UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2004.
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition from _____________ to
_________________________.
Commission File Number: 0-16375
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 Rd.
Rancho Cordova, CA 95742
(916) 858-5100
(Address of principal executive officer, including zip code, and
telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section13 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 the Exchange Act) Yes [ ] No [X]
The number of shares of the registrant's common stock, $0.001 par value,
outstanding on April 28, 2004 was 44,607,557.
_______________________________
THERMOGENESIS CORP.
INDEX
Page Number
Part I Financial Information -----------
Item 1. Financial Statements (Unaudited):
Balance Sheets at March 31, 2004 and June 30, 2003..................3
Statements of Operations for the
Three and Nine Months Ended March 31, 2004 and 2003.................5
Statements of Cash Flows for
the Nine Months Ended March 31, 2004 and 2003.......................6
Notes to Financial Statements.......................................7
Item 2. Management's Discussion and Analysis of
Financial Condition & Results of Operations........................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........18
Item 4. Controls and Procedures............................................18
Part II Other Information
Item 1. Legal Proceedings..................................................19
Item 2. Changes in Securities and Use of Proceeds..........................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
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
THERMOGENESIS CORP.
Balance Sheets
(Unaudited)
March 31, June 30,
2004 2003
(see Note 1)
----------------- -----------------
ASSETS
Current Assets:
Cash and cash equivalents $18,070,000 $6,815,000
Accounts receivable, net of allowance for 2,163,000 2,014,000
doubtful accounts of $60,000
($80,000 at June 30, 2003)
Inventories 2,910,000 2,650,000
Other current assets 697,000 820,000
----------------- -----------------
Total current assets 23,840,000 12,299,000
Equipment, at cost less accumulated depreciation
of $2,311,000 ($2,599,000 at June 30, 2003) 844,000 442,000
Other assets 49,000 50,000
----------------- -----------------
$24,733,000 $12,791,000
================= =================
See accompanying notes to financial statements.
Page 3
THERMOGENESIS CORP.
Balance Sheets (Cont'd)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, June 30,
2004 2003
(see Note 1)
---------------- ----------------
Current liabilities:
Accounts payable $1,544,000 $1,165,000
Accrued payroll and related expenses 235,000 235,000
Accrued liabilities 822,000 389,000
Deferred revenue 331,000 384,000
---------------- ----------------
Total current liabilities 2,932,000 2,173,000
Long-term portion of capital lease obligations and
note payable 27,000 44,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000
shares authorized; Series A convertible
preferred stock, 1,077,540 shares issued,
126,000 outstanding (158,000 outstanding
at June 30, 2003) ($1,118,000 aggregate
involuntary liquidation value at March 31, 2004) -- --
Common stock, $0.001 par value; 50,000,000
shares authorized; 44,607,557 issued and
outstanding (39,396,594 at June 30, 2003) 45,000 39,000
Paid in capital in excess of par 80,122,000 65,248,000
Accumulated deficit (58,393,000) (54,713,000)
---------------- ----------------
Total stockholders' equity 21,774,000 10,574,000
---------------- ----------------
$24,733,000 $12,791,000
================ ================
See accompanying notes to financial statements.
Page 4
THERMOGENESIS CORP.
Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
------------ ------------ ------------ -----------
Net revenues $3,367,000 $2,886,000 $8,010,000 $7,289,000
Cost of revenues 2,200,000 2,375,000 5,452,000 6,010,000
------------ ------------ ------------ -----------
Gross profit 1,167,000 511,000 2,558,000 1,279,000
------------ ------------ ------------ -----------
Expenses:
Selling, general and administrative 1,341,000 1,386,000 3,762,000 3,755,000
Research and development 1,057,000 795,000 2,504,000 2,183,000
------------ ------------ ------------ -----------
Total operating expenses 2,398,000 2,181,000 6,266,000 5,938,000
Interest expense 9,000 3,000 21,000 10,000
Interest income 22,000 7,000 49,000 57,000
------------ ------------ ------------ -----------
Net loss ($1,218,000) ($1,666,000) ($3,680,000) ($4,612,000)
============ ============ ============ ===========
Per share data:
Basic and diluted net loss per common share ($0.03) ($0.05) ($0.09) ($0.13)
============ ============ ============ ===========
Shares used in computing per share data 42,742,891 36,570,697 40,822,944 35,700,791
============ ============ ============ ===========
See accompanying notes to financial statements.
