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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: June 30, 2004
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 Road
Rancho Cordova, California 95742
--------------------------------
(Address of principal executive offices) (Zip Code)
(916) 858-5100
--------------
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $0.001
par value
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 twelve 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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K, is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [X] Yes [ ] No
The aggregate market value of the common stock held by non-affiliates as of
December 31, 2003 (the last trading day of the second fiscal quarter) was
$213,876,725, based on the closing sale price on such day.
As of August 20, 2004, 44,843,919 shares of the Registrant's Common Stock were
outstanding.
Documents incorporated by reference: Portions of the registrant's proxy
statement for its 2004 Annual Meeting of Stockholders are incorporated by
reference into Part III hereof.
TABLE OF CONTENTS
Page Number
-----------
Part I
ITEM 1. Business......................................................3
(A) Overview of Business......................................3
(B) Clinical Summary Status...................................4
(C) Competition...............................................7
(D) Research and Development..................................8
(E) Description of Device Manufacturing.......................8
(F) Government Regulation....................................10
(G) Patents and Proprietary Rights...........................11
(H) Factors Affecting Future Results.........................13
(I) Licenses and Distribution Rights.........................17
(J) Employees................................................19
ITEM 2. Properties...................................................19
ITEM 3. Legal Proceedings............................................19
ITEM 4. Submission of Matters to a Vote of Security Holders..........19
Part II
ITEM 5. Market for the Registrant's Common Stock and Related
Stockholder Matters......................................20
ITEM 6. Selected Financial Data......................................21
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................22
(a) Overview.................................................22
(b) Results of Operations....................................25
(c) Liquidity and Capital Resources..........................28
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk...30
ITEM 8. Financial Statements and Supplementary Data..................31
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................56
ITEM 9A. Other Information............................................56
ITEM 9B Controls and Procedures......................................56
Part III
ITEM 10. Directors and Executive Officers of the Registrant...........56
ITEM 11. Executive Compensation.......................................56
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management...............................................56
ITEM 13. Certain Relationships and Related Transactions...............56
ITEM 14. Principal Accountant Fees and Services.......................56
Part IV
ITEM 15. Exhibits and Financial Statement Schedules...................57
(A) Financial Statements.....................................57
(B) Exhibits.................................................58
2
PART I
ITEM 1. BUSINESS
--------
(A) Overview of Business
--------------------
ThermoGenesis Corp. ("the Company", "we", "our") incorporated in Delaware in
July 1986, designs, manufactures and distributes blood processing
systems---CryoSeal(R) Fibrin Sealant ("FS") System and BioArchive(R) System and
their companion products--- that enable the manufacture of surgical sealants or
cell therapy drugs from donor blood. These "enabling technologies" are sold into
two distinct markets: Blood Processing and Hospital/Wound Care centers. Both the
CryoSeal and BioArchive systems consist of an automated blood processing device,
and dedicated sterile single-use disposables that our customers use to
manufacture surgical sealant and cell therapy products sourced from single units
of blood. These products include hematopoietic stem cells from placental/cord
blood for bone marrow rescue transplants and blood derived proteins and wound
healing growth factors that provide surgeons with a means of arresting bleeding
and/or bonding excised tissue together thereby initiating cellularFrepair of the
excised tissues. These growth factors are also reported to accelerate the
healing of damaged bones and chronic dermal wounds. Initially, the Company
developed its ThermoLine products for ultra rapid freezing and thawing of blood
components.
The Company markets and sells its products through both a direct sales force and
independent distributors. The principal geographic markets are the United
States, Europe, Japan and Asia-Pacific. The Company also sells its products in
Canada and Latin America.
Blood Processing
- ----------------
The Company produces the BioArchive System and Accessories, the ThermoLineTM
Ultra-Rapid Plasma Thawers and Ultra-Rapid Plasma Freezers.
The BioArchive System is a robotic liquid Nitrogen Storage System with
integrated controlled rate freezers. The BioArchive technology enables the
processing, cryopreservation and archiving of single unit of donor cell
specimens in liquid nitrogen (-196 degree centigrade) without harmful transient
warming events by eliminating manual transfer of samples from the controlled
rate freezer to the quarantined freezer and to storage freezers. The robotic
storage and retrieval reduces losses of cell viability, provides consistent
handling and eliminates misplacement of samples.
The BioArchive Accessories and Disposables include overwrap bags, sealers,
expressors, a manual retrieval device, canisters, processing bags and freezing
bags. The 25 ml freezer bag provides consistent sample geometry (shape, size,
volume) and repeatable freeze characteristics for each unit for traceable freeze
process.
The BioArchive System, Accessories and Disposables are sold to both Public and
Private Cord Blood Banks.
The ThermoLine Ultra-Rapid Plasma Thawers are used for thawing stored RBC (red
blood cells) or FFP (fresh frozen plasma) before their transfusion. A process of
rapid homogenous thawing of frozen plasma or red blood cells is desirable so
that emergency transfusions can be quickly administrated. The sealed system
(membrane thawer pockets) allows the hospital blood bank to thaw frozen blood
plasma in approximately twelve minutes with substantially reduced maintenance
requirements and with reduced airborne contaminants.
The Ultra-Rapid Plasma Freezers optimize plasma freezing through unique liquid
heat transfer and uniform freezing technologies. The snap-seal membrane pockets
3
accommodate plasma bags of various sizes and reduce possibility of
contamination. Conventional freezing systems rely on air blast freezing;
however, this method requires a considerable length of time to thoroughly freeze
a unit of FFP.
The market for Ultra Rapid Plasma Freezers is concentrated within the blood
banks, blood transfusion centers, and plasma collection centers around the
world. Another category of customer is the facilities where plasma fractionators
collect blood plasma from paid donors. These customers require large,
high-capacity freezers.
Hospital/Wound Care
- -------------------
The Company produces the CryoSeal FS System and a Thrombin Processing Device for
the Hospital/Wound Care Market.
Fibrin sealants are a type of protein gel used by surgeons as hemostatic agents
(material used to control or stop bleeding) or to glue tissue together during
surgery. While sutures and staples will bring tissue edges together very
effectively, they do not have inherent sealing and clotting activity or certain
growth factors which induce the regeneration of damaged tissue.
Conventional "first generation" fibrin sealants sourced from "pools" of
thousands of purchased units of plasma are used today for a wide variety of
surgical procedures. These include the major blood-loss surgeries of the
cardiovascular, pulmonary, and liver regions. Fibrin sealants are used to seal
needle holes, pulmonary leaks, and to seal slow oozing wounds. Fibrin sealants
provide excellent adhesion for skin graft, plastic surgery procedures, and
sealing the dura to prevent cerebral spinal fluid leaks.
The CryoSeal FS System simultaneously produces fibrin sealant components,
fibrinogen-rich cryoprecipitate and thrombin, from a single unit of autologous
plasma in about 1 hour. The system is convenient and easy to use with minimized
"hands-on" time through system automation. The CryoSeal ("CS-1") device displays
step-by-step instructions. The system allows creating customized fibrin sealant
kits depending on the volume required. Each kit may contain up to 6 ml of fibrin
sealant.
CryoSeal FS components are prepared in a closed system from autologous plasma,
eliminating the risks associated with pooled plasma products. CryoSeal FS is
100% human and contains no bovine or animal components and no synthetics
(gluteraldehyde, cyanoacrylate).
CryoSeal FS has CE Mark approval and is available in Europe, Latin America and
Canada. In the US, the Company is completing its Food and Drug Administration
("FDA") Phase III clinical trial utilizing CryoSeal sealant to achieve
hemostasis after liver resection surgery.
The Thrombin Processing Device is available as part of the CryoSeal FS system.
It is a unique, sterile single use disposable, which can produce approximately 8
ml of activated thrombin from a 10 ml aliquot of the patient's blood. The
Thrombin Processing Device is also available as a stand alone product for spinal
surgery and is sold to Interpore Cross for distribution in Europe.
(B) CLINICAL SUMMARY STATUS
-----------------------
Other than initial filing of applications and final agency approval of such
applications, the Company does not comment on the day-to-day details of ongoing
clinical activities.
CryoSeal FS System:
-------------------
(1) As of July 15, 2001 the Company successfully completed the
pre-clinical studies designed to characterize CryoSeal Fibrin Sealant
for our Investigational Device Exemption ("IDE") submission to the
FDA:
4
o Chemical Characterization of the Thrombin and Fibrinogen and
Protein-rich Cryoprecipitate. In vitro assays were performed to
demonstrate the reproducibility of the system and its performance
across a significant sampling of donor plasmas, the impact of
system variables on system performance, including fresh vs.
frozen plasma, starting plasma volume and the type of
anticoagulant present, the protein composition as well as the
short and long term stability of the final thrombin and
cryoprecipitate preparations.
o Determination of Tensile Strength of the Thrombin and
Fibrinogen-rich Cryoprecipitate. In vitro tensile (mechanical)
strength measurements were performed on CryoSeal Fibrin Sealant,
as well as a commercial fibrin sealant, using equipment designed
for such purpose.
o Demonstration of Pre-Clinical Efficacy of CryoSeal Fibrin Sealant
during Pig Liver Resectioning. An in vivo animal model, pig liver
resectioning, was performed to refine the technique of applying
the CryoSeal Fibrin Sealant to the surgical site, determination
of the time to hemostasis.
(2) In March of 2001, CE Mark approval was granted by the European
community, thus approving the CryoSeal FS System for commercial
activities within the European Community. A number of European
clinical studies are planned during the fiscal year 2004 to
demonstrate the product's efficacy with a wide array of surgical
procedures.
(3) In May of 2001, a license was granted by the Canadian government
approving the CryoSeal FS System for commercialization within Canada.
(4) In August 2001, an IDE was filed with the FDA requesting approval to
initiate Phase III human clinical trials for liver resectioning. The
filing and the approval of the results of the phase III clinical
trials will enable the Company to immediately initiate commercial
activities for the CryoSeal FS System in the United States.
(5) On July 31, 2002, the Company announced that an independent Data
Safety Monitoring Board ("DSMB"), comprised of surgeons, a
biostatician and an ethicist, recommended proceeding with the
multi-center pivotal trial for the CryoSeal FS System.
(6) As of June 30, 2004, the Company was continuing to enroll patients
into our Phase III clinical study at multiple US teaching hospitals.
