FASB Statement No. 109 (SFAS 109). There was no impact on our financial statements upon adoption.
Because of our historical significant net operating losses, we have not been subject to income tax
since inception. The tax years 1993-2007 remain open to examination by the major taxing jurisdictions to which we
are subject. The Companys policy is to recognize interest and penalties related to the
underpayment of income taxes as a component of income tax expense. To date, there have been no
interest or penalties charged to the Company in relation to the underpayment of income taxes. There were no unrecognized tax benefits during all the periods presented.
We maintain deferred tax assets that reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. These deferred tax assets include net operating loss carryforwards,
research credits and deferred revenue. The net deferred tax asset has been fully offset by a
valuation allowance because of our history of losses. Utilization of operating losses and credits
may be subject to annual limitation due to ownership change provisions of the Internal Revenue Code
of 1986 and similar state provisions. The annual limitation may result in the expiration of net
operating losses and credits before utilization.
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ThermoGenesis Corp.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
for the Three Months Ended September 30, 2007 and 2006
Managements Discussion and Analysis of
Financial Condition and Results of Operations
for the Three Months Ended September 30, 2007 and 2006
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking Statements
This report contains forward-looking statements which are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements
involve risks and uncertainties that could cause actual results to differ materially from the
forward-looking statements. When used in this report, the words anticipate, believe,
estimate, expect and similar expressions as they relate to the Company or its management are
intended to identify such forward-looking statements. The Companys actual results, performance or
achievements could differ materially from the results expressed in, or implied by these
forward-looking statements. The Company wishes to caution readers of the important factors, among
others, that in some cases have affected, and in the future could affect the Companys actual
results and could cause actual results for fiscal year 2008, and beyond, to differ materially from
those expressed in any forward-looking statements made by, or on behalf of, the Company. These
factors include without limitation, the ability to obtain capital and other financing in the
amounts and at the times needed to complete clinical trials and product marketing for new products,
market acceptance of new products, regulatory approval and time frames for such approval of new
products and new claims for existing products, realization of forecasted income and expenses,
initiatives by competitors, price pressures, the risks associated with initiating manufacturing for
new products, and the risk factors listed from time to time in the Companys Securities and
Exchange Commission (SEC) reports, including, in particular, the factors and discussion in the
Companys Form 10-K for its last fiscal year.
Succession Planning, Governance and Growth
On July 27, 2007, we appointed William Osgood
as our new Chief Executive Officer, and our former Chief Executive Officer assumed the role of Chief Technology Architect.
Subsequent to this change, we also appointed Dr. Hubert Huckel as a non-executive Chairman of the Board of Directors. We continue to pursue additional independent
directors through an executive search firm retained by the Governance & Nominating Committee.
Overview
We are principally a leading supplier of innovative products that process, cryopreserve and store
and administer therapeutic doses of adult stem cells for treatment of disease and injury. These
stem cells typically originate from the blood or tissue from donated
placental cord blood or the bone marrow of the patient to be treated.
The Stem Cell therapy market is a broad, rapidly growing field of medicine that involves the
collection, purification, manipulation and administration of stem cells, to treat malignant or
genetic blood diseases, tailored to individual patients. This methodology of personalized
treatment is considerably different than practices with generic conventional pharmaceutical drugs.
Pharmaceutical drugs are produced in large quantities and are effective on most patients with
similar underlying medical conditions. Additionally, these drugs typically consist of inert
materials that can be stored in medicine cabinets at room temperature. In contrast, personalized
cell therapies are manufactured one at a time, are intended for a single patient and must be used
immediately or, if stored, require precision freezing and extremely low storage temperatures
(-196°C in some cases) in order to preserve the viability of the cells.
Historically, our focus was on our core ultra-rapid freezing technology, applied principally to
freezers for blood and blood components and plasma thawers, which are our legacy products. Through
our research programs we developed more advanced product platforms directed at stem cell therapies
and wound care. Our stem cell products have been the principal drivers of our revenue growth over
the past few years, and our legacy products have become an increasingly smaller component of
revenue and are no longer strategically relevant to our growth.