Page 5
THERMOGENESIS CORP.
Statements of Cash Flows
Nine months ended March 31, 2004 and 2003
2004 2003
---------------- ---------------
Cash flows from operating activities:
Net loss ($3,680,000) ($4,612,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 209,000 211,000
Issuance of common stock for services 10,000 65,000
Non cash stock compensation expense 20,000 --
Loss on retirement of equipment 10,000 9,000
Net change in operating assets and liabilities:
Accounts receivable (149,000) (125,000)
Inventories (260,000) (61,000)
Other current assets 123,000 (476,000)
Other assets 1,000 (20,000)
Accounts payable 379,000 33,000
Accrued payroll and related expenses -- 133,000
Deferred revenue (53,000) (62,000)
Accrued liabilities 429,000 129,000
---------------- ---------------
Net cash used in operating activities (2,961,000) (4,776,000)
---------------- ---------------
Cash flows from investing activities:
Capital expenditures (621,000) (67,000)
Maturities of short-term investments -- 2,013,000
---------------- ---------------
Net cash (used in) provided by investing
activities (621,000) 1,946,000
---------------- ---------------
Cash flows from financing activities:
Payments on capital lease obligations and note
payable (13,000) (20,000)
Exercise of stock options and warrants 5,073,000 40,000
Issuance of common stock 9,777,000 5,305,000
---------------- ---------------
Net cash provided by financing activities 14,837,000 5,325,000
---------------- ---------------
Net increase in cash and cash equivalents 11,255,000 2,495,000
Cash and cash equivalents at beginning of period 6,815,000 4,713,000
---------------- ---------------
Cash and cash equivalents at end of period $18,070,000 $7,208,000
================ ===============
Supplemental non-cash flow information:
Equipment acquired by note payable -- $36,000
================ ===============
Surrender of stock to exercise options $656,000 --
================ ===============
See accompanying notes to financial statements.
Page 6
THERMOGENESIS CORP.
Notes to Financial Statements
March 31, 2004
(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 accounting principles generally accepted in the United States 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, 2004 are not necessarily indicative of the results that may be
expected for the year ended June 30, 2004.
The balance sheet at June 30, 2003, has been derived from the audited financial
statements at that date but does not include all the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements.
Summary of Significant Accounting Policies
Segment
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.
Revenues
The Company recognizes revenue including multiple element arrangements, in
accordance with the provisions of SAB No. 101 and EITF 00-21. 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
arrangement's 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. If an undelivered
element exists, the Company will determine the fair value of the undelivered
element and subtract the fair value of the undelivered element from the total
consideration under the arrangement. The residual amount is the Company's
estimate of the fair value of the delivered element. 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. 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 contracts.
Page 7
THERMOGENESIS CORP.
Notes to Financial Statements (Cont'd)
March 31, 2004
(Unaudited)
Summary of Significant Accounting Policies (Cont'd)
Revenues from the sale of the Company's products 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 and are generally
sold 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 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 inventories 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 currently recognizes
revenue on the sell-in method with its distributors. 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. Service
revenue which is included in net revenues, 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.
Amounts billed in excess of revenue recognized are recorded as deferred revenue
on the balance sheet.
Recent Accounting Pronouncements
In November 2002, the EITF reached a consensus on Issue 00-21, "Revenue
Arrangements with Multiple Deliverables" ("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. EITF 00-21 was adopted on July 1,
2003 and had no impact on our financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150
(SFAS 150), "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity". SFAS 150 requires certain financial instruments
that embody obligations of the issuer and have characteristics of both
liabilities and equity to be classified as liabilities. Many of these
instruments previously were classified as equity or temporary equity and as
such, SFAS 150 represents a significant change in practice in the accounting for
a number of mandatorily redeemable equity instruments and certain equity
derivatives that frequently are used in connection with share repurchase
programs. SFAS 150 was adopted as of July 1, 2003 and had no impact on our
financial statements.
Page 8
THERMOGENESIS CORP.