Non-US Clinical Studies
-----------------------
(1) Bellaria-Maggiore Hospital in Bologna, conducted a study titled,
"Production and Use of Fibrin Glue at Blood Transfusion Service of
Bellaria-Maggiore Hosptial Bologna". The authors report on a
retrospective controlled evaluation of the efficacy and safety of
autologous CryoSeal FS Fibrin Sealant. The thirty (30) patients
receiving CryoSeal FS had a significantly lower number of blood units
transfused and were significantly less anemic at discharge. In
addition, the evaluation shows shorter hospital stay in the group
receiving CryoSeal FS.
(2) St. Michael's Hospital, University of Toronto Canada compared the
influence of allogeneic units transfused of pre-operative autologous
donation ("PAD"), and usage of CryoSeal FS. There were 21 patients
included in the study. They found that using PAD and CryoSeal compared
with using only PAD decreased the usage of allogeneic blood from 2.5
units to 1.25 units/transfused patient.
5
(3) Mercuriali et al., study titled, "Efficacy of 'Home-Made' Fibrin Glue
in Reducing Bleeding in Liver Resections", reported a comparison of
using CryoSeal FS and commercial fibrin sealant on patients undergoing
liver resections. The results show that using CryoSeal FS gives
similar outcomes compared with Tissucol from Baxter. There were 30
patints included in the study.
(4) Ottawa Civic Hospital is conducting a randomized trial to evaluate
hemostasis in surgical procedures for ear, nose and throat using the
CryoSeal FS System. The study involves one-hundred (100) patients and
is on-going.
(5) Asahi Medical Ltd. has completed the CryoSeal FS study in Japan. The
study evaluated the hemostatic ability of the CryoSeal Fibrin Sealant
during multiple surgical procedures. Submission to the Japanese
Ministry of Health is expected in early FY2005. There were 70 patients
included in the study.
6
(C) Competition
-----------
Blood Processing
----------------
o Cord Blood Banking and Cell Therapy
-----------------------------------
The competition is limited to manufacturers of individual
cryogenic components (dewars, controlled rate freezers, etc.) of
conventional systems, such as Taylor Wharton and MVE.
The Company anticipates greater demand for the BioArchive System
and compatible disposables as cell therapy companies work to
develop products that are more end user friendly and provide the
manufacturer with greater logistical flexibility. This could lead
to other competitors emerging to provide various products which
deliver one or more of the needed enabling technologies for the
future growth of the cell therapy industry.
o Freezers: North American Competitors
-------------------------------------
In North America, the three major manufacturers of Plasma
Freezers are the Company, SPX/SGA Division and Forma Scientific.
ThermoGenesis Corp. utilizes a liquid heat transfer freezing
method while Forma Scientific and SPX use an air blast freezing
method.
Thawers: North American Competitors
------------------------------------
In North America, the major manufacturers of Plasma Thawers are
the Company, Helmer, Cytotherm and Genesis.
Hospital/Wound Care Market
--------------------------
o Commercial Fibrin Sealants
--------------------------
The Company is aware of five companies which have developed or
are developing commercial fibrin glues: Baxter, Hemacure,
Aventis, Vivolution and Omrix Pharmaceuticals ("Omrix").
To date, only Baxter, Hemacure, and Omrix have received FDA
approval to market their products in the US.
The main competitor is Baxter, which markets Tisseel/Tissucol in
the US and in Europe.
Aventis markets Beriplast in Europe and Japan and is the largest
manufacturer of fibrin sealant outside the US. Beriplast is not
available in the US.
o Thrombin Processing Devices ("TPD")
-----------------------------------
The only competition for the ThermoGenesis TPD in the U.S. is
bovine thrombin.
In Europe, two companies e.g., Medtronic, Harvest Technologies
offer a thrombin processing device which integrated in their
platelet gel systems.
Dideco has released the Activat device in Europe, which produces
autologous thrombin.
7
(D) Research and Development
------------------------
The Company is focused on the development of new product line extensions
and on improvements to existing products. The future research and
development activities of the Company will be devoted to the completion of
the CryoSeal System's human clinical trial for the control of bleeding
during liver resectioning surgery, and additional products or significant
upgrades to existing products associated with the BioArchive and CryoSeal
product platforms. Research and Development expense reflects the cost of
these activities, as well as the costs to obtain regulatory approvals of
new products and processes and to maintain the highest quality standards
with respect to existing products. The Company's research and development
expenses were $3,472,000 or 30% of net revenues in 2004, $2,937,000 or 29%
of net revenues in 2003 and $2,283,000 or 24% of net revenues in 2002. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(E) Description of Device Manufacturing
-----------------------------------
The Company is currently manufacturing all major instruments and equipment
sold by the Company, as well as manufacturing a limited number of its
disposable products (Thrombin Reagent and the BioArchive Overwrap Bag). The
manufacturing site is compliant to the FDA's Quality System Regulations
("QSR"), the European ISO 9001 and ISO 13485. The Company believes that
vendors used by the Company are capable of producing sufficient quantities
of all required components. Products manufactured or sold by the Company
are warranted against defect in manufacture for major instrument equipment
for a period of 12 months from shipment or installation, as applicable,
when used for the equipment's intended purpose, which warranties exclude
consequential damages to the extent allowed by law.
Instrument Manufacturing- The Company manufactures the BioArchive
instrument, the Auto-Expressor, CS-1 instrument, Ultra Rapid Plasma
Freezers and Ultra Rapid Plasma Thawers at its ISO 9001 and FDA
Compliant Rancho Cordova, CA facility. The Company assembles the
hardware from multiple subassemblies supplied by a wide base of
skilled suppliers. However, the Company manufactures certain
sub-assemblies, e.g., the BioArchive robotic, barcode-reading
periscope, in their entirety at the Rancho Cordova facility. All parts
and subassemblies are procured from qualified suppliers. Trained
ThermoGenesis employees inspect incoming parts and sub-assemble
products and perform final QC release based on performance criteria.
All processes are procedurized and either verified or validated to
ensure products meet specification.
Disposables Manufacturing- The Company utilizes contract manufacturers
with FDA registered facilities that we believe have the technical
capability and production capacity to manufacture our CryoSeal and
BioArchive disposables. However, there are two disposables that we
manufacture in house.
Thrombin Reagent and BioArchive Overwrap Bag Manufacturing- The
manufacturing process for the Thrombin Reagent occurs at two
different facilities, ThermoGenesis Corp. and at a contract
manufacturer. We perform the initial manufacturing processes at
our manufacturing facilities. After filling and stoppering of the
syringes, the syringes are shipped to our contract manufacturer
where they are terminally sterilized, individually labeled and
packaged. Our Quality Assurance Department is responsible for
final product release. All processes associated with the
manufacture of the BioArchive overwrap bag occur at the Company's
manufacturing facility.
8
The majority of the materials used to produce the Company's products are readily
available from various sources. Based upon current information from
manufacturers, the Company does not anticipate any shortage of supply. In the
event that it becomes necessary for us to obtain raw materials from an
alternative supplier, we would first be required to qualify the quality
assurance systems and product of that alternative supplier.
9
We, as well as any contract manufacturers of our products, are subject to
inspections by the FDA and other regulatory agencies for compliance with
applicable good manufacturing practices, codified in the Quality System
Regulation ("QSR's"), which include requirements relating to manufacturing
conditions, extensive testing, control documentation and other quality assurance
procedures. Our facilities have undergone an ISO 9001 and ISO 13485 and Medical
Device Directives ("MDD") inspection, in preparation for obtaining a CE Mark on
our products, in addition to an FDA and State Food and Drug inspections. Failure
to obtain or maintain necessary regulatory approval to market our products would
have a material adverse impact on our business. See "Factors Affecting Operating
Results."
(F) Government Regulation
---------------------
The product development, pre-clinical and clinical testing, manufacturing,
labeling, distribution, sales, marketing, advertising and promotion of the
Company's research, investigational, and medical devices are subject to
extensive government regulation in the United States, and also in other
countries. These national agencies and other federal, state and local entities
regulate, among other things, development activities and the testing (in vitro
and in clinical trials), manufacture, safety, effectiveness, labeling, storage,
record keeping, approval, advertising and promotion of our products.
The extent of the process required by the FDA before a medical device may be
marketed in the United States depends on the classification of device. If the
medical device is a Class III such as the CryoSeal FS System, the process
includes the following:
o Extensive pre-clinical laboratory and animal testing;
o Submission and approval of an Investigational Device Exemption (IDE)
application;
o Human clinical trials to establish the safety and efficacy of the medical
device for the intended indication; and
o Submission and approval of a Pre-Market Application ("PMA") to the FDA.
Pre-clinical tests include laboratory evaluation of product
chemistry/biochemistry and animal studies to assess the potential safety of the
product. Safety testing includes tests such as biocompatibility, package
integrity and stability. Pre-clinical tests must be performed by laboratories
that comply with the FDA's Good Laboratory Practices ("GLP's") regulations. The
results of the pre-clinical tests are submitted to the FDA as part of an IDE
application and are reviewed by the FDA before human clinical trials can begin.
Human clinical trials begin when IDE approval is granted.
Clinical trials involve the application of the medical device or biologic
produced by the medical device to patients by a qualified medical investigator
according to an approved protocol and approval from an Institutional Review
Board ("IRB"). Clinical trials are conducted in accordance with FDA regulations
and an approved protocol that detail the objectives of the study, the parameters
to be used to monitor participant safety and efficacy or other criteria to be
evaluated. Each protocol is submitted to the FDA as part of the IDE. Each
clinical study is conducted under the approval of an IRB. The IRB considers,
among other things, ethical factors, the potential risks to subjects
participating in the trial and the possible liability of the institution. The
IRB also approves the consent form signed by the trial participants.
Medical device clinical trials are typically conducted as a phase III clinical
trial. A safety pilot trial may be performed prior to initiating the phase III
clinical trial to determine the safety of the product for specific targeted
10
indications to determine dosage tolerance, optimal dosage and means of
application and to identify possible adverse effects and safety risks. Phase III
trials are undertaken to confirm the clinical efficacy and safety of the product
within an expanded patient population at geographically dispersed clinical study
sites. The FDA, the clinical trial sponsor, the investigators or the IRB may
suspend clinical trials at any time if any one of them believes that study
participants are being exposed to an unacceptable health risk.