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ThermoGenesis Corp.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
for the Three Months Ended September 30, 2007 and 2006 (Continued)
Managements Discussion and Analysis of
Financial Condition and Results of Operations
for the Three Months Ended September 30, 2007 and 2006 (Continued)
Our Products
The BioArchive System, an automated cryogenic device, is used by cord blood stem cell banks in more
than 25 countries for cryopreserving and archiving cord blood stem cell units for transplant. GE
Healthcare is the global distribution partner for the BioArchive System. The BioArchive System has
initially been configured to automate the cryopreservation and archiving in liquid nitrogen of
units of stem cells sourced from umbilical cord blood.
The AXP() AutoXpress Platform (AXP) is an innovative product which semi-automates the
isolation and concentration of stem cells from cord blood into a fixed 20 ml volume in a
functionally closed sterile environment. It includes a compact battery powered device and a
proprietary disposable bag set. The AXP has been commercially available since March 2006, marketed
under a Master File with the FDA. In October 2007, the Company received 510k clearance from the
FDA for the use of the AXP in the processing of cord blood for cryopreservation. The AXP Platform
replaces the current clinical process which is typically an 18-step manual method over a ninety
(90) minute period with a semi-automated process requiring only thirty (30) minutes. The manual
process requires the introduction of sedimentation agents or density gradient media into the cord
blood and requires a clean room along with trained technicians to accomplish. The AXP Platform
completes its processing without these agents or media with a higher cell recovery rate in a
functionally closed bag set in thirty (30) minutes. Included in the set is a 25 ml freezing bag
which can be archived in the BioArchive System.
The CryoSeal FS System produces a second-generation surgical sealant which harvests the two
interactive protein component solutions of a fibrin sealant: (1) the wound healing proteins of
fibrinogen, fibronectin, Factor VIII, von Willebrands Factor and Factor XIII and (2) the activating
enzyme, thrombin from the patients own blood. When combined at the bleeding wound site, the two
components form an adhesive gel that stops bleeding and bonds tissue. This advanced surgical
sealant may be manufactured in either hospitals or blood centers and competes with conventional
fibrin sealants, sourced from pools of plasma purchased from up to ten thousand individuals.
On July 30, 2007, the Company announced that it had received FDA clearance to market the CryoSeal
FS Systems autologous fibrin sealant, as an adjunct to hemostasis in liver resection surgery. In
Japan, our distributor, Asahi has completed enrollment in their pivotal clinical trial and filed
their PMA equivalent in March 2005 with approval expected during fiscal 2009. The Company has
received CE Mark approval for the system enabling its sale and use in Europe. However, we have not
been able to meaningfully penetrate the market with this product and revenues have lagged
expectations. Over the last several years while marketing the CryoSeal in numerous European
countries, we and our distributors have faced substantial country specific regulatory,
cost-reimbursement and product registration requirements that have negatively impacted our ability
to sell the product and grow revenues. Compliance with these requirements has been more
complicated than we anticipated, requiring far more time and the consumption of more of our
resources than we originally projected.
With a better appreciation today for the country specific expertise required to successfully market
the CryoSeal, we are assessing strategic alternatives beyond our own regulatory and marketing
capabilities to help us better navigate the regulatory and reimbursement pathways in each of our
markets throughout the world. We are targeting to increase our market penetration for this product
in Europe and in other areas of the world including Brazil, Korea, Mexico, Russia and Taiwan where
our distributors may now register the CryoSeal System following our recently received FDA approval.
Page 13
Table of Contents
ThermoGenesis Corp.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
for the Three Months Ended September 30, 2007 and 2006 (Continued)
Managements Discussion and Analysis of
Financial Condition and Results of Operations
for the Three Months Ended September 30, 2007 and 2006 (Continued)
Our Products (continued)
We believe that there is a market for our 100% autologous CryoSeal System due to its safety
advantages over conventional, non-autologous fibrin sealants that carry the risk of contamination
by blood-borne pathogens from other donors, and that this market may extend beyond the typical
wound care applications to include use of the technology in the delivery of stem cells for cell
therapeutics. Therefore, we are evaluating alternatives for commercialization of our CryoSeal
System including new strategic partnering and licensing, distribution channel partners, and the
potential use of the technology in the delivery of stem cells.
The Thrombin Processing Device (TPD), a product line extension of the CryoSeal System, is a small
stand alone disposable that isolates and captures activated autologous thrombin from approximately
11 ml of patient blood plasma. Thrombin is used as a topical hemostatic agent for minor bleeding
sites, to treat pseudoaneurysms and to release growth factors from platelets.
The Companys legacy is in its ThermoLine products for ultra rapid freezing and thawing of blood
components, which the Company distributes to blood banks and hospitals. We are currently
evaluating our divestiture options for the ThermoLine consistent with our strategic direction
emphasizing the cell therapy and surgical wound care market.
The following is Managements discussion and analysis of certain significant factors which have
affected the Companys financial condition and results of operations during the period included in
the accompanying financial statements.
Critical Accounting Policies
The Companys discussion and analysis of its financial condition and results of operations are
based upon the Companys financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent assets and
liabilities. On an on-going basis, the Company evaluates its estimates, including those related to
bad debts, inventories, warranties, contingencies and litigation. The Company bases its estimates
on historical experience and on various other assumptions that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more significant
judgments and estimates used in the preparation of its financial statements.
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Table of Contents
ThermoGenesis Corp.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
for the Three Months Ended September 30, 2007 and 2006 (Continued)
Managements Discussion and Analysis of
Financial Condition and Results of Operations
for the Three Months Ended September 30, 2007 and 2006 (Continued)
Critical Accounting Policies (Continued)
Revenue Recognition:
The Company recognizes revenue including multiple element arrangements, in accordance with the
provisions of the Securities and Exchange Commissions (SEC) Staff Accounting Bulletin (SAB)
No. 104, Revenue Recognition and the Financial Accounting Standards Boards (FASB) Emerging
Issues Task Force (EITF) 00-21, Revenue Agreements with Multiple Deliverables. Revenues from the
sale of the Companys products are recognized when persuasive evidence of an arrangement exists,
delivery has occurred (or services have been rendered), the price is fixed or determinable, and
collectibility is reasonably assured. The Company generally ships products F.O.B. shipping point
at its office. There is no conditional evaluation on any product sold and recognized as revenue.
All foreign sales are denominated in U.S. dollars. Amounts billed in excess of revenue recognized
are recorded as deferred revenue on the balance sheet.
The Companys foreign sales are generally through distributors. There is no right of return
provided for distributors. For sales of products made to distributors, the Company considers a
number of factors in determining whether revenue is recognized upon transfer of title to the
distributor, or when payment is received. These factors include, but are not limited to, whether
the payment terms offered to the distributor are considered to be non-standard, the distributor
history of adhering to the terms of its contractual arrangements with the Company, the level of
inventories maintained by the distributor, whether the Company has a pattern of granting
concessions for the benefit of the distributor, and whether there are other conditions that may
indicate that the sale to the distributor is not substantive. The Company currently recognizes
revenue primarily on the sell-in method with its distributors.
Revenue arrangements with multiple elements are divided into separate units of accounting if
certain criteria are met, including whether the delivered item has value to the customer on a
stand-alone basis and whether there is objective and reliable evidence of the fair value of the
undelivered items. Revenue is recognized as specific elements indicated in sales contracts are
executed. If an element is essential to the functionality of an arrangement, the entire
arrangements revenue is deferred until that essential element is delivered. The fair value of
each undelivered element that is not essential to the functionality of the system is deferred until
performance or delivery occurs. The fair value of an undelivered element is based on vendor
specific objective evidence or third party evidence of fair value as appropriate. Costs associated
with inconsequential or perfunctory elements in multiple element arrangements are accrued at the
time of revenue recognition. The Company accounts for training and installation as a separate
element of a multiple element arrangement. The Company therefore recognizes the fair value of
training and installation services upon their completion when the Company is obligated to perform
such services.
Service revenue generated from contracts for providing maintenance of equipment is amortized over
the life of the agreement. All other service revenue is recognized at the time the service is
completed.
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Table of Contents
ThermoGenesis Corp.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
for the Three Months Ended September 30, 2007 and 2006 (Continued)
Managements Discussion and Analysis of
Financial Condition and Results of Operations
for the Three Months Ended September 30, 2007 and 2006 (Continued)
Critical Accounting Policies (Continued)
Revenue Recognition (Continued):
Milestone payments the Company receives under collaborative arrangements are recognized as revenue
upon achievement of the milestone events, which represent the culmination of the earnings process,
and when collectibility is reasonably assured. Milestone payments are triggered by the results of
the Companys development efforts. Accordingly, the milestone payments are substantially at risk
at the inception of the contract, and the amounts of the payments assigned thereto are commensurate
with the milestone achieved. Upon the achievement of a milestone event, which may include
acceptance by the counterparty, the Company has no future performance obligations related to that
milestone as the milestone payments received by the Company are nonrefundable. The direct costs,
primarily labor, of product development contracts are deferred until the development revenue is
recognized.
For licensing agreements pursuant to which the Company receives up-front licensing fees for
products or technologies that will be provided by the Company over the term of the arrangements,
the Company defers the up-front fees and recognizes the fees as revenue on a straight-line method
over the term of the respective license. For license agreements that require no continuing
performance on the Companys part, license fee revenue is recognized immediately upon grant of the
license.
Stock-Based Compensation:
The Company accounts for stock-based employee compensation arrangements in accordance with the
provisions of Statement of Financial Accounting Standards No. 123(R), Shared-Based Payments (FAS
123(R)). Under FAS 123(R), compensation cost is calculated on the date of the grant using the
Black Scholes-Merton option-pricing formula. The compensation expense is then amortized over the
vesting period. The Company uses the Black-Scholes-Merton option-pricing formula in determining the
fair value of the Companys options at the grant date and applies judgment in estimating the key
assumptions that are critical to the model such as the expected term, volatility and forfeiture
rate of an option. The Companys estimate of these key assumptions is based on historical
information and judgment regarding market factors and trends. If actual results are not consistent
with the Companys assumptions and judgments used in estimating the key assumptions, the Company
may be required to record additional compensation expense, which could have a material impact on
the Companys financial position and results of operations.
Allowance for Doubtful Accounts:
The Company maintains allowances for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. If the financial condition of the Companys
customers were to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required, which would be charged against earnings.
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Table of Contents
ThermoGenesis Corp.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
for the Three Months Ended September 30, 2007 and 2006 (Continued)
Managements Discussion and Analysis of
Financial Condition and Results of Operations
for the Three Months Ended September 30, 2007 and 2006 (Continued)
Critical Accounting Policies (Continued)
Warranty:
The Company provides for the estimated cost of product warranties at the time revenue is
recognized. While the Company engages in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of its component suppliers, the Companys
warranty obligation is affected by product failure rates, material usage and service delivery costs
incurred in correcting a product failure. Should actual product failure rates, material usage or
service delivery costs differ from the Companys estimates, revisions to the estimated warranty
liability would be required.
Inventory Reserve:
The Company plans inventory procurement and production based on orders received, forecasted demand
and supplier requirements. The Company writes down its inventories for estimated obsolescence or
unmarketable inventories equal to the difference between the cost of inventories and its net
realizable value based upon estimates about future demand from our customers and distributors and
market conditions. Because some of the Companys products are highly dependent on government and
third-party funding, current customer use and validation, and completion of regulatory and field
trials, there is a risk that we will forecast incorrectly and purchase or produce excess inventory.
As a result, actual demand may differ from forecasts, and such a difference may have a material
adverse effect on future results of operations due to required write-offs of excess or obsolete
inventory. This inventory risk may be further compounded for the CryoSeal family of products
because they are at initial market introduction and market acceptance will depend upon the customer
accepting the products as clinically useful, reliable, accurate and cost effective compared to
existing and future products and completion of required clinical or field acceptance trials.
Results of Operations for the Three Months Ended September 30, 2007 as Compared to the Three Months
Ended September 30, 2006
Net Revenues:
Revenues for the three months ended September 30, 2007 were $3,632,000, compared to $4,305,000 for
the three months ended September 30, 2006, a decrease of $673,000 or 16%. This is primarily due to
a decrease in BioArchive device shipments, seven in the first quarter of fiscal 2007 versus three
in the current quarter, which contributed to a decrease in revenues of $760,000. Additionally,
there was a decrease in revenues of $490,000 as there were no AXP devices sold in the current
quarter as compared to the prior year due to the device being on hold until certain quality enhancements could be completed.
The Company anticipates sales of AXP devices to resume in
the second quarter of fiscal 2008. Offsetting the decreases was an increase in sales of AXP
disposables of $700,000.
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Table of Contents
ThermoGenesis Corp.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
for the Three Months Ended September 30, 2007 and 2006 (Continued)
Managements Discussion and Analysis of
Financial Condition and Results of Operations
for the Three Months Ended September 30, 2007 and 2006 (Continued)
Critical Accounting Policies (Continued)
Net Revenues (Continued):
The following represents the Companys cumulative BioArchive devices sold into the following
geographies through the dates indicated:
September 30, | ||||||||
2007 | 2006 | |||||||
United States |
34 | 29 | ||||||
Asia |
56 | 52 | ||||||
Europe |
42 | 36 | ||||||
Rest of World |
26 | 25 | ||||||
158 | 142 | |||||||
The following represents the Companys revenues for disposables by product line:
September 30, | ||||||||
2007 | 2006 | |||||||
BioArchive |
$ | 809,000 | $ | 787,000 | ||||
AXP |
718,000 | 1,000 | ||||||
TPD |
91,000 | 95,000 | ||||||
CryoSeal |
291,000 | 117,000 | ||||||
$ | 1,909,000 | $ | 1,000,000 | |||||
Percentage of total
Company revenues |
53 | % | 23 | % | ||||
Gross Profit:
The Companys gross profit was $1,209,000 or 33% of net revenues for the three months ended
September 30, 2007, as compared to $1,712,000 or 40% for the corresponding fiscal 2007 period. The
decrease in gross profit is primarily due to higher warranty costs associated with the AXP device
and docking station and the destruction of lots and product testing as part of the quality
assurance program of the AXP bagset disposables.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses were $2,420,000 for the three months ended September
30, 2007, compared to $2,312,000 for the comparable fiscal 2007 period, an increase of $108,000 or
5%. The increase is primarily due to an increase in salary and benefits for additional sales and
marketing personnel.
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Table of Contents
ThermoGenesis Corp.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
for the Three Months Ended September 30, 2007 and 2006 (Continued)
Managements Discussion and Analysis of
Financial Condition and Results of Operations
for the Three Months Ended September 30, 2007 and 2006 (Continued)
Results of Operations (Continued)
Research and Development Expenses:
Included in this line item are Engineering, Regulatory Affairs, Scientific and Clinical Affairs.
Research and development expenses for the three months ended September 30, 2007, were $1,496,000
compared to $962,000 for the corresponding fiscal 2007 period, an increase of $534,000 or 56%. The
increase is primarily due to salaries, benefits and stock compensation related to the Chief
Technology Architect, a new position filled by the Companys former Chief Executive Officer as of
August 1, 2007 as part of the succession plan and payments made to UC Davis in connection with a
collaboration agreement to develop stem cell treatments.
Liquidity and Capital Resources
At September 30, 2007, the Company had cash, cash equivalents and short-term investments of $31,350,000 and working
capital of $36,174,000. This compares to cash, cash equivalents and short-term investments of $33,379,000 and
working capital of $37,759,000 at June 30, 2007. The cash was used to fund operations and other
cash needs of the Company. In addition to product revenues, the Company has primarily financed
operations through the private and public placement of equity securities and has raised
approximately $108,000,000, net of expenses, through common and preferred stock financings and
option and warrant exercises. As of September 30, 2007, the Company has no off-balance sheet
arrangements.
Net cash used in operating activities for the three months ended September 30, 2007 was $2,412,000,
primarily due to the net loss of $2,300,000 which included the accretion of discount on short-term
investments of $295,000, offset by depreciation and stock based compensation expense of $136,000
and $628,000, respectively. Inventories utilized $716,000 of cash primarily due to lower than
projected shipments of BioArchive devices.
We believe that our currently available cash, cash equivalents and short-term investments, will be
sufficient to satisfy our operating and working capital requirements for at least the next twelve
months. However, if we experience significant growth in the future, we may be required to raise
additional cash through the issuance of new debt or additional equity.
Backlog
The Companys cancelable backlog at September 30, 2007 was $5,457,000.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
All sales, domestic and foreign, are made in U.S. dollars and therefore material fluctuations in
foreign currency rates are believed to have no impact on the Companys net revenues. The Company
has no long-term investments or long-term debt, other than a capital lease, and therefore is not
subject to interest rate risk. Management does not believe that inflation has had or will have a
significant impact on the Companys results of operations. The Company is not exposed to any
market risk involving activities in derivative financial instruments, other financial instruments
or derivative commodity instruments.
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Table of Contents
ThermoGenesis Corp.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
for the Three Months Ended September 30, 2007 and 2006 (Continued)
Managements Discussion and Analysis of
Financial Condition and Results of Operations
for the Three Months Ended September 30, 2007 and 2006 (Continued)
Item 4. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the
Companys management, including the Companys Principal Executive Officer along with the Companys
Principal Financial Officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures (as defined by Exchange Act Rule 13a-15(e) and 15d-15(e)) as of
the end of our fiscal quarter pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the
Companys Principal Executive Officer along with the
Companys Principal Financial Officer concluded that
the Companys disclosure controls and procedures are effective in ensuring that information
required to be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms.
There were no changes in the Companys internal controls over financial reporting that occurred
during the three months ended September 30, 2007 that have materially affected, or are reasonably
likely to materially affect, its internal controls over financial reporting. The Company believes
that a control system, no matter how well designed and operated, cannot provide absolute assurance
that the objectives of the control system are met, and no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within any company have
been detected.
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Table of Contents
PART II OTHER INFORMATION
Item 1. Legal.
In the normal course of operations, the Company may have disagreements or disputes
with distributors, vendors or employees. These disputes are seen by the Companys
management as a normal part of business, and there are no pending actions currently
or no threatened actions that management believes would have a significant material
impact on the Companys financial position, results of operations or cash flows.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual
Report on Form 10-K for the year ended June 30, 2007, which could materially affect
our business, financial condition or future results. The risks described in our
Annual Report on Form 10-K are not the only risks facing our Company. Additional
risks and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial condition
and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits:
31.1
|
Certification by the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification by the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32
|
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
Page 21
Table of Contents
ThermoGenesis Corp.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
ThermoGenesis Corp. | ||||
(Registrant) | ||||
Dated: November 7, 2007
|
/s/ William R. Osgood | |||
Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
/s/ Matthew T. Plavan | ||||
Matthew T. Plavan | ||||
Chief Financial Officer | ||||
(Principal Financial Officer and Principal | ||||
Accounting Officer) |
Page 22