Notes to Financial Statements (Cont'd)
March 31, 2004
(Unaudited)
Inventories
Inventories consisted of the following at:
March 31, 2004 June 30, 2003
---------------------- -------------------
Raw materials $1,480,000 $1,612,000
Work in process 610,000 382,000
Finished goods 820,000 656,000
---------------------- -------------------
$2,910,000 $2,650,000
====================== ===================
At March 31, 2004, the Company carried an inventory reserve of $484,000 of which
approximately $300,000 related to the CryoSeal inventory products which is based
on inventory levels in excess of current demand for the product.
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. 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:
Balance at July 1, 2003 $193,000
Warranties issued during the period 177,000
Settlements made during the period (94,000)
Changes in liability for pre-existing
warranties during the period,
including expirations 20,000
---------------
Balance at March 31, 2004 $296,000
===============
Stockholders' Equity
The Company completed a private financing on March 26, 2004, in which it
received $9,777,000 net of expenses. The proceeds from the offering were
received from the sale of 2,660,000 shares of common stock.
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".
Page 9
THERMOGENESIS CORP.
Notes to Financial Statements (Cont'd)
March 31, 2004
(Unaudited)
Stock Based-Compensation (Cont'd)
The Black-Scholes 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,
2004 2003 2004 2003
----------- ----------- ------------ ------------
Net loss, as reported ($1,218,000) ($1,666,000) ($3,680,000) ($4,612,000)
Add: stock-based employee
compensation expense included in
reported net loss, 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 (119,000) (457,000) (381,000) (860,000)
----------- ----------- ------------ ------------
Pro forma net loss ($1,337,000) ($2,123,000) ($4,061,000) ($5,472,000)
=========== =========== ============ ============
Basic and diluted net loss per share
As reported ($0.03) ($0.05) ($0.09) ($0.13)
Pro Forma ($0.03) ($0.06) ($0.10) ($0.15)
Related Party Transactions
During the second quarter of fiscal 2004, the Company entered into an agreement
with Mediware Information Systems, Inc. (Mediware) to explore technical and
market requirements and terms and conditions for the joint development and
marketing of the industry's first fully integrated system to make personalized
cell therapy safer and more accessible. The Company had no expenses or revenues
associated with this agreement during the third quarter of fiscal 2004. The
Company's Chief Executive Officer is on the Board of Directors of Mediware and
Mediware's Chief Executive Officer is on the Board of Directors of the Company.
Page 10
THERMOGENESIS CORP.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
for the Three and Nine Months Ended March 31, 2004 and 2003
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 2004, 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 and manufactures medical devices and disposables used for
the distributed manufacturing of biologic products such as concentrated stem
cells from umbilical cord blood, fibrin sealant and thrombin from blood plasma
and other related blood products. Initially the Company developed its
ThermoLine(TM) 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 biologic
products to patients in need. We believe our future continued growth will be
predicated at large by the developing increased therapeutic benefits and the
corresponding market acceptance of our newer products. We believe that our
continuing research and development efforts are also a key to maintaining our
market share and future growth of our market share where our products are sold
and utilized.
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.
Page 11
THERMOGENESIS CORP.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
for the Three and Nine Months Ended March 31, 2004 and 2003 (Cont'd)
Item 2. Managements Discussion & Analysis of Financial Condition and Results of
Operations (Cont'd)
Introduction (Cont'd)
Prior to the development and market launch of our BioArchive and CryoSeal
technology, our revenue was derived principally from the sale of our blood
plasma freezers and thawers. With the launch of our BioArchive System, we have
realized significant revenue increases due to the sale of that equipment and
more recently increases in revenue due to the recurring sale of disposables used
in the BioArchive that is commensurate with an ever increasing installed base of
BioArchive Systems worldwide. We anticipate similar revenue increases from
disposable sales related to the CryoSeal System when the installed base of units
increases, however there is no assurance that this will occur.
Our BioArchive Systems and related products are purchased predominantly by
specialized cord blood stem cell banks. The sales in prior years were dependent
on start up and funding costs associated with new stem cell banks as the science
evolved. In more recent periods governmental funding and involvement, as well as
more recognized therapeutic benefits from this stem cell treatment, have
shortened the sales cycle and appears to be increasing demand. Consistent with
the perception that governmental backing and funding will accelerate the demand
for the products, the Company has incurred expenses to promote federal financing
to increase the inventory of high quality cord blood units manufactured by a
network of FDA-approved cord blood banks. Although legislation appropriating $10
million passed in January 2004 and additional authorizing legislation is
pending, there is no certainty that the authorizing legislation will ultimately
pass or that if it passes, it will result in a corresponding increase in our
revenues due to cord blood banks who receive the funds deciding to purchase our
BioArchive System.