The results of product development, pre-clinical studies and clinical studies
are submitted to the FDA as a PMA for approval of the marketing and commercial
shipment of the medical device in the United States. The FDA may deny a PMA if
applicable regulatory criteria are not satisfied or may require additional
clinical testing. Even if the appropriate data is submitted, the FDA may
ultimately decide the PMA does not satisfy the criteria for approval. Product
approvals, once obtained, may be withdrawn if compliance with regulatory
standards are not maintained or if safety concerns arise after the product
reaches the market. The FDA may require post-marketing testing and surveillance
programs to monitor the effect of the medical devices that have been
commercialized and has the power to prevent or limit future marketing of the
product based on the results of such programs.
Each domestic manufacturing establishment in California must be registered with
by the FDA and the California State Food and Drug Branch. Domestic manufacturing
establishments are subject to biennial inspections by the FDA and annual
inspections by the State of California for compliance with the QSRs. We are also
subject to U.S. federal, state, and local regulations regarding workplace
safety, environmental protection and hazardous materials and controlled
substance regulations, among others. The Company has a California Environmental
Protection Agency Identification number for the disposal of bio-hazardous waste
from its research and development biological lab.
Some of our products which have a lower potential safety risk to the intended
user or patient, and which have similar, competitive products previously cleared
by the FDA for the same intended indication, may utilize a simpler and shorter
regulatory path called a Premarket Notification or a 510(k) application to gain
commercial access to the marketplace. This regulatory process requires that the
Company demonstrate substantial equivalence to a product which was on the market
prior to May 29, 1976, or which has been found substantially equivalent after
that date.
Some of our products that have minimal risk to the intended user and do not
involve direct patient interaction may be deemed by the FDA as being exempt from
FDA review. These products still require compliance with QSRs.
Failure to comply with applicable FDA requirements can result in fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, distribution, sales and marketing, or refusal of the
FDA to grant clearance of a PMA or clearance of a 510(k). Actions by the FDA
might also include withdrawal of marketing clearances and criminal prosecution.
Such actions could have a material adverse effect on the Company's business,
financial condition, and results of operation.
(G) Patents and Proprietary Rights
------------------------------
The Company believes that patent protection is important for products and
potential segments of its current and proposed business. In the United States,
the Company currently holds 20 patents, and has six (6) patents pending to
protect the designs of products which the Company intends to market. There can
be no assurance, however, as to the breadth or degree of protection afforded to
11
the Company or the competitive advantage derived by the Company from current
patents and future patents, if any. Although the Company believes that its
patents and the Company's existing and proposed products do not infringe upon
patents of other parties, it is possible that the Company's existing patent
rights may be challenged and found invalid or found to violate proprietary
rights of others. In the event any of the Company's products are challenged as
infringing, the Company would be required to modify the design of its product,
obtain a license or litigate the issue. There is no assurance that the Company
would be able to finance costly patent litigation, or that it would be able to
obtain licenses or modify its products in a timely manner. Failure to defend a
patent infringement action or to obtain a license or implementation of
modifications would have a material adverse effect on the Company's continued
operations.
12
While patents have been issued or are pending, the Company realizes (a) that the
Company will benefit from patents issued only if it is able to market its
products in sufficient quantities of which there is no assurance; (b) that
substitutes for these patented items, if not already in existence, may be
developed; (c) that the granting of a patent is not a determination of the
validity of a patent, such validity can be attacked in litigation or the Company
or owner of the patent may be forced to institute legal proceedings to enforce
validity; and (d) that the costs of such litigation, if any, could be
substantial and could adversely affect the Company.
(H) Factors Affecting Future Results
--------------------------------
We Have Incurred Net Losses since Our Inception and Expect Losses to Continue.
Except for net income of $11,246 for fiscal 1994, we have not been profitable
since our inception. For the fiscal year ended June 30, 2004, we had a net loss
of $4,777,000, and an accumulated deficit at June 30, 2004, of $59,490,000. We
will continue to incur significant costs as we continue our efforts to develop
and market our current systems and related applications. Although we are
executing on our business plan to develop and market launch new products,
continuing losses may impair our ability to fully meet our objectives for new
product sales.
We May Need to Raise Additional Capital in the Future to Fund Our Operations. We
May be Unable to Raise Funds When Needed or on Acceptable Terms. During the year
ended June 30, 2004, our operating activities used cash of $4,478,000 and our
financing activities provided $15,124,000 in the same period. As of June 30,
2004, we had cash on hand of $16,612,000. Based on our cash balance, historical
trends and future projections, we believe our current funds are sufficient to
provide for our projected needs to maintain operations for at least the next 12
months. However, if actual sales do not meet expectations, or marketing,
production and clinical trial costs increase significantly, we may need to seek
additional financing. Any additional equity financings may be dilutive to our
existing stockholders.
We Have Limited Testing Data and Must Complete Further Testing Successfully in
Order to Gain FDA Approval Required to Market our CryoSeal Fibrin Sealant System
in the United States. The Company is conducting the pivotal trial of its
CryoSeal FS System in the United States. While these studies provide a basis to
achieve regulatory permission to promote these systems for some of the
indications that management believes can be achieved, they do not provide a
basis to achieve all of the indications. Further clinical studies must be
performed. There can be no assurance that the clinical studies can be
successfully completed within the Company's expected time frame and budget, or
that the Company's products will prove effective in the required clinical
trials. If the Company is unable to conclude successfully the clinical trials of
its products in development, the Company's business, financial condition and
results of operations could be adversely affected.
Our Failure to Develop New Products Will Adversely Affect Our Future Growth.
Historically, substantially all of our sales have been from products related to
freezing, thawing, and storing of blood plasma. Because we expect this segment
of the blood plasma market to have limited growth potential, new products for
the biotechnology market will have to be successfully developed and marketed for
future growth. Recently, the BioArchive product line has been a significant
contributor to our revenues. We are currently focused on increasing our
BioArchive product line revenues and marketing novel blood processing systems
such as the CryoSeal FS System for the automated production of autologous or
allogeneic blood components used as fibrin sealants. Although the CryoSeal
product uses technology related to our core competencies, it also represents a
departure from our former core blood plasma business. Further, although we have
had discussions with experts in areas of application for this product, it is
still in its development and/or initial market phase. No assurance can be given
that potential products can be successfully developed, and if developed, that a
market will also develop for them.
13
Our Business is Heavily Regulated, Resulting in Increased Costs of Operations
and Delays in Product Sales. Most of our products require FDA approval to sell
in the U.S and will require clearance from comparable agencies to sell our
products in foreign countries. These clearances may limit the U.S. or foreign
market in which our products may be sold or circumscribe applications for U.S.
or foreign markets in which our products may be sold. The majority of our
products related to freezing blood components are currently exempt from the
requirement to file a 510(k) pre-market application. These products are
currently marketed and sold worldwide. Further, our products must be
manufactured under principals of our quality system for continued CE Marking
that allows our products to be marketed and sold in Europe, which are similar to
the quality system regulations of both the FDA and California Department of
Health. Failure to comply with those quality system requirements and regulations
may subject the Company to delays in production while it corrects any deficiency
found by either the FDA, the State of California or the Company's Notifying
European Body during any audit of our quality system. With limited working
capital and resources there is no assurance that we will not be found to be out
of compliance, resulting in warning letters or even temporarily shut down in
manufacturing while the non-conformances are rectified.
Influence By the Government and Insurance Companies May Adversely Impact Sales
of Our Products. Our business may be materially affected by continuing efforts
by government, third party payers such as Medicare, Medicaid, and private health
insurance plans, to reduce the costs of healthcare. For example, in certain
foreign markets the pricing and profit margins of certain healthcare products
are subject to government controls. In addition, increasing emphasis on managed
care in the U.S. will continue to place pressure on the pricing of healthcare
products. As a result, continuing effort to contain healthcare costs may result
in reduced sales or price reductions for our products. To date, we are not aware
of any direct impact on our pricing or product sales due to such efforts by
governments to contain healthcare costs, and we do not anticipate any immediate
impact in the near future.
Our Inability to Protect Our Patents, Trademarks, and Other Proprietary Rights
could Adversely Impact Our Competitive Position. We believe that our patents,
trademarks, and other proprietary rights are important to our success and our
competitive position. Accordingly, we devote substantial resources to the
establishment and protection of our patents, trademarks, and proprietary rights.
We currently hold patents for products, and have patents pending for additional
products that we market or intend to market. However, our actions to establish
and protect our patents, trademarks, and other proprietary rights may be
inadequate to prevent imitation of our products by others or to prevent others
from claiming violations of their trademarks and proprietary rights by us. If
our products are challenged as infringing upon patents of other parties, we will
be required to modify the design of the product, obtain a license, or litigate
the issues, all of which may have an adverse business effect on us.
Failure to Protect Our Trade Secrets May Assist Our Competitors. We use various
methods, including confidentiality agreements with employees, vendors, and
customers, to protect our trade secrets and proprietary know-how for our
products. However, such methods may not provide complete protection and there
can be no assurance that others will not obtain our know-how, or independently
develop the same or similar technology. We prepare and file for patent
protection on aspects of our technology which we think will be integrated into
final products early in design phases, thereby attempting to mitigate the
potential risks.
Competition in Our Industry is Intense and Will Likely Involve Companies with
Greater Resources than We Have. We hope to develop a competitive advantage in
the medical applications of our products, but there are many competitors that
are substantially larger and who possess greater financial resources and
personnel than we have. Our current principal market is the users of ultra-rapid
blood plasma freezing and thawing equipment and cord blood banks. There are
companies that sell freezers to the blood plasma freezing industry that are
larger and possess greater financial and other resources than we do. The
14
CryoSeal System may face competition from major plasma fractionators that
currently sell fibrin glue sourced from pooled plasma outside the U.S. With
regard to the BioArchive System, numerous larger and better-financed medical
device manufacturers may choose to enter this market as it develops.
15
We Have a Limited Marketing and Sales Force for New Products Which May Delay Our
Goal of Increased Sales Levels. We currently sell our existing medical devices
through a direct sales and marketing force, and our foreign distribution
network. Although we have entered into exclusive distribution agreements for our
two new platform products and we continue to seek strategic partners, there are
no assurances that the distributors will produce significant sales of the
systems.
Our Lack of Production Experience May Delay Producing Our New Products. We have
manufactured our blood Plasma Thawers, Freezers and BioArchive Systems for a
number of years. Although we have redesigned our manufacturing facility to
accommodate the BioArchive System and the CryoSeal System, we do not have
significant experience in manufacturing the CryoSeal System or in the
manufacture of disposables. There can be no assurance that our current resources
and manufacturing facility could handle a significant increase in orders for
either the BioArchive System or the CryoSeal System. If we are unable to meet
demand for sales of the new systems, we would need to contract with third-party
manufacturers for the backlog, and no assurances can be made that such
third-party manufacturers can be retained, or retained on terms favorable to us
and our pricing of the equipment. Inability to have products manufactured by
third parties at a competitive price will erode anticipated margins for such
products, and negatively impact our profitability.
Our New Products Are at Initial Market Introduction, and We Are Not Sure the
Market Will Accept Them. The market acceptance of our new products in
development will depend upon the medical community and third-party payers
accepting the products as clinically useful, reliable, accurate, and cost
effective compared to existing and future products or procedures. Market
acceptance will also depend on our ability to adequately train technicians on
how to use the CryoSeal System and the BioArchive System. Even if our new
product systems are clinically adopted, the use may not be recommended by the
medical profession or hospitals unless acceptable reimbursement from health care
and third party payers is available. Failure of either of these new systems to
achieve significant market share could have material adverse effects on our long
term business, financial condition, and results of operation.
Failure to Keep Our Key Personnel May Adversely Affect Our Operations. Failure
to retain skilled personnel could hinder our operations. Our future success
partially depends upon the continued services of key technical and senior
management personnel. Our future success also depends on our continuing ability
to attract, retain and motivate highly qualified managerial and technical
personnel. The inability to retain or attract qualified personnel could have a
significant negative effect upon our efforts and thereby materially harm our
business and financial condition. We have entered into employment agreements
with each member of our senior management. Specifically, we are dependent upon
the experience and services of Philip H. Coelho, Chairman and Chief Executive
Officer, and Kevin Simpson, our President and Chief Operating Officer. We have
obtained key man life insurance covering Mr. Coelho in the amount of $2,000,000
as some protection against the risk.
Product Liability and Uninsured Risks May Adversely Affect the Continuing
Operations. We may be liable if any of our products cause injury, illness, or
death. We also may be required to recall certain of our products should they
become damaged or if they are defective. We are not aware of any material
product liability claim against us. Further, we maintain a general liability
policy that includes product liability coverage of $1,000,000 per occurrence and
$2,000,000 per year in the aggregate. However, a product liability claim against
us could have a material adverse effect on our business or financial condition.
Dependence on Suppliers for Custom Components may Impact the Production
Schedule. The Company obtains certain custom components from a limited number of
suppliers. If the supplier raises the price of the component or discontinues
production, the Company will have to find another qualified supplier to provide
the component. In the event that it becomes necessary for us to find another
16
supplier, we would first be required to qualify the quality assurance systems
and product of that alternative supplier. Any transfer between qualified
suppliers may impact the production schedule, thus delaying revenues, and may
cause the price of the key components to increase.
A Significant Portion of our Sales is to Customers in Foreign Countries. We may
Lose Revenues, Market Share, and Profits due to Exchange Rate Fluctuations and
Other Factors related to our Foreign Business. In the year ended June 30, 2004,
sales to customers in foreign countries comprised approximately 74% of our
revenues. Our foreign business is subject to economic, political and regulatory
uncertainties and risks that are unique to each area of the world. Fluctuations
in exchange rates may also affect the prices that our foreign customers are
willing to pay, and may put us at a price disadvantage compared to other
competitors. Potentially volatile shifts in exchange rates may negatively affect
our financial condition and operations.
The Preparation of our Financial Statements in Accordance with U.S. Generally
Accepted Accounting Principles Requires Us to Make Estimates, Judgments, and
Assumptions that may Ultimately Prove to be Incorrect. The accounting estimates
and judgments that management must make in the ordinary course of business
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
periods presented. If the underlying estimates are ultimately proven to be
incorrect, subsequent adjustments could have a material adverse effect on our
operating results for the period or periods in which the change is identified.
Additionally, subsequent adjustments could require us to restate our financial
statements. Restating financial statements could result in a material decline in
the price of our stock.
(I) Licenses and Distribution Rights
--------------------------------
In January 2002, the Company entered into a five year OEM supply agreement with
Interpore Cross International ("ICI") for a modified version of the Thrombin
Activating Device ("TAD") for spinal surgery applications. In accordance with
the agreement, ICI paid the Company $300,000 for worldwide license and
distribution rights and development fees. The Company will be the exclusive
manufacturer of the modified TAD, which will be used in conjunction with the ICI
Autologous Growth Factors product.
In March 1997, the Company and New York Blood Center ("NYBC"), as licensors,
entered into a license agreement with Pall Medical, a subsidiary of Pall
Corporation, as Licensees through which Pall Medical became the exclusive
world-wide manufacturer (excluding Japan) for a system of sterile, disposable
containers developed by the Company and NYBC for the processing of hematopoietic
stem cells sourced from placental cord blood ("PCB"). The system is designed to
simplify and streamline the harvesting of stem cell rich blood from detached
placental/cords and the concentration, cryopreservation (freezing) and
transfusion of the PCB stem cells while maintaining the highest stem cell
population and viability from each PCB donation. These units of PCB stem cells
will be "banked" in frozen storage for hematopoietic reconstitution of patients
afflicted with such diseases as aplastic anemia, hypoproliferative stem and
progenitor cell disorders, leukemia, lymphomas and gaucher disease. In May of
1999, the Company and Pall Medical amended the original agreement, and the
Company regained the rights to distribute the bag sets outside North America &
Europe under the Company's name, and in May of 2000, the Company negotiated
rights to directly co-market the bag sets in Europe in exchange for an
additional royalty fee, while continuing to utilize Pall Europe's distribution
centers.
In June 1995, the Company granted the Japanese distribution rights to its
BioArchive System to Air Water, Japan. The Company received $350,000 for the
distribution rights and access to the necessary technology. In May of 1999, the
Company granted development, manufacturing and distribution (Japan and Asia)
17
rights to Air Water for a downsized version of the BioArchive System. The
Company received $300,000 for the technology rights and retained the rights to
manufacture and sell the new "mini" BioArchive System in the non-Asia
marketplace.
18
(J) Employees
---------
As of June 30, 2004, the Company had 72 employees, 15 of whom were engaged in
research and new product development, regulatory affairs, clinical and
scientific affairs, 28 in manufacturing and quality control, 17 in sales,
marketing and service and 12 in finance and administration. The Company also
utilizes temporary employees throughout the year to address business needs and
significant fluctuations in orders and product manufacturing. None of our
employees is represented by a collective bargaining agreement, nor have we
experienced any work stoppage.
FINANCIAL INFORMATION ON FOREIGN SALES AND OPERATIONS
- -----------------------------------------------------
During fiscal 2004, the Company entered into a contract with Kawasumi
Laboratories Inc. ("KLI") to manufacture certain disposables for the CryoSeal
product line. The manufacturing facility and company headquarters are located in
Asia. For fiscal year 2004, foreign sales were $8,595,000 or 74% of net
revenues. For fiscal year 2003, foreign sales were $6,162,000 or 60% of net
revenues. For fiscal year 2002, foreign sales were $3,930,000, or 41% of net
revenues.
The Company is required to file annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and other information with the
Securities and Exchange Commission ("SEC"). The public can obtain copies of
these materials by visiting the SEC's Public Reference Room at 450 Fifth Street,
NW, Washington, D.C. 20549, by calling the SEC at 1-800-SEC-0330, or by
accessing the SEC's website at www.sec.gov. In addition, as soon as reasonably
practicable after these materials are filed with or furnished to the SEC, the
Company will make copies available to the public free of charge through its
website, www.thermogenesis.com. The information on the Company's website is not
incorporated into, and is not part of, this annual report.
ITEM 2. PROPERTIES
----------
The Company leases one facility with approximately 28,000 square feet of space
located in Rancho Cordova, California. Approximately 50% of the facility is
devoted to warehouse space and manufacturing of products, including 500 square
feet for a clean room. The other 50% is comprised of office space, a Biologics
lab and a research and development lab. The lease expires in September, 2008. At
fiscal year end, the Company did not own or lease any other facilities.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company and its property are not a party to any pending legal proceedings.
In the normal course of operations, the Company may have disagreements or
disputes with employees, vendors or customers. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company did not submit any matters to security holders during the fourth
quarter of its last fiscal year ended June 30, 2004.
19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
-------
The Company's common stock, $0.001 par value, is traded on the Nasdaq SmallCap
Market under the symbol KOOL. The following table sets forth the range of high
and low bid prices for the Company's common stock for the past two fiscal years
as reported by Nasdaq. The ranges listed represent actual transactions, without
adjustment for retail markups, markdowns or commissions, as reported by Nasdaq.
Fiscal 2004 High Low Fiscal 2003 High Low
- ---------------------------------- -------- ----------- ------------------------------- ---------- ----------
First Quarter (Sep. 30) $3.94 $2.36 First Quarter (Sep. 30) $2.060 $1.450
Second Quarter (Dec. 31) $5.75 $3.03 Second Quarter (Dec. 31) $2.050 $1.100
Third Quarter (Mar. 31) $6.78 $3.83 Third Quarter (Mar. 31) $2.100 $1.500
Fourth Quarter (June 30) $5.14 $3.91 Fourth Quarter (June 30) $2.929 $1.910
The Company has not paid cash dividends on its common stock and does not intend
to pay a cash dividend in the foreseeable future. There were approximately 456
stockholders of record on June 30, 2004 (not including street name holders).
The following table provides information for all of the Company's equity
compensation plans and individual compensation arrangements in effect as of June
30, 2004:
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Plan Category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights rights equity compensation plans
(excluding securities
reflected in column
(a))
(a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by securities holders 1,834,077 $1.97 1,536,351
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans not 25,000 $1.57 --
approved by security holders
- ----------------------------------------------------------------------------------------------------------------------
Total 1,859,077 1,536,351
- ----------------------------------------------------------------------------------------------------------------------
20
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
ThermoGenesis Corp.
Five-Year Review of Selected Financial Data
Year Ended June 30,
Summary of Operations 2004 2003 2002 2001 2000
- ------------------------------------- ----------- ----------- ---------- ---------- ----------
Net revenues $11,646,000 $10,187,000 $9,549,000 $5,792,000 $4,211,000
Cost of revenues (7,844,000) (7,900,000) (7,558,000) (5,012,000) (4,246,000)
----------- ---------- ---------- ---------- ----------
Gross profit (loss) 3,802,000 2,287,000 1,991,000 780,000 (35,000)
Selling, general and
administration (5,174,000) (5,014,000) (4,843,000) (3,889,000) (4,195,000)
Research and development (3,472,000) (2,937,000) (2,283,000) (1,782,000) (1,624,000)
Interest and other income 90,000 74,000 110,000 130,000 77,000
Interest and other expense (23,000) (13,000) (13,000) (1,110,000) (41,000)
----------- ---------- ---------- ---------- ----------
Net loss before cumulative effect
of accounting change under
SAB 101 (4,777,000) (5,603,000) (5,038,000) (5,871,000) (5,818,000)
Cumulative effect of accounting
change under SAB 101 -- -- -- (282,000) --
----------- ---------- ---------- ---------- ----------
Net loss ($4,777,000) ($5,603,000)($5,038,000) ($6,153,000)($5,818,000)
=========== ========== ========== ========== ==========
Per share data:
Net loss before preferred stock
dividend or discount and
cumulative effect of
accounting change under
EITF 00-27 ($4,777,000) ($5,603,000)($5,038,000) ($6,153,000)($5,818,000)
Preferred stock dividend or
discount -- -- -- (100,000) (905,000)
Cumulative effect of accounting
change under EITF 00-27 -- -- -- (580,000) --
----------- ----------- --------- ---------- ----------
Net loss to common stockholders ($4,777,000) ($5,603,000)($5,038,000) ($6,833,000)($6,723,000)
=========== =========== ========= ========== ==========
Basic and diluted net loss per
share before cumulative effect
of accounting changes ($0.11) ($0.15) ($0.15) ($0.22) ($0.30)
Cumulative effect of accounting
change under SAB 101 -- -- -- (0.01) --
Cumulative effect of accounting
change under EITF 00-27 -- -- -- (0.02) --
----------- ----------- --------- ---------- ----------
Basic and diluted net loss per
common share ($0.11) ($0.15) ($0.15) ($0.25) ($0.30)
=========== =========== ========= ========== ==========
Pro Forma amounts assuming
the accounting change under
SAB 101 is applied
retroactively:
Net loss to common
stockholders ($4,777,000) ($5,603,000)($5,038,000) ($6,551,000)($6,299,000)
=========== =========== ========= ========== ==========
Basic and diluted net loss
per share ($0.11) ($0.15) ($0.15) ($0.24) ($0.28)
=========== =========== ========= ========== ==========
21
As Of June 30,
------------------------------------------------------------------------------------------
Balance Sheet Data 2004 2003 2002 2001 2000
- ------------------------------------- --------------- -------------- --------------- --------------- --------------
Cash and short term investments $16,612,000 $6,815,000 $6,726,000 $5,366,000 $2,550,000
Working capital $19,798,000 $10,365,000 $9,631,000 $7,098,000 $4,613,000
Total assets $24,114,000 $12,791,000 $12,239,000 $9,553,000 $6,735,000
Total liabilities $3,146,000 $2,217,000 $2,046,000 $1,621,000 $1,043,000
Total stockholders' equity $20,968,000 $10,574,000 $10,193,000 $7,932,000 $5,692,000
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-------------
CERTAIN STATEMENTS CONTAINED IN THIS SECTION AND OTHER PARTS OF THIS REPORT ON
FORM 10-K WHICH ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS AND ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY
DIFFER SIGNIFICANTLY FROM THE PROJECTED RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT AFFECT ACTUAL RESULTS INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN ITEM 1 - BUSINESS - UNDER THE SUBSECTION ENTITLED
"FACTORS AFFECTING OPERATING RESULTS," AND OTHER FACTORS IDENTIFIED FROM TIME TO
TIME IN THE COMPANY'S REPORTS FILED WITH THE U.S. SECURITIES AND EXCHANGE
COMMISSION.
The following discussion should be read in conjunction with the Company's
financial statements contained in this report.
(a) Overview
--------
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 components. 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 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.
22
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 and stem cell research facilities. 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 of cord blood banks, 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.
23
Critical Accounting Policies
- ----------------------------
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.
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 could have a material impact on the
Company's financial position, cash flows or results of operations.
Inventory Reserve:
The Company plans inventory procurement and production based on orders received,
forecasted demand and supplier requirements. The Company writes down its
inventories for estimated obsolescence or unmarketable inventories equal to the
difference between the cost of inventories and its net realizable value based
upon estimates about future demand from our customers and distributors and
market conditions. Because some of the 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.
24
(b) Results of Operations
---------------------
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 periods included in the accompanying financial statements.
25
Results of Operations for the Year Ended June 30, 2004 as Compared to the Year
Ended June 30, 2003
Net Revenues:
Revenues for year ended June 30, 2004 were $11,646,000 compared to $10,187,000
for the fiscal 2003 period, an increase of $1,459,000 or 14%. BioArchive
revenues were $7,745,000 for the year ended June 30, 2004, compared to
$5,448,000 for the corresponding fiscal 2003 period, an increase of $2,297,000
or 42%. The Company sold 26 devices in the year ended June 30, 2004 versus 20 in
the year ended June 30, 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 year ended June
30, 2004 were $393,000 versus $575,000 for the year ended June 30, 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. As the trials in Japan were in progress, the
distributor purchased CryoSeal disposables in fiscal 2004, but no devices. Also,
we experienced lower than expected sales from our distributor in Europe who
underwent a significant internal reorganization earlier this year. Revenues
generated from the ThermoLine Freezers decreased $700,000 or 50% from the prior
year primarily due to significantly raising the price on the smallest model, the
MP500, which resulted in a higher gross margin but lower revenues and eight of
our largest freezer model were sold to our distributor in the U.K. for the
National Blood Services tender. Only one freezer was sold under this tender in
fiscal 2004.
The following represents the Company's cumulative BioArchive devices sold into
the following geographies:
June 30,
2004 2003
---------- ---------
United States 18 17
Asia 39 26
Europe 23 16
Rest of World 12 7
---------- ---------
92 66
========== =========
Cost of Revenues:
Cost of revenues as a percent of revenues was 67% for the year ended June 30,
2004, as compared to 78% 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 $241,000 decrease in the manufacturing overhead pool for
the year ended June 30, 2004. The ASP for the BioArchive device increased 6% and
the ThermoLine Freezers ASP increased 40% for the year ended June 30, 2004
versus the prior year. The increase in the ASPs increased gross margin by
approximately $405,000. 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 14% for the year ended June 30, 2004 as
compared to the year ended June 30, 2003.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses remained relatively consistent year
to year, increasing $160,000 or 3%. The increase is due to the commissions paid
to the Company's agent in Japan. Also, the increase in professional and
consulting fees associated with the Sarbanes-Oxley Act of 2002, was offset by a
26
decrease in professional fees from the comparable prior year paid in connection
with the executive search for a new President and Chief Operating Officer and to
promote federal financing of a National Cord Blood Stem Cell Bank Network.
27
Research and Development Expenses:
Research and development expenses for the year ended June 30, 2004 were
$3,472,000 compared to $2,937,000 for the corresponding fiscal 2003 period, an
increase of $535,000 or 18%. 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 were $1,255,000 a decrease from
$1,310,000 in fiscal 2003.
Management believes that product development and refinement is essential to
maintaining the Company's market position. Therefore, the Company considers
these costs as continuing costs of doing business. No assurances can be given
that the products or markets recently developed or under development will be
successful.
Results of Operations for the Year Ended June 30, 2003 as Compared to the Year
Ended June 30, 2002
Revenues:
Net revenues increased $638,000 or 7% from fiscal 2002 to 2003. BioArchive
revenues were $5,448,000 for the year ended June 30, 2003 compared to $3,043,000
for the year ended June 30, 2002, an increase of $2,405,000 or 79%. There were
20 BioArchive devices recognized in revenue in the year ended June 30, 2003
versus 14 for the previous year. BioArchive revenues also increased from
disposables due to the increased demand from private and public cord blood banks
in Asia. The increase in revenues from the BioArchive product line help offset
in part the decrease in freezer revenues due to the large order received from
Aventis Bio-Services, Inc. in the prior year. Revenues generated by the CryoSeal
product line for the year ended June 30, 2003 were $575,000 versus $322,000 for
the year ended June 30, 2002 an increase of 79%.
Cost of Revenues:
As a percentage of revenues, the Company's cost of revenues decreased from 79%
in fiscal year 2002 to 78% in fiscal 2003. The slight improvement in the cost of
revenues percentage was due to the increase in revenues from the BioArchive
product line which has a higher gross profit margin than the other product
lines.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses increased $171,000 or 4% from
fiscal 2002 to 2003. The increase is primarily the result of professional fees
paid in connection with the executive search for a new President and Chief
Operating Officer.
Research and Development Expenses:
Research and Development expenses increased $654,000 or 29% from fiscal 2002 to
fiscal 2003. The increase is due to the costs associated with the CryoSeal FS
human clinical trials, which accounted for approximately $1,310,000 of the
research and development expenses in fiscal 2003. Management expects the
research and development line item to increase as the human clinical trials
continue.
(c) Liquidity and Capital Resources
-------------------------------
At June 30, 2004, the Company had a cash balance of $16,612,000 and working
capital of $19,798,000. This compares to a cash balance of $6,815,000 and
working capital of $10,365,000 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 $5.3 million of cash generated from the exercise of stock options and
warrants during the year ended June 30, 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 operations through the private placement of
equity securities and has raised approximately $71.9 million, net of expenses,
28
through common and preferred stock financings and option and warrant exercises.
As of June 30, 2004, the Company had no off-balance sheet arrangements.
29
Net cash used in operating activities for the year ended June 30, 2004 was
$4,478,000, primarily due to the net loss of $4,777,000. Accounts receivable
utilized $1,093,000 of cash as a result of revenue growth through the year.
Accounts payable provided $544,000 in cash due to larger production volumes and
vendor accruals for research and development and capital expenditure projects
initiated in fiscal 2004. Accrued liabilities provided $440,000 in cash through
accruals for warranty reserves due to the increase in product sales.
The Company generally does not require extensive capital equipment to produce or
sell its current products. However, when significant capital equipment is
required, the Company purchases from a vendor base. In fiscal 2002, the Company
spent $175,000 primarily for molds, tooling and equipment used in research and
development. In fiscal 2003, the Company spent $92,000 primarily for computers,
equipment used in research and development and a truck for field service
personnel. In fiscal 2004, the Company spent $849,000, which 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 and the
purchase of an Enterprise Resource Planning ("ERP") system. Future capital
expenditures are anticipated, and the Company believes that the amounts expended
will be lower in fiscal 2005. At June 30, 2004, the Company has $1.7 million
outstanding in cancelable orders to purchase inventory, supplies and services
for use in normal business operations.
At June 30, 2004, the Company had four customers that individually accounted for
16%, 13%, 12% and 12% of accounts receivable. At June 30, 2003 the Company had
two customers that individually accounted for 12% and 11% of accounts
receivable. The Company manages the concentration of credit risk with these
customers through a variety of methods including, letters of credit with
financial institutions, pre-shipment deposits credit reference checks and credit
limits. Although management believes that these customers are sound and
creditworthy, a severe adverse impact on their business operations could have a
corresponding material effect on their ability to pay timely and therefore on
our net revenues, cash flows and financial
condition.
As of June 30, 2004, the Company had the following contractual obligations and
commercial commitments:
---------------------------------------------------------------------------------------------------------
Contractual Obligations Payments Due by Period
---------------------------------------------------------------------------------------------------------
Total Less than 1 1-3 years 4-5 years After 5
year years
---------------------------------------------------------------------------------------------------------
Capital Lease Obligations $ 20,000 $ 20,000 -- -- --
---------------------------------------------------------------------------------------------------------
Operating Leases 1,633,000 366,000 $781,000 $486,000 --
---------------------------------------------------------------------------------------------------------
Note payable 32,000 9,000 18,000 5,000 --
---------------------------------------------------------------------------------------------------------
Total Contractual Cash Obligations $1,685,000 $395,000 $799,000 $491,000 --
---------------------------------------------------------------------------------------------------------
ITEM 7A. 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 material long-term investments or debt, other than a note
payable, and therefore is not subject to interest rate risk. Management does not
believe that inflation has had or will have a significant impact on the
Company's results of operations.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Page Number
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm 32
Balance Sheets at June 30, 2004 and 2003 33
Statements of Operations for the years ended June 30, 2004, 2003 and 2002 34
Statements of Stockholders' Equity for the years ended June 30, 2004, 2003 and 2002 35
Statements of Cash Flows for the years ended June 30, 2004, 2003 and 2002 36
Notes to Financial Statements 37
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of ThermoGenesis Corp.
We have audited the accompanying balance sheets of ThermoGenesis Corp. as of
June 30, 2004 and 2003, and the related statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended June 30,
2004. Our audits also included the financial statement schedule listed in the
Index at Item 15.(a)(2). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ThermoGenesis Corp. at June 30,
2004 and 2003, and the results of its operations and its cash flows for each of
the three years in the period ended June 30, 2004, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Sacramento, California
August 17, 2004
32
ThermoGenesis Corp.
Balance Sheets
ASSETS June 30, 2004 June 30, 2003
--------------------- ---------------------
Current assets:
Cash and cash equivalents $16,612,000 $6,815,000
Accounts receivable, net of allowance for
doubtful accounts of $61,000 ($80,000 at June 30, 2003) 3,107,000 2,014,000
Inventory 2,470,000 2,650,000
Other current assets 582,000 820,000
--------------------- ---------------------
Total current assets 22,771,000 12,299,000
Equipment at cost less accumulated depreciation of $2,383,000
($2,599,000 at June 30, 2003) 1,146,000 442,000
Other assets 197,000 50,000
--------------------- ---------------------
$24,114,000 $12,791,000
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,709,000 $1,165,000
Accrued payroll and related expenses 287,000 235,000
Deferred revenue 142,000 145,000
Accrued liabilities 835,000 389,000
--------------------- ---------------------
Total current liabilities 2,973,000 1,934,000
Long-term portion of capital lease obligations and note payable 21,000 44,000
Deferred revenue 152,000 239,000
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) ($1,203,000 aggregate involuntary liquidation
value at June 30, 2004) -- --
Common stock, $0.001 par value; 50,000,000 shares
authorized; 44,711,871 issued and outstanding
(39,396,594 at June 30, 2003) 45,000 39,000
Paid in capital in excess of par 80,413,000 65,248,000
Accumulated deficit (59,490,000) (54,713,000)
--------------------- ---------------------
Total stockholders' equity 20,968,000 10,574,000
--------------------- ---------------------
$24,114,000 $12,791,000
===================== =====================
See accompanying notes.
33
ThermoGenesis Corp.
Statements of Operations
Years ended June 30
------------------------------------------------------------
2004 2003 2002
---------------- ---------------- ----------------
Revenues:
Product and other revenues $10,459,000 $9,036,000 $8,309,000
Service revenues 1,187,000 1,151,000 1,240,000
---------------- ---------------- ----------------
Net revenues 11,646,000 10,187,000 9,549,000
Cost of revenues:
Costs of product and other revenues 7,112,000 7,260,000 6,682,000
Cost of service revenues 732,000 640,000 876,000
---------------- ---------------- ----------------
Total costs of revenues 7,844,000 7,900,000 7,558,000
---------------- ---------------- ----------------
Gross profit 3,802,000 2,287,000 1,991,000
Expenses:
Selling, general and administrative 5,174,000 5,014,000 4,843,000
Research and development 3,472,000 2,937,000 2,283,000
---------------- ---------------- ----------------
Total expenses 8,646,000 7,951,000 7,126,000
---------------- ---------------- ----------------
Loss before interest and other income (4,844,000) (5,664,000) (5,135,000)
Interest and other expense (23,000) (13,000) (13,000)
Interest and other income 90,000 74,000 110,000
---------------- ---------------- ----------------
Total interest and other income 67,000 61,000 97,000
Net loss ($4,777,000) ($5,603,000) ($5,038,000)
================ ================ ================
Per share data:
Basic and diluted net loss per common share ($0.11) ($0.15) ($0.15)
================ ================ ================
Shares used in computing per share data 41,779,818 36,587,102 32,844,292
================ ================ ================
See accompanying notes.
34
ThermoGenesis Corp.
Statements of Stockholders' Equity
Common stock Paid in Accumulated Stockholder Total
capital in deficit note stockholders'
excess of par receivable equity
---------------------------------------------------------------------------
Balance at June 30, 2001 $32,000 $52,397,000 ($44,072,000) ($425,000) $7,932,000
Issuance of 3,504,310 common
shares in private placement 3,000 6,830,000 -- -- 6,833,000
Issuance of 161,417 shares for
exercise of options -- 173,000 -- -- 173,000
Cancellation of stockholder note
receivable for surrender of
200,000 shares -- (425,000) -- 425,000 --
Stock based compensation -- 293,000 -- -- 293,000
Net loss -- -- (5,038,000) -- (5,038,000)
---------------------------------------------------------------------------
Balance at June 30, 2002 35,000 59,268,000 (49,110,000) -- 10,193,000
Issuance of 3,807,594 common
shares in private placement 3,000 5,327,000 -- -- 5,330,000
Issuance of 322,251 shares for
exercise of options 1,000 588,000 -- -- 589,000
Issuance of 35,495 common shares
for services -- 65,000 -- -- 65,000
Net loss -- -- (5,603,000) -- (5,603,000)
---------------------------------------------------------------------------
Balance at June 30, 2003 39,000 65,248,000 (54,713,000) -- 10,574,000
Issuance of 2,660,000 common
shares in private placement 3,000 9,830,000 -- -- 9,833,000
Issuance of 2,493,777 shares for
exercise of options and warrants 3,000 5,325,000 -- -- 5,328,000
Issuance of 1,500 common shares
for services -- 10,000 -- -- 10,000
Issuance of 160,000 common
shares upon conversion of Series
A preferred stock -- -- -- -- --
Net loss -- -- (4,777,000) -- (4,777,000)
---------------------------------------------------------------------------
Balance at June 30, 2004 $45,000 $80,413,000 ($59,490,000) -- $20,968,000
===========================================================================
See accompanying notes.
35
ThermoGenesis Corp.
Statements of Cash Flows
Years ended June 30
------------------------------------------------------------
2004 2003 2002
---------------- ---------------- ----------------
Cash flows from operating activities:
Net loss ($4,777,000) ($5,603,000) ($5,038,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 302,000 266,000 434,000
Stock compensation expense 20,000 -- 293,000
Issuance of common stock for services 10,000 65,000 --
Loss on sale/retirement of equipment 7,000 9,000 15,000
Net changes in operating assets and liabilities:
Accounts receivable (1,093,000) (98,000) (547,000)
Inventory 16,000 185,000 (1,044,000)
Other current assets 88,000 (681,000) (19,000)
Other assets 3,000 (16,000) 10,000
Accounts payable 544,000 170,000 230,000
Accrued payroll and related expenses 52,000 31,000 22,000
Deferred revenue (90,000) (52,000) 203,000
Accrued liabilities 440,000 11,000 (18,000)
---------------- ---------------- ----------------
Net cash used in operating activities (4,478,000) (5,713,000) (5,459,000)
---------------- ---------------- ----------------
Cash flows from investing activities:
Purchases of short-term investments -- -- (2,013,000)
Maturities of short-term investments -- 2,013,000 1,822,000
Capital expenditures (849,000) (92,000) (175,000)
---------------- ---------------- ----------------
Net cash (used in) provided by investing
activities (849,000) 1,921,000 (366,000)
---------------- ---------------- ----------------
Cash flows from financing activities:
Exercise of stock options and warrants 5,308,000 589,000 173,000
Payments on capital lease obligations and note
payable (17,000) (25,000) (12,000)
Issuance of common stock and warrants 9,833,000 5,330,000 6,833,000
---------------- ---------------- ----------------
Net cash provided by financing activities 15,124,000 5,894,000 6,994,000
---------------- ---------------- ----------------
Net increase in cash and cash equivalents 9,797,000 2,102,000 1,169,000
Cash and cash equivalents at beginning of year 6,815,000 4,713,000 3,544,000
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $16,612,000 $6,815,000 $4,713,000
================ ================ ================
Supplemental cash flow information:
Cash paid during the year for interest $15,000 $13,000 $13,000
================ ================ ================
Supplemental non-cash financing and investing
information:
Surrender of stock to exercise options $656,000 -- --
================ ================ ================
Equipment acquired by note payable -- $36,000 --
================ ================ ================
Transfer of inventory to equipment $164,000 $52,000 --
================ ================ ================
Cancellation of stockholder note receivable -- -- $425,000
================ ================ ================
See accompanying notes.
36
ThermoGenesis Corp.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
------------------------------------------
Organization and Business
- -------------------------
ThermoGenesis Corp. ("the Company") was incorporated in Delaware in July 1986.
The Company designs, manufactures and markets automated devices and single-use
processing disposables that enable hospitals and blood banks to manufacture a
therapeutic dose of stem cells, wound healing proteins or growth factors from a
single unit of cord blood or the patient's own blood in less than one hour.
Initially, the Company developed medical devices for ultra rapid freezing and
thawing of blood components, which the Company manufactures and distributes to
blood banks and hospitals.
Revenue Recognition
- -------------------
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.
37
ThermoGenesis Corp.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Revenue Recognition (Continued)
- -------------------------------
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. The Company's
foreign sales are generally through distributors. There is no right of return
provided for distributors. For sales of products made to distributors, the
Company considers a number of factors in determining whether revenue is
recognized upon transfer of title to the distributor, or when 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. 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 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.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash, Cash Equivalents and Short Term Investments
- -------------------------------------------------
The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents. Short term
investments are comprised of certificates of deposit with maturities greater
than 90 days, but not exceeding one year.
Fair Value of Financial Instruments
- -----------------------------------
Carrying amounts of financial instruments held by the Company, which include
cash and cash equivalents, short term investments, accounts receivable, accounts
payable and accrued liabilities, approximate fair value due to their short
duration.
38
ThermoGenesis Corp.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Accounts Receivable and Allowance for Doubtful Accounts
- -------------------------------------------------------
The Company's receivables are recorded when billed and represent claims against
third parties that will be settled in cash. The carrying value of the Company's
receivables, net of the allowance for doubtful accounts represents their
estimated net realizable value. The Company estimates its allowance for doubtful
accounts based on historical collection trends, age of outstanding receivables
and existing economic conditions. If events or changes in circumstances indicate
that a specific receivable balance may be impaired, further consideration is
given to the collectibility of those balances and the allowance is adjusted
accordingly. Past-due receivable balances are written-off when the Company's
internal collection efforts have been unsuccessful in collecting the amount due.
Inventory
- ---------
Inventory is stated at the lower of cost or market and includes the cost of
material, labor and manufacturing overhead. Cost is determined on the first-in,
first-out basis.
Suppliers
- ---------
The Company obtains certain custom components from a limited number of
suppliers. If the supplier raises the price of the component or discontinues
production, the Company will have to find another qualified supplier to provide
the component. In the event that it becomes necessary for us to find another
supplier, we would first be required to qualify the quality assurance systems
and product of that alternative supplier. Any transfer between qualified
suppliers may impact the production schedule, thus delaying revenues, and may
cause the price of the key components to increase.
Equipment
- ---------
Equipment is recorded at cost. Repairs and maintenance costs are expensed as
incurred. Depreciation for office, computer, machinery and equipment is computed
under the straight-line method over the estimated useful lives. Leasehold
improvements are depreciated under the straight line method over their estimated
useful lives or the remaining lease period, whichever is shorter.
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 could have a material impact on the
Company's financial position, cash flows or results of operations.
39
ThermoGenesis Corp.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Stock Based Compensation
- ------------------------
The Company has adopted the disclosure provision for stock-based compensation of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", and SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", which was released in December, 2002 as
an amendment of SFAS No 123, 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".
The Company uses the Black-Scholes option pricing model to determine the fair
value of the equity instruments issued (which were determined to be more
reliably measurable than the fair value of consideration received) using the
stock price and other measurement assumptions as of the date a commitment for
performance by the counterparty to earn the equity instrument was reached. The
fair value of the equity instruments issued is recognized in the same period as
if the Company had paid cash for the services.
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 using the straight-line method.
The Company's pro forma information is as follows:
2004 2003 2002
---------------------- ----------------------- -------------------
Net loss, as reported ($4,777,000) ($5,603,000) ($5,038,000)
Add: stock-based employee
compensation expense
included in reported net loss,
net of related tax effects -- -- 293,000
Deduct: total stock-based
employee compensation
expense determined
under fair value method for
all awards, net of related tax
effects (538,000) (969,000) (802,000)
---------------------- ----------------------- --------------------
Pro forma net loss ($5,315,000) ($6,572,000) ($5,547,000)
====================== ======================= ====================
Basic and diluted net loss per
share
As reported ($0.11) ($0.15) ($0.15)
Pro forma ($0.13) ($0.18) ($0.17)
40
ThermoGenesis Corp.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Stock Based Compensation (Continued)
- ------------------------------------
The pro forma amounts discussed above were derived using the Black-Scholes
option-pricing model with the assumptions indicated below:
2004 2003 2002
------------------- --------------------- ---------------------
Average expected
life (years) 4.2 4.4 3.4
Risk-free interest rate 3.2% 3.2% 3.36%
Volatility 88% 97% 93%
Dividend yield 0% 0% 0%
The weighted average grant date fair value of options granted during the years
ended June 30, 2004, 2003 and 2002 was $2.29, $1.23 and $1.45, respectively.
Credit Risk
- -----------
The Company manufactures and sells thermodynamic devices principally to the
blood component processing industry and performs ongoing evaluations of the
credit worthiness of its customers. The Company believes that adequate
provisions for uncollectible accounts have been made in the accompanying
financial statements.
Segment Reporting
- -----------------
The Company operates in a single segment providing medical devices and
disposables to hospitals and blood banks throughout the world which utilize the
equipment to process blood components.
Income Taxes
- ------------
The liability method is used for accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that are scheduled to be in effect when the
differences are expected to reverse. The Company used the flow-through method to
account for income tax credits.
Net Loss per Share
- ------------------
Net loss per share is computed by dividing the net loss to common stockholders
by the weighted average number of common shares outstanding. The calculation of
the basic and diluted earnings per share is the same for all periods presented,
as the effect of the potential common stock equivalents is antidilutive due to
the Company's net loss position for all periods presented. Antidilutive
securities, which consist of stock options, warrants and the Series A
convertible preferred stock, that were not included in diluted net loss per
common share were 3,437,272, 7,591,249 and 8,069,369 as of June 30, 2004, 2003
and 2002, respectively.
41
ThermoGenesis Corp.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Reclassifications
- -----------------
Certain amounts in the prior year's financial statements have been reclassified
to conform with the 2004 presentations.
New Accounting Pronouncements
- -----------------------------
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. 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.
2. Inventory
---------
Inventory consisted of the following at June 30:
2004 2003
--------------- ----------------
Raw materials $1,448,000 $1,711,000
Work in process 769,000 493,000
Finished goods 755,000 838,000
Reserve (502,000) (392,000)
--------------- ----------------
$2,470,000 $2,650,000
=============== ================
Included in the Company's inventory reserve at June 30, 2004 and 2003 was
$320,000 and $252,000, respectively, related to CryoSeal inventory products
which is based on inventory levels in excess of current demand for the product.
42
ThermoGenesis Corp.
NOTES TO FINANCIAL STATEMENTS (Continued)
3. Equipment
---------
Equipment consisted of the following at June 30:
2004 2003 Estimated Useful Life
---------------- ---------------- --------------------------
Office equipment $477,000 $370,000 5-10 years
Computer and purchased software 951,000 829,000 2-5 years
Machinery and equipment 1,921,000 1,642,000 5-10 years or lease term
Leasehold improvements 180,000 200,000 5 years
---------------- ----------------
3,529,000 3,041,000
Less accumulated depreciation and amortization (2,383,000) (2,599,000)
---------------- ----------------
$1,146,000 $442,000
================ ================
4. Accrued Liabilities
-------------------
Accrued liabilities consisted of the following at June 30:
2004 2003
------------------ -----------------
Accrued warranty reserves $281,000 $193,000
Accrued commissions 264,000 56,000
Deferred rent 69,000 -
Customer deposits 32,000 2,000
Capital lease obligations 21,000 16,000
Other accrued liabilities 168,000 122,000
------------------ -----------------
$835,000 $389,000
================== =================
5. Commitments and Contingencies
-----------------------------
Operating Leases
- ----------------
The Company leases its facility pursuant to a non-cancelable operating lease.
The facility lease includes the option to renew for a five year term. The annual
future cash obligations are as follows:
2005 $366,000
2006 382,000
2007 399,000
2008 416,000
2009 70,000
Thereafter --
----------------
Total $1,633,000
================
43
Rent expense was $487,000, $395,000 and $356,000 for the years ended June 30,
2004, 2003 and 2002, respectively.
44
ThermoGenesis Corp.
NOTES TO FINANCIAL STATEMENTS (Continued)
5. Commitments and Contingencies (Continued)
-----------------------------------------
Capital Leases
- --------------
The Company leases certain equipment under capital leases. The following amounts
are included in equipment as assets under these capital leases as of June 30:
2004 2003
----------------- -----------------
Cost $62,000 $62,000
Less: accumulated amortization 45,000 33,000
----------------- -----------------
Net assets under capital leases $17,000 $29,000
================= =================
The future minimum lease payments under capital leases as of June 30, 2004 are
$20,000 of which $2,000 represents interest. The present value of the minimum
lease payments of $18,000 is a current liability.
Note Payable
- ------------
The Company entered into a note payable with a financial institution to purchase
a vehicle for field service personnel in January 2003 for $36,000. The note
bears interest at 9.90%, requires monthly payments of principal and interest of
$756 and matures on January 5, 2008.
Contingencies
- -------------
In the normal course of operations, the Company may have disagreements or
disputes with employees or vendors. 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 flow.
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 which is included in accrued
liabilities during the period are as follows:
For years ended June 30,
2004 2003
------------------- -------------------
Beginning balance $193,000 $158,000
Warranties issued during the period 249,000 276,000
Settlements made during the period (131,000) (205,000)
45
Changes in liability for pre-existing
warranties during the period, including
expirations (30,000) (36,000)
------------------- -------------------
Ending balance $281,000 $193,000
=================== ===================
46
ThermoGenesis Corp.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Stockholder's Equity
Series A Convertible Preferred Stock
- ------------------------------------
In January 1999, the Company completed a private placement of 1,077,540 shares
of Series A Convertible Preferred Stock ("Series A"), raising $6,227,000, net of
commissions and direct expenses. Commissions of 7% of the gross proceeds and
warrants to purchase 200,000 shares of common stock at $1.70 per share were
issued to the placement agent. The significant features of the Series A are as
follows:
Voting Rights - the holders of shares of Series A are entitled to voting
rights equal to the number of shares of common stock to be issued upon
conversion of the Series A.
Liquidation Preferences - In the event of liquidation or dissolution of the
Company, the Series A stockholders are entitled to priority over common
stockholders with respect to distribution of Company assets or payments to
stockholders. The liquidation preference is equal to $6.25 per share
compounded annually at 8% per share per year.
Conversion Rights - Holders of the Series A have the right to convert the
Series A at the option of the holder, at any time, into shares of common
stock of the Company at the conversion rate of one preferred share for five
shares of common stock. The conversion rate is subject to adjustment for
changes in the company's capital structure, which would otherwise have a
dilutive effect on the conversion rate. The value assigned to the
Beneficial Conversion Feature, as determined using the quoted market price
of the Company's common stock on the date the Series A was sold, amounted
to $3,605,000, which represents a discount to the value of the Series A. As
of June 30, 2004, 951,540 shares of Series A have been converted, 32,000
were converted during the year ended June 30, 2004.
Automatic Conversion - At the option of the Company, each share of Series A
may be converted into shares of common stock at the conversion rate of 1:5
provided that the shares of the Company's common stock trade at an average
price equal to or greater than $5 per share for 30 consecutive trading
days.
Dividends - The holder of Series A shall be entitled to receive dividends
at the same rate and at the same time as any dividends declared on the
Company's common stock.
Common Stock
- ------------
The Company completed a private financing on March 26, 2004, in which it
received $9,833,000, net of expenses. The proceeds from the offering were
received from the sale of 2,660,000 shares of common stock.
The Company completed a private financing on March 28, 2003, in which it
received $5,330,000, net of expenses. The proceeds from the offering were
received from the sale of 3,807,594 shares of common stock and issued three year
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. There
were no warrants exercised as of June 30, 2004.
47
ThermoGenesis Corp.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Stockholder's Equity (Continued)
--------------------------------
Common Stock (Continued)
- ------------------------
The Company completed a private financing on March 26, 2002, in which it
received $6,833,000 net of expenses. The proceeds from the offering were
received from the sale of 3,504,310 shares of common stock at $2.00 per share
and five year warrants representing the right to acquire an additional 723,362
shares of common stock at $3.07 per share. The warrants vest immediately. There
were 260,000 warrants exercised as of June 30, 2004.
As of June 30, 2004, the Company had 4,819,928 shares of common stock reserved
for future issuance.
Warrants
- --------
In conjunction with a private placement on April 27, 2001, five year warrants
were issued, representing the right to acquire an additional 788,809 shares of
common stock, at an exercise price of $2.88 per share. The warrants vest
immediately. There were 599,402 warrants exercised as of June 30, 2004.
In conjunction with a debt financing in December 2000, five year warrants were
issued, representing the right to acquire 415,000 shares of common stock for an
exercise price of $1.625. The warrants vest immediately. There were 348,000
warrants exercised as of June 30, 2004.
In conjunction with a private placement in December 1999 and January 2000, five
year warrants were issued, representing the right to acquire 484,562 common
shares at an exercise price of $2.72628. There were 268,112 warrants exercised
as of June 30, 2004.
As part of the placement agent's compensation in the 1999 private placement of
Series A convertible preferred stock, warrants to purchase 200,000 shares of
common stock at an exercise price of $1.70 were issued. The warrants were fully
vested upon issuance. There were 200,000 warrants exercised prior to their
expiration in January 2004.
In conjunction with a private placement in November 1996, seven-year warrants
were issued, representing the right to acquire 1,478,001 shares of common stock
at an exercise price of $3.661 per share. The warrants were fully vested upon
issuance and expired in November 2003. There were 132,200 warrants exercised
prior to November 2003.
Stock Options
- -------------
The Amended 1994 Stock Option Plan ("1994 Plan") permits the grant of stock or
options to employees, directors and consultants. A total of 1,450,000 shares
were approved by the stockholders for issuance under the 1994 Plan. Options are
granted at prices that are equal to 100% of the fair market value on the date of
grant, and expire over a term not to exceed ten years. Options generally vest
ratably over a five-year period, unless otherwise determined by the Board of
Directors.
The Amended 1998 Stock Option Plan ("1998 Plan") permits the grant of stock or
options to employees, directors and consultants. A total of 3,798,000 shares
were approved by the stockholders for issuance under the 1998 Plan. Options are
48
granted at prices that are equal to 100% of the fair market value on the date of
grant, and expire over a term not to exceed ten years. Options generally vest
ratably over three to five years, unless otherwise determined by the Board of
Directors.
49
ThermoGenesis Corp.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Stockholder's Equity (Continued)
--------------------------------
Stock Options (Continued)
- -------------------------
The 2002 Independent Directors Equity Incentive Plan ("2002 Plan") permits the
grant of stock or options to independent directors. A total of 250,000 shares
were approved by the stockholders for issuance under the 2002 Plan. Options are
granted at prices which are equal to 100% of the fair market value on the date
of grant, and expire over a term not to exceed ten years. Options generally vest
immediately, unless otherwise determined by the Board of Directors.
In May 2002, the term for 288,000 fully vested options to purchase shares of the
Company's common stock was extended for an additional five years. As a result of
this stock option modification, the Company recorded compensation expense of
$205,000 for the year ended June 30, 2002. The $205,000 was calculated using the
intrinsic value method which compares the common stock option exercise price to
the fair market value of the underlying common stock on the date of extension.
A summary of stock option activity for the three years ended June 30, 2004
follows:
Number of Options Weighted-Average
Outstanding Exercise Price
Per Share
------------------------ -----------------------
Balance at June 30, 2001 2,109,285 $1.98
Options granted 1,539,000 $2.07
Options canceled (455,333) $2.82
Options exercised (161,417) $1.53
------------------------
Balance at June 30, 2002 3,031,535 $1.93
========================
Exercisable at June 30, 2002 1,426,206 $1.79
========================
Options granted 525,000 $1.74
Options canceled (434,745) $2.08
Options exercised (322,251) $1.82
------------------------
Balance at June 30, 2003 2,799,539 $1.88
========================
Exercisable at June 30, 2003 1,752,372 $1.74
========================
Options granted 57,250 $3.47
Options canceled (11,667) $2.14
Options exercised (986,045) $1.78
------------------------
Balance at June 30, 2004 1,859,077 $1.97
========================
Exercisable at June 30, 2004 1,098,250 $1.86
========================
The following table summarizes information about stock options outstanding at
June 30, 2004:
Range of Exercise Number Weighted-Average Weighted-Average Number Weighted-Average
Prices Outstanding Remaining Exercise Exercisable Exercise Price
Contractual Life Price
- -------------------- --------------- ------------------- -------------- -------------- ------------------
$1.125-$1.68 481,833 3.3 $1.45 475,000 $1.45
$1.70-$2.50 1,321,834 4.8 $2.10 597,334 $2.09
50
$3.15-$4.70 55,410 4.4 $3.49 25,916 $3.87
--------------- --------------
Total 1,859,077 1,098,250
=============== ==============
51
ThermoGenesis Corp.
NOTES TO FINANCIAL STATEMENTS (Continued)
7. Stockholder Note Receivable
---------------------------
In October 2000, the Company entered into a note receivable with the Company's
Chief Executive Officer and Chairman of the Board for $425,000. The principal
amount of the note represents the amount due to the Company for the exercise of
options for 200,000 shares of common stock at an exercise price of $2.13. The
note was a full recourse note, bore interest at 6.3% and was due October 31,
2001. In October 2001, the compensation committee rescinded the transaction. As
such, the note was cancelled and the CEO surrendered the 200,000 shares of
common stock.
8. Major Customers and Foreign Sales
---------------------------------
At June 30, 2004, the Company had four customers that individually accounted for
16%, 13%, 12% and 12% of accounts receivable. At June 30, 2003, the Company had
two customers that individually accounted for 12% and 11% of accounts
receivable.
During the fiscal year ended June 30, 2004, revenues from two significant
customers totaled $2,523,000 or 22% of net revenues. During the fiscal year
ended June 30, 2003, revenues from two significant customers totaled $2,547,000
or 25% of net revenues. During the fiscal year ended June 30, 2002, revenues
from a significant customer totaled $3,523,000 or 37% of net revenues.
If the relationship between the Company and these customers were altered, it
could have a material impact on the Company's financial position, cash flows or
results of operations.
The Company had sales to customers outside the United States as follows for the
years ended June 30:
2004 2003 2002
------------------------- ------------------------ -------------------------
Europe $3,195,000 $2,400,000 $1,679,000
Asia 4,521,000 2,815,000 1,631,000
Other 879,000 947,000 620,000
------------------------- ------------------------ -------------------------
$8,595,000 $6,162,000 $3,930,000
========================= ======================== =========================
9. Income Taxes
------------
The reconciliation of federal income tax attributable to operations computed at
the federal statutory tax rate of 34% to income tax expense is as follows for
the years ended June 30:
2004 2003 2002
----------------- ----------------- -----------------
Statutory federal income tax benefit ($1,624,000) ($1,905,000) ($1,712,000)
Net operating loss with no tax benefit 1,624,000 1,905,000 1,712,000
----------------- ----------------- -----------------
Total federal income tax $ $ $
- - -
================= ================= =================
52
At June 30, 2004, the Company had net operating loss carryforwards for federal
and state income tax purposes of approximately $52,336,000 and $17,553,000
respectively, that are available to offset future income. The federal and state
loss carryforwards expire in various years between 2005 and 2024, and 2005 and
2014, respectively.
53
ThermoGenesis Corp.
NOTES TO FINANCIAL STATEMENTS (Continued)
9. Income Taxes (Continued)
------------------------
At June 30, 2004, the Company has research and experimentation credit
carryforwards of approximately $500,000 for federal tax purposes that expire in
various years between 2005 and 2024, and $395,000 for state income tax purposes
that do not have an expiration date.
Significant components of the Company's deferred tax assets and liabilities for
federal and state income taxes are as follows:
June 30, 2004