U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(b) of the Securities
--- Exchange Act of 1934 for the quarterly period ended March 31, 2003.
Commission File Number: 0-16375
THERMOGENESIS CORP.
(Exact name of registrant as specified in its character)
Delaware 94-3018487
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
3146 Gold Camp Drive
Rancho Cordova, CA 95670
(916) 858-5100
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
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. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of Exchange Act). Yes [ ] No [X]
The number of shares of the registrant's common stock, $0.001 par value,
outstanding on May 1, 2003 was 39,109,093.
-------------------------------
THERMOGENESIS CORP.
INDEX
Page Number
-----------
Part I Financial Information
Item 1. Financial Statements (Unaudited):
Balance Sheets at March 31, 2003 and June 30, 2002.................3
Statements of Operations for the
Three and Nine Months Ended March 31, 2003 and 2002................5
Statements of Cash Flows for
the Nine Months Ended March 31, 2003 and 2002......................6
Notes to Financial Statements......................................7
Item 2. Management's Discussion and Analysis of
Financial Conditions & Results of Operations......................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations
Item 4. Controls and Procedures...........................................17
Part II Other Information
Item 1. Legal Proceedings.................................................19
Item 2. Changes in Securities.............................................19
Item 3. Default Upon Senior Securities....................................19
Item 4. Submission of Matters to a Vote of Security Holders...............19
Item 5. Other Information.................................................19
Item 6. Exhibits and Reports on Form 8-K..................................19
Signatures ..................................................................20
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
- ----------------------------------------
THERMOGENESIS CORP.
Balance Sheets
(Unaudited)
March 31, June 30,
2003 2002
--------------------- ---------------------
ASSETS
Current Assets:
Cash and cash equivalents $7,208,000 $4,713,000
Short term investments -- 2,013,000
Accounts receivable, net of allowance for 2,041,000 1,916,000
doubtful accounts of $80,000
($84,000 at June 30, 2002)
Inventory 2,896,000 2,887,000
Other current assets 615,000 115,000
--------------------- ---------------------
Total current assets 12,760,000 11,644,000
Equipment, at cost less accumulated depreciation
of $2,544,000 ($2,389,000 at June 30, 2002) 472,000 537,000
Other assets 54,000 58,000
--------------------- ---------------------
$13,286,000 $12,239,000
===================== =====================
See accompanying notes to financial statements.
THERMOGENESIS CORP.
Balance Sheets (Cont'd)
(Unaudited)
LIABILITIES AND STOCKHOLERS' EQUITY March 31, June 30,
2003 2002
-------------------- -------------------
Current liabilities:
Accounts payable $1,028,000 $995,000
Accrued payroll and related expenses 337,000 204,000
Deferred revenue 374,000 436,000
Accrued liabilities 507,000 378,000
-------------------- -------------------
Total current liabilities 2,246,000 2,013,000
Long-term portion of capital lease obligations and
note payable 49,000 33,000
Commitments and contingencies
Stockholders' equity:
Series A convertible preferred stock, $0.001 par value, 1,200,000 shares
authorized; 158,000 issued and outstanding (158,000 at June 30, 2002)
($1,323,000 aggregate involuntary
liquidation value at March 31, 2003) -- --
Preferred stock, $0.001 par value; 800,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $0.001 par value; 50,000,000
shares authorized; 39,109,093 issued and
outstanding (35,230,254 at June 30, 2002) 39,000 35,000
Paid in capital in excess of par 64,674,000 59,268,000
Accumulated deficit (53,722,000) (49,110,000)
-------------------- -------------------
Total stockholders' equity 10,991,000 10,193,000
-------------------- -------------------
$13,286,000 $12,239,000
==================== ===================
See accompanying notes to financial statements.
THERMOGENESIS CORP.
Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
---------------- --------------- --------------- ---------------
Net revenues $2,886,000 $2,735,000 $7,289,000 $6,720,000
Cost of revenues 2,375,000 2,101,000 6,010,000 5,211,000
---------------- --------------- --------------- ---------------
Gross profit 511,000 634,000 1,279,000 1,509,000
---------------- --------------- --------------- ---------------
Expenses:
Selling, general and administrative 1,386,000 1,184,000 3,755,000 3,433,000
Research and development 795,000 652,000 2,183,000 1,708,000
---------------- --------------- --------------- ---------------
Total expenses 2,181,000 1,836,000 5,938,000 5,141,000
Interest expense 3,000 4,000 10,000 11,000
Interest income 7,000 6,000 57,000 75,000
---------------- --------------- --------------- ---------------
Net loss ($1,666,000) ($1,200,000) ($4,612,000) ($3,568,000)
================ =============== =============== ===============
Per share data:
Basic and diluted net loss per common share ($0.05) ($0.04) ($0.13) ($0.11)
================ =============== =============== ===============
Shares used in computing per share data 36,570,697 32,745,103 35,700,791 32,051,362
================ =============== =============== ===============
See accompanying notes to financial statements.
THERMOGENESIS CORP.
Statements of Cash Flows
Nine months ended March 31, 2003 and 2002
2003 2002
------------------- -------------------
Cash flows from operating activities:
Net loss ($4,612,000) ($3,568,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 211,000 331,000
Issuance of common stock for services 65,000 --
Loss on retirement of equipment 9,000 --
Net change in operating assets and liabilities:
Accounts receivable (125,000) (916,000)
Inventory (61,000) (1,239,000)
Other current assets (476,000) (2,000)
Other assets (20,000) 5,000
Accounts payable 33,000 346,000
Accrued payroll and related expenses 133,000 111,000
Deferred revenue (62,000) 125,000
Accrued liabilities 129,000 238,000
------------------- -------------------
Net cash used in operating activities (4,776,000) (4,569,000)
------------------- -------------------
Cash flows from investing activities:
Capital expenditures (67,000) (124,000)
Maturities of short-term investments 2,013,000 822,000
------------------- -------------------
Net cash provided by investing activities 1,946,000 698,000
------------------- -------------------
Cash flows from financing activities:
Payments on capital lease obligations (20,000) (10,000)
Exercise of stock options 40,000 141,000
Issuance of common stock 5,305,000 6,288,000
------------------- -------------------
Net cash provided by financing activities 5,325,000 6,419,000
------------------- -------------------
Net increase in cash and cash equivalents 2,495,000 2,548,000
Cash and cash equivalents at beginning of period 4,713,000 3,544,000
------------------- -------------------
Cash and cash equivalents at end of period $7,208,000 $6,092,000
=================== ===================
Supplemental non-cash flow information:
Equipment acquired by note payable $36,000 --
=================== ===================
Cancellation of stockholder note receivable -- $425,000
=================== ===================
See accompanying notes to financial statements
THERMOGENESIS CORP.
Notes to Financial Statements
March 31, 2003
(Unaudited)
Interim Reporting
- -----------------
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles 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 the Company's 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 nine month period ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the year ended
June 30, 2003.
Summary of Significant Accounting Policies
- ------------------------------------------
On December 3, 1999, the SEC staff issued Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements," and effective July 1, 2000,
the Company changed its method of accounting for revenue recognition for
BioArchive(R) Systems and certain licensing agreements. Previously, the Company
recognized revenue for BioArchive units upon the delivery of the equipment to
the customers. The costs of training and installation were accrued in the same
period the installation and training was performed and the related training and
installation revenue was recognized. Under the new accounting method for
BioArchive Systems adopted retroactive to July 1, 2000, the Company now
recognizes revenue for BioArchive Systems for which the Company is responsible
for the installation and training upon completion of training and installation
of the equipment at the end-user's site. If a third party vendor is responsible
for the installation and training, the Company recognizes the revenue for the
BioArchive device upon transfer of title. Previously, the Company recognized
revenue for licensing agreements when payment was received and the Company
performed all services required under the agreements. Under the new accounting
method which was adopted retroactive to July 1, 2000 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 now defers the up-front fees and recognizes the fees
as revenue on a straight-line method over the term of the respective contracts.
The cumulative effect of the change on prior years resulted in an increase in
the net loss of $282,000 (net of income taxes of $0), which is included in the
net loss before the cumulative effect of a change in accounting principle for
the year ended June 30, 2001, and $13,000 has been included in deferred revenue
as of June 30, 2001. The $282,000 is comprised of revenues of $664,000 less cost
of revenues of $382,000. The effect of the change on the year ended June 30,
2001 was to decrease the net loss before the cumulative effect of the accounting
change by $179,000 ($0.01 per share). The $179,000 is comprised of revenues of
$272,000 less cost of revenues of $93,000.
THERMOGENESIS CORP.
Notes to Financial Statements (Cont'd)
March 31, 2003
(Unaudited)
Summary of Significant Accounting Policies (Cont'd)
- ---------------------------------------------------
For the three months ended March 31, 2003 and 2002, the Company recognized $0 in
revenue that was included in the cumulative effect adjustment as of July 1,
2000. For the nine months ended March 31, 2003 and 2002 the Company recognized
$0 and $138,000 respectively, in revenue that was included in the cumulative
effect adjustment as of July 1, 2000. The effect of that revenue and related
cost of revenue of $0 and $125,000 was to reduce the net loss by $0 and $13,000
during those periods, respectively.
Revenues from the sale of the Company's CryoSeal(R) FS System and ThermoLine TM
products to end-users are recognized upon transfer of title. 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. The Company's foreign sales are
generally through distributors. There is no right of return provided for
distributors. For sales of CryoSeal, BioArchive and ThermoLine 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 the
distributor places the product with an end-user. 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 inventory
maintained by the distributor, whether the Company has a pattern of granting
concessions for the benefit of the distributor, or whether there are other
conditions that may indicate that the sale to the distributor is not
substantive. Shipping and handling fees billed to customers are included in net
revenues, while the related costs are included in cost of revenues. Service
revenue is generally generated from contracts for providing maintenance of
equipment. Service revenue is recognized at the time the service is completed.
Recent Accounting Pronouncements
- --------------------------------
On June 29, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 eliminates the pooling-of-interests method of accounting for business
combinations. Under SFAS No. 142, goodwill and indefinite lived intangible
assets are no longer amortized but are reviewed annually, or more frequently if
impairment indicators arise, for impairment. Intangible assets whose lives are
not indefinite are amortized over their useful lives, and reviewed for
impairment in accordance with SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 141 was
adopted as of July 1, 2001 and had no impact on our financial statements. SFAS
No. 142 was adopted as of July 1, 2002 and had no impact on the Company's
financial statements.
THERMOGENESIS CORP.
Notes to Financial Statements (Cont'd)
March 31, 2003
(Unaudited)
Recent Accounting Pronouncements (Cont'd)
- -----------------------------------------
In October 2001, the FASB issued SFAS No. 144 on "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121. The
primary objectives of SFAS No. 144 are to develop one accounting model based on
the framework established in SFAS No. 121 for long-lived assets to be disposed
of by sale, and to address significant implementation issues. SFAS No. 144 was
adopted on July 1, 2002 and had no impact on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB No. 4, 44 and
64, Amendment of FASB No. 13 and Technical Corrections". SFAS No. 145 updates,
clarifies and simplifies existing accounting pronouncements. SFAS No. 145
rescinds SFAS No. 4, which required all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. As a result, the criteria in Accounting Principles
Board Opinion No. 30 will now be used to classify those gains and losses because
SFAS No. 4 has been rescinded. SFAS 145 amends SFAS No. 13 to require that
certain lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
This amendment is consistent with the FASB's goal of requiring similar
accounting treatment for transactions that have similar economic effects. SFAS
No. 145 also makes technical corrections to existing pronouncements. While those
corrections are not substantive in nature, in some instances, they may change
accounting practice. The Company adopted the provisions of SFAS 145 for fiscal
2003, which had no impact on the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)" ("Issue 94-3").
The principal difference between SFAS No. 146 and Issue 94-3 relates to SFAS No.
146's requirements for recognition of a liability for a cost associated with an
exit or disposal activity. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue 94-3, a liability for an exit cost as generally defined in
Issue 94-3 was recognized at the date of an entity's commitment to an exit plan.
A fundamental conclusion reached by the FASB in SFAS No. 146 is that an entity's
commitment to a plan, by itself, does not create an obligation that meets the
definition of a liability. Therefore, SFAS No. 146 eliminates the definition and
requirements for recognition of exit costs in Issue 94-3. SFAS No. 146 also
establishes that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. SFAS No. 146 was adopted
on January 1, 2003 and had no impact on the Company's financial statements.
THERMOGENESIS CORP.
Notes to Financial Statements (Cont'd)
March 31, 2003
(Unaudited)
Recent Accounting Pronouncements (Cont'd)
- -----------------------------------------
In November 2002, the EITF reached a consensus on Issue 00-21,
"Multiple-Deliverable Revenue Arrangements" ("EITF 00-21"). EITF 00-21 addresses
how to account for arrangements that may involve the delivery or performance of
multiple products, services, and/or rights to use assets. The consensus mandates
how to identify whether goods or services or both that are to be delivered
separately in a bundled sales arrangement should be accounted for separately
because they are "separate units of accounting." The guidance can affect the
timing of revenue recognition for such arrangements, even though it does not
change rules governing the timing or pattern of revenue recognition of
individual items accounted for separately. The final consensus will be
applicable to agreements entered into in fiscal years beginning after June 15,
2003 with early adoption permitted. Additionally, companies will be permitted to
apply the consensus guidance to all existing arrangements as the cumulative
effect of a change in accounting principle in accordance with APB Opinion No.
20, Accounting Changes. We are assessing the impact the adoption of EITF 00-21
will have on the Company's financial position, cash flows and results of
operations.
In November 2002, the FASB issued Interpretation Number 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). This interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN 45 are effective for
interim and annual periods ending after December 15, 2002 and the Company has
adopted those requirements for the financial statements included in this Form
10-Q. The initial recognition and initial measurement requirements of FIN 45 are
effective prospectively for guarantees issued or modified after December 31,
2002. FIN 45 was adopted on January 1, 2003 and did not have a material impact
on the Company's financial position, cash flows or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation and provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. SFAS No. 148 also amends the disclosure
requirements of SFAS No. 123 to require more prominent and frequent disclosures
in financial statements about the effects of stock-based compensation. The
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for financial statements issued for fiscal years ending after December
15, 2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002 and the Company has adopted those provisions for the financial statements
included in this form 10-Q. Adoption of SFAS No. 148 is not expected to
materially impact on the Company's financial statements.
THERMOGENESIS CORP.
Notes to Financial Statements (Cont'd)
March 31, 2003
(Unaudited)
Inventory
- ---------
Inventory consisted of the following at:
March 31, 2003 June 30, 2002
---------------------------- -----------------------
Raw Materials $1,740,000 $1,456,000
Work in process 647,000 765,000
Finished goods 509,000 666,000
---------------------------- -----------------------
$2,896,000 $2,887,000
============================ =======================
Warranty
- --------
The Company offers a one-year warranty for parts only on all of its products.
The Company estimates the costs that may be incurred under its basic limited
warranty and records a liability in the amount of such costs at the time product
revenue is recognized. Factors that affect the Company's warranty liability
include the number of installed units, historical and anticipated rates of
warranty claims, and cost per claim. Additionally, the Company sells extended
warranties on its BioArchive and freezers. The customer pays for the extended
warranty at the beginning of the contract period and the resulting liability is
included in deferred revenue. The Company periodically assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary.
Changes in the Company's product liability during the period are as follows:
July 1, 2002 balance $267,000
Warranties issued during the period 289,000
Settlements made during the period (168,000)
Changes in liability for pre-existing
warranties during the period, including
expirations (130,000)
------------------
March 31, 2003 balance $258,000
==================
Stockholders' Equity
- --------------------
The Company completed a private financing on March 28, 2003, in which it
received $5,834,000, before expenses. The proceeds from the offering were
received from the sale of 3,807,594 shares of common stock and issued warrants
representing the right to acquire an additional 11,976 shares of the Company's
common stock at $2.39 per share. The warrants vest immediately.
Stock-Based Compensation
- ------------------------
The Company has adopted the disclosure provision for stock-based compensation of
SFAS No. 123, "Accounting for Stock-Based Compensation", but continues to
account for such items using the intrinsic value method as outlined under
accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees".
THERMOGENESIS CORP.
Notes to Financial Statements (Cont'd)
March 31, 2003
(Unaudited)
Stock Based-Compensation (Cont'd)
- ---------------------------------
The Black-Sholes option valuation model was developed for use in estimating the
fair value of traded options. The Company's employee stock options have
characteristics significantly different from those of traded options such as
vesting restrictions and extremely limited transferability. In addition, the
assumptions used in option valuation models (see below) are highly subjective,
particularly the expected stock price volatility of the underlying stock.
Because changes in these subjective input assumptions can materially affect the
fair value estimates, in management's opinion, the existing models do not
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the options' vesting periods. The Company's pro forma
information is as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
--------------- -------------- -------------- ---------------
Net loss, as reported ($1,666,000) ($1,200,000) ($4,612,000) ($3,568,000)
Add: stock-based employee
compensation expense included in
reported net income, net of related tax
effects -- -- -- --
Deduct: total stock-based employee
compensation expense determined
under fair value method for all awards,
net of related tax effects (457,000) (252,000) (860,000) (664,000)
--------------- -------------- -------------- ---------------
Pro forma net loss ($2,123,000) ($1,452,000) ($5,472,000) ($4,232,000)
=============== ============== ============== ===============
Basic and diluted net loss per share
As reported ($0.05) ($0.04) ($0.13) ($0.11)
Pro Forma ($0.06) ($0.04) ($0.15) ($0.13)
For the three months ended March 31, 2003 and 2002, the fair value of the
Company's stock-based awards to employees was estimated using the following
weighted-average assumptions:
March 31,
2003 2002
------------------ -----------------
Average expected life
(years) 3.8 3.4
Risk-free interest rate 3.10% 3.36%
Volatility 98% 93%
Dividend yield 0% 0%
Related Party Transactions
- --------------------------
During the three and nine months ended March 31, 2003, the Company paid a board
member $26,000 and $99,000 respectively for consulting services related to the
Company's strategic initiatives.
THERMOGENESIS CORP.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
for the Three and Nine Months Ended March 31, 2003 and 2002
Item 2. Managements Discussion & 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 Company's 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 Company's actual results and could
cause actual results for fiscal year 2002, 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, and the risk factors
listed from time to time in the Company's SEC reports, including, in particular,
the factors and discussion in the Company's Form 10-K for its last fiscal year.
Introduction
- ------------
The Company designs, markets and manufactures medical devices and disposables
used for the distributed manufacturing of biotherapeutic products such as
concentrated mononuclear cells from umbilical cord blood, fibrin sealant and
thrombin from blood plasma or other related blood products. Initially the
Company developed its ThermoLine products for ultra rapid freezing and thawing
of blood components, which the Company distributes to blood banks and hospitals.
After extensive research and development, two new technology platforms (the
BioArchive System and the CryoSeal System) have evolved products which provide
new biotherapeutic products to patients in need.
Beginning in late 1993, and with accelerated research and development efforts
from 1996 to 1999, the Company completed development of the BioArchive and
CryoSeal technology platforms, each of which will give rise to multiple medical
products targeted at a number of different surgical and transplant indications.
To achieve completion of these research projects and add experienced executive
talent to launch the products and move the Company to new levels of growth and
revenues, considerable capital resources were used.
The following is Management's discussion and analysis of certain significant
factors which have affected the Company's financial condition and results of
operations during the period included in the accompanying financial statements.
THERMOGENESIS CORP.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
for the Three and Nine Months Ended March 31, 2003 and 2002 (Cont'd)
Critical Accounting Policies
- ----------------------------
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's 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. The Company recognizes revenue for BioArchive Systems upon transfer
of title if we are not responsible for training and installation services,
otherwise, we recognize revenue upon completion of training and installation of
the equipment at the end-user's site. For licensing arrangements 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 upfront fees and recognizes the fees as revenue on a
straight-line method over the term of the respective contracts. For sales of
CryoSeal, BioArchive and ThermoLine 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 the distributor places the product
with an end-user. These factors include, but are not limited to, whether the
payment terms offered to the distributor are considered to be non-standard, the
distributor's history of adhering to the terms of its contractual arrangements
with the Company, the level of inventory maintained by the distributor, whether
the Company has a pattern of granting concessions for the benefit of the
distributor, or whether there are other conditions that may indicate that the
sale to the distributor is not substantive. 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 Company's
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required. 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 Company's 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 Company's estimates, revisions to the estimated
warranty liability would be required. The Company writes down its inventory for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required.
THERMOGENESIS CORP.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
For the Three and Nine Months Ended March 31, 2003 and 2002 (Cont'd)
Results of Operations
- ---------------------
This quarter represents the first three months of operations under the direction
of Kevin Simpson, the Company's new President and COO who has more than 20 years
of executive management experience in the field of life sciences, 12 years
specifically in the blood industry.
During the third quarter of fiscal 2003, Mr. Simpson assessed the Company's
operations and executed a three part restructuring plan designed to improve the
gross profit margin necessary for the Company to achieve self sufficiency and
growth. This plan will be executed in three parts: (1) Focus the Company's
marketing and sales efforts to improve the revenues of the CryoSeal and
BioArchive product lines, (2) Reduce the in-house direct and overhead costs of
manufacturing and (3) Identify alternative OEM supplier relationships that will
provide low cost and high quality disposables. As part of the restructuring
plan, on April 9, 2003, the Company reduced the personnel costs in manufacturing
overhead by approximately $500,000 on an annual basis.
In addition to the restructuring plan, key operational objectives and new
internal financial reporting systems have been initiated to provide more timely
assessment of all the Company's costs going forward. Initial results of this
restructuring plan will be realized in the quarter ending June 30, 2003.
Management believes but can provide no assurances that the plan will be
implemented on a timely basis or that the projected results will be achieved. If
the Company's objectives under the plan do not come to timely fruition the
Company may need to obtain debt or equity financing.
Net Revenues:
Revenues for the three and nine months ended March 31, 2003 were $2,886,000 and
$7,289,000, compared to $2,735,000 and $6,720,000 for the fiscal 2002 periods,
an increase of $151,000 or 6% and $569,000 or 8%, respectively. BioArchive
revenues were $1,654,000 and $3,632,000 for the three and nine months ended
March 31, 2003, compared to $575,000 and $2,262,000 for the corresponding fiscal
2002 periods, an increase of $1,079,000 or 188% and $1,370,000 or 61%. The
number of devices sold increased from ten for the nine months ended March 31,
2002 to thirteen for the nine months ended March 31, 2003. BioArchive revenues
also increased from disposables sold to existing customers due to the increased
demand from private and public cord blood banks in Asia. As BioArchive revenues
from Asia may be threatened by the SARS epidemic, the Company is emphasizing its
sales efforts in Europe and the Americas to meet its projected revenues for the
fourth quarter. Revenues generated by the CryoSeal product line for the three
and nine months ended March 31, 2003 were $191,000 and $554,000 versus $173,000
and $197,000 for the three and nine months ended March 31, 2002 an increase of
10% and 181%, respectively
Cost of Revenues:
Cost of revenues as a percent of net revenues was approximately 82% for the
three and nine months ended March 31, 2003, as compared to 77% and 78% for the
corresponding fiscal 2002 periods. The cost of revenues percentage increased
primarily due to the higher overhead resulting from lower units produced
in-house and increased service contract expenses. Management expects the
restructuring plan that was implemented on April 9th to reduce cost of revenues
as a percentage of net revenues beginning in the fourth quarter of fiscal 2003.
THERMOGENESIS CORP.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
for the Three and Nine Months Ended March 31, 2003 and 2002 (Cont'd)
Selling, General and Administrative Expenses:
Selling, general and administrative expenses were $1,386,000 and $3,755,000 for
the three and nine months ended March 31, 2003 compared to $1,184,000 and
$3,433,000 for the fiscal 2002 periods, an increase of 17% and 9%, respectively.
The increases were primarily the result of additional travel and professional
fees, $131,000, paid to promote federal financing of a National Cord Blood Stem
Cell Bank Network. The purpose for these expenditures was to educate the members
of the U.S. Congress and Executive staff in the use of umbilical cord stem cells
to treat life threatening diseases such as, leukemia, lymphoma, sickle cell
anemia and various metabolic disorders and as a stem cell replacement for
victims of radiation exposure resulting from terrorist attacks. The Company
anticipates being one of several supporters of this effort until the legislation
for a National Cord Blood Stem Cell Bank is approved. Although uncertain in
light of current fiscal and budgetary debates in Congress, the Company is
hopeful that a bill providing for the funding will be introduced over the next
six months. Additional expenses were incurred in the executive search for a new
President and Chief Operating Officer.
Research and Development Expenses:
Research and development expenses for the three and nine months ended March 31,
2003 were $795,000 and $2,183,000 compared to $652,000 and $1,708,000 for the
corresponding fiscal 2002 periods, an increase of 22% and 28% respectively. The
increase is primarily due to the costs associated with the CryoSeal FS human
clinical trials which were $400,000 and $980,000 for the three and nine months
ended March 31, 2003, respectively.
Liquidity and Capital Resources
- -------------------------------
At March 31, 2003, the Company had a cash balance of $7,208,000, short-term
investments of $0 and working capital of $10,514,000. This compares to a cash
balance of $4,713,000, short-term investments of $2,013,000 and working capital
of $9,631,000 at June 30, 2002. The Company raised net proceeds of $5.3 million
through the private placement of common stock in March 2003. The cash and
short-term investments were used to fund operations and other cash needs of the
Company. In addition to product revenues, we have primarily financed our
operations through the private placement of equity securities. Since its
inception, the Company has raised approximately $56.3 million, net of expenses,
through common and preferred stock financings and option and warrant exercises.
As of March 31, 2003, the Company has no off-balance sheet arrangements.
Net cash used in operating activities for the nine months ended March 31, 2003
was $4,776,000, primarily due to the net loss of $4,612,000. Other current
assets utilized $476,000 of cash primarily due to a $385,000 prepayment to a
Clinical Research Organization (CRO) for services with respect to the Company's
CryoSeal FS human clinical trials.
THERMOGENESIS CORP.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
for the Three and Nine Months Ended March 31, 2003 and 2002 (Cont'd)
As of March 31, 2003, the Company had the following contractual obligations and
commercial commitments:
- --------------------------------------------------------------------------------------------------------------
Contractual Obligations Payments Due by Period
- --------------------------------------------------------------------------------------------------------------
Total Less than 1 year 1-3 years 4-5 years
- --------------------------------------------------------------------------------------------------------------
Capital lease obligations and $70,000 $21,000 $35,000 $14,000
note payable
- --------------------------------------------------------------------------------------------------------------
Operating leases 82,000 76,000 6,000 -
- --------------------------------------------------------------------------------------------------------------
Total contractual cash $152,000 $97,000 $41,000 $14,000
obligations
- --------------------------------------------------------------------------------------------------------------
The report of independent auditors on the Company's June 30, 2002 financial
statements includes an explanatory paragraph indicating there is substantial
doubt about the Company's ability to continue as a going concern. The Company
believes that it has developed a viable plan to address these issues and that
its plan will enable the Company to continue as a going concern through the end
of fiscal year 2004. The plan includes the realization of revenues from the
commercialization of new products and the reduction of certain operating
expenses as required. The financial statements do not include any adjustments to
reflect the uncertainties related to the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
inability of the Company to continue as a going concern. There is no assurance
that the Company will be able to achieve additional financing or that such
events will be on terms favorable to the Company. Based on the completed equity
financing and the restructuring efforts, management believes, but cannot assure
that there is sufficient liquidity and working capital to meet its needs for the
next 18 months.
At March 31, 2003, the Company has $1.8 million outstanding in cancelable orders
to purchase inventory, supplies and services for use in normal business
operations and no significant outstanding capital commitments.
Backlog
- -------
The Company's cancelable backlog at March 31, 2003 was $154,000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -----------------------------------------------------------------
All sales, domestic and foreign, are made in U.S. dollars and therefore currency
fluctuations are believed to have no impact on the Company's net revenues. The
Company has no long-term debt or investments and therefore is not subject to
interest rate risk.
Item 4. Controls and Procedures
- -------------------------------
Within the 90 days prior to the date of this Form 10-Q, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer along with the
Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
THERMOGENESIS CORP.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
for the Three and Nine Months Ended March 31, 2003 and 2002 (Cont'd)
Exchange Act Rule 13a-14. Based upon that evaluation, the Company's Chief
Executive Officer along with the Company's Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company required to be
included in this Form 10-Q.
There have been no significant changes in the Company's internal controls or in
other factors which could significantly affect internal controls subsequent to
the date the Company carried out its evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In the normal course of operations, the Company may have disagreements
or disputes with vendors or employees. These disputes are seen by the
Company's 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 Company's
financial position, results of operations or cash flows.
Item 2. Changes in Securities.
On March 26, 2003, the Company, pursuant to a private placement with
certain institutional investors and holders of Series A Preferred with
participation rights ("Private Placement") sold 3,807,594 shares of
common stock at $1.53 per share and issued three year warrants
representing the right to acquire an additional 11,976 shares of
common stock, in the aggregate, at an exercise price of $2.39 per
share, for gross proceeds of approximately $5.8 million, before
deducting expenses in the offering. The Company will use the net
proceeds from the offering for working capital and implementation of
operational plans. The Private Placement was made in reliance on the
exemptions under Sections 4(2) and 4(6) of the Securities Act of 1933,
as amended, and Rule 506 of Regulation D, promulgated by the
Securities and Exchange Commission, and comparable exemptions for
sales under state securities laws. Pursuant to the terms of the
offering, the Company registered the shares of common stock issued and
shares of common stock issuable upon conversion of the warrants for
resale by the investors.
Item 3. Default Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Employment Agreement with Renee Ruecker
99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
A report on Form 8-K for the event dated March 28, 2003 was filed
on April 2, 2003 announcing the closing of the Company's Private
Placement. A report on Form 8-K for the event dated March 21,
2003 was filed on March 25, 2003 announcing the initial closing
of the Company's Private Placement.
THERMOGENESIS CORP.
Signatures
In accordance with 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 May 12, 2003
/s/Philip H. Coelho
---------------------------------------------
Philip H. Coelho
Chief Executive Officer
(Principal Executive Officer)
/s/Renee M. Ruecker
--------------------------------------------
Renee M. Ruecker
Chief Financial Officer
(Principal Financial and Accounting Officer)