Our CryoSeal System is still in U.S. clinical trials, and sales in the U.S. are
limited pending completion of the trial and the required FDA approval following
pre-market application ("PMA") submission. The Company has received CE approval
for the system enabling its sale and use in Europe, although sales into
individual countries under cost reimbursement structures often requires some
supporting clinical usage. We have, through our distribution partner in Europe,
undertaken many of those clinical studies and, upon completion, will pursue a
more aggressive marketing plan. In Japan, our distributor, Asahi Medical Co.
Ltd., has recently completed enrollment in their pivotal clinical trials and is
expected to file their PMA soon. In Canada, field trials are underway to provide
a cost justification for federal reimbursement to hospitals that use the
product. In Brazil, field trials have begun to establish training and
demonstration with selected customers. Several similar field trials are at
various stages throughout Europe.
A significant focus during the past year has been on decreasing manufacturing
costs and overhead to drive operations towards profitability, while also
pursuing required improvements in our operations required for compliance with
new regulatory pronouncements, including the Sarbanes-Oxley Act and FDA Quality
System Regulations.
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.
Page 12
THERMOGENESIS CORP.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
for the Three and Nine Months Ended March 31, 2004 and 2003 (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
judgments and estimates, including those related to revenue recognition, 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.
Revenue Recognition:
The Company recognizes revenue in accordance with the provisions of SAB No. 101
and EITF 00-21. 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 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 inventories
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 currently recognizes revenue on the sell-in method with
its distributors.
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 Company's 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.
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 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.
Page 13
THERMOGENESIS CORP.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
for the Three and Nine Months Ended March 31, 2004 and 2003 (Cont'd)
Critical Accounting Policies (Cont'd)
Inventories 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 Company's 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
Results of Operations for the Three Months Ended March 31, 2004 as Compared to
the Three Months Ended March 31, 2003
Net Revenues:
Revenues for the three months ended March 31, 2004 were $3,367,000 compared to
$2,886,000 for the fiscal 2003 period, an increase of $481,000 or 17%. Revenues
generated by the BioArchive product line were $2,188,000 for the three months
ended March 31, 2004, compared to $1,654,000 for the corresponding fiscal 2003
period, an increase of $534,000 or 32%. The increase was primarily generated
from sales of BioArchive devices, eight for the quarter ended March 31, 2004
versus six for the corresponding fiscal 2003 period. The increase in device
revenue is primarily due to the infusion of government funding for public cord
blood banking in Japan and the expansion of cord blood-based programs that have
provided an increased demand for our technology which resulted in product sales
into new countries, Scotland and Turkey. Revenues generated by the CryoSeal
product line for the three months ended March 31, 2004 were $29,000 versus
$191,000 for the corresponding fiscal 2003 period. The decrease in revenues is
primarily due to slow demand from our distributor in Europe who underwent a
significant internal reorganization earlier this year.
The following represents the Company's cumulative BioArchive devices sold into
the following countries:
March 31,
2004 2003
-------- --------
United States 18 14
Asia 34 26
Europe 22 14
Rest of World 10 5
-------- --------
84 59
======== ========
Page 14
THERMOGENESIS CORP.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
For the Three and Nine Months Ended March 31, 2004 and 2003 (Cont'd)
Results of Operations (Cont'd)
Cost of Revenues:
Cost of revenues as a percent of revenues was 65% for the three months ended
March 31, 2004, as compared to 82% for the corresponding fiscal 2003 period. The
cost of revenues percentage decreased primarily due to an increase in average
selling prices ("ASP") of the BioArchive device and ThermoLine freezers, the
volume increase of the BioArchive product line and an increase in royalties
received during the quarter. The ASP for the BioArchive device increased 8% and
the ThermoLine freezers ASP increased 35% for the quarter ended March 31, 2004
versus the quarter ended March 31, 2003. The increase in the ASPs increased
gross margin by approximately $170,000. Management expects the current pricing
for the BioArchive device to remain consistent with gradual increases in the
future. The freezer's ASP is heavily dependant on the mix of devices sold
domestically versus internationally, volume discounts and the demand for devices
not included on our current product list. The products in the BioArchive product
line have a higher gross profit margin than the other product lines, ranging
from 40% to 50% for devices and generally 50% to 60% for disposables. The amount
of BioArchive product line revenues as a percent of total Company revenues
increased 8% for the quarter ended March 31, 2004 as compared to the quarter
ended March 31, 2003 which attributed approximately $120,000 to the increase in
gross margin. The Company received $57,000 in royalties from Air Water, the
distributor of the BioArchive system in Japan, for the sales of mini BioArchive
systems. Management does not expect to receive any additional royalties from
sales of the mini BioArchive for the remainder of the fiscal year.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses were $1,341,000 for the three
months ended March 31, 2004 compared to $1,386,000 for the fiscal 2003 period, a
decrease of $45,000 or 3%. The decrease is primarily due to professional fees
paid during the quarter ended March 31, 2003 to promote federal financing of a
National Cord Blood Stem Cell Bank Network. The initial $10 million
appropriation was passed by Congress in January 2004. The Company is still
supporting this effort, but at a lower run rate than previous periods.
Research and Development Expenses:
Research and development expenses for the three months ended March 31, 2004 were
$1,057,000 compared to $795,000 for the corresponding fiscal 2003 period, an
increase of $262,000 or 33%. The increase in research and development is due to
the costs associated with new product development, primarily the "Smart"
automated cell selection device and proprietary disposable. The costs associated
with the CryoSeal FS human clinical trials increased to $410,000 from $396,000.
Page 15
THERMOGENESIS CORP.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
For the Three and Nine Months Ended March 31, 2004 and 2003 (Cont'd)
Results of Operations (Cont'd)
Results of Operations for the Nine Months Ended March 31, 2004 as Compared to
the Nine Months Ended March 31, 2003
Net Revenues:
Revenues for the nine months ended March 31, 2004 were $8,010,000 compared to
$7,289,000 for the fiscal 2003 period, an increase of $721,000 or 10%.
BioArchive revenues were $5,189,000 for the nine months ended March 31, 2004,
compared to $3,632,000 for the corresponding fiscal 2003 period, an increase of
$1,557,000 or 43%. The Company sold 18 devices in the nine months ended March
31, 2004 versus 11 in the nine months ended March 31, 2003. The increase is due
to the infusion of government funding in Japan and Moscow and the growth of
private cord blood banking in Asia. Revenues generated by the CryoSeal product
line for the nine months ended March 31, 2004 were $239,000 versus $554,000 for
the nine months ended March 31, 2003. The decrease is due to the sales of four
CryoSeal devices and the related disposables during the first quarter of fiscal
2003, to our distributor in Japan to initiate clinical trials. Also, we are
experiencing lower than expected sales in Europe as our field clinical studies
to earn reimbursement from government health programs are not completed. We are
working to accelerate completion of the clinical studies to improve their sales
penetration.
Cost of Revenues:
Cost of revenues as a percent of revenues was 68% for the nine months ended
March 31, 2004, as compared to 82% for the corresponding fiscal 2003 period. The
primary drivers behind the cost of revenues percentage decrease were the cost
reduction programs that were implemented in the fourth quarter of fiscal 2003,
an increase in ASPs of the BioArchive device and ThermoLine freezers and the
volume increase of the BioArchive product line. The cost reduction programs
included reducing manufacturing overhead costs and consolidating operations into
one facility. The programs resulted in a $450,000 decrease in the manufacturing
overhead pool for the nine months ended March 31, 2004. The ASP for the
BioArchive device increased 5% and the ThermoLine freezers ASP increased 35% for
the nine months ended March 31, 2004 versus the nine months ended March 31,
2003. The increase in the ASPs increased gross margin by approximately $260,000.
The products in the BioArchive product line have a higher gross profit margin
than the other product lines, ranging from 30% to greater than 50%. The amount
of BioArchive product line revenues as a percent of total Company revenues
increased 15% for the nine months ended March 31, 2004 as compared to the nine
months ended March 31, 2003.
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THERMOGENESIS CORP.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
For the Three and Nine Months Ended March 31, 2004 and 2003 (Cont'd)
Results of Operations (Cont'd)
Results of Operations for the Nine Months Ended March 31, 2004 as Compared to
the Nine Months Ended March 31, 2003 (Cont'd)
Selling, General and Administrative Expenses:
Selling, general and administrative expenses remained relatively consistent year
to year, increasing only $7,000. The increase in professional and consulting
fees associated with Sarbanes-Oxley was offset by a decrease in professional
fees from the comparable prior year period paid in connection with the executive
search for a new chief operating officer and to promote federal financing of a
National Cord Blood Stem Cell Bank Network.
Research and Development Expenses:
Research and development expenses for the nine months ended March 31, 2004 were
$2,504,000 compared to $2,183,000 for the corresponding fiscal 2003 period, an
increase of $321,000 or 15%. The increase in research and development is due to
the costs associated with new product development, primarily the "Smart"
automated cell selection device and proprietary disposable.
Liquidity and Capital Resources
At March 31, 2004, the Company had a cash balance of $18,070,000 and working
capital of $20,908,000. This compares to a cash balance of $6,815,000 and
working capital of $10,126,000 at June 30, 2003. The Company raised net proceeds
of $9.8 million through the private placement of common stock in March 2004.
There was $5.1 million of cash generated from the exercise of stock options and
warrants during the nine months ended March 31, 2004. This was offset by the
funding of operations and other cash needs of the Company. In addition to
product revenues, the Company has primarily financed its operations through the
private placement of equity securities. Since its inception, the Company has
raised approximately $71.6 million, net of expenses, through common and
preferred stock financings and option and warrant exercises. As of March 31,
2004, the Company has no off-balance sheet arrangements.
Net cash used in operating activities for the nine months ended March 31, 2004
was $2,961,000, primarily due to the net loss of $3,680,000. Inventories
utilized $260,000 of cash as a result of building up BioArchive and ThermoLine
subassemblies and devices to continue the Company's revenue growth and maintain
a consistent manufacturing workflow throughout the quarter. Accrued liabilities
provided $429,000 in cash through accruals for warranty reserves due to the
increase in product sales and direct expenses associated with the private
placement that occurred in March. Expenditures for capital assets utilized
$621,000 of cash. The majority of the capital assets consisted of leasehold
improvements, furniture, phone and security systems as a result of moving to a
consolidated facility in the first quarter of fiscal 2004.
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THERMOGENESIS CORP.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
For the Three and Nine Months Ended March 31, 2004 and 2003 (Cont'd)
Liquidity and Capital Resources (Cont'd)
The report of independent auditors on the Company's June 30, 2003 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 due to the completed equity financing and the proceeds from the
exercise of options and warrants that it has adequate cash reserves and has
developed a viable operating plan to continue as a going concern through the end
of fiscal year 2005. The plan includes the realization of revenues from the
commercialization of new products and the management 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.
At March 31, 2004, the Company had $2.5 million outstanding in cancelable orders
to purchase inventory, supplies and services for use in normal business
operations and no significant outstanding capital commitments. Additionally, the
Company has a contract with an OEM vendor to purchase $8.7 million of inventory
through fiscal 2009. There have been no purchases under this contract to date.
Backlog
The Company's cancelable backlog at March 31, 2004 was $1.5 million.
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. The Company expects that these conditions will continue for
the foreseeable future.
Item 4. Controls and Procedures
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 (as defined in Exchange Act Rule 13a-15(e)) as of the end of the
period covered by this report. The Company's disclosure controls and procedures
are designed to ensure that information required to be disclosed by the Company
in the reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported on a timely basis. 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 alerting them in a timely fashion to material
information required to be disclosed by us in reports that we file or submit
under the Exchange Act.
Page 18
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 and Use of Proceeds.
On March 26, 2004, pursuant to a private placement with certain
institutional investors and holders of Series A Preferred with
participation rights ("the Offering") the Company sold 2,660,000
shares of common stock at $4.00 per share, for gross proceeds of
approximately $10.6 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 Offering
was made in reliance on the exemptions under Sections 4(2) 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 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
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. 1350.
(b) Reports on Form 8-K
A report on Form 8-K for the event dated March 10, 2004 was filed
on March 10, 2004 announcing the closing of the Offering. A
report on Form 8-K for the event dated February 13, 2004 was
filed on February 18, 2004 announcing the Company's second
quarter results.
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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)
Date May 12, 2004
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)
Page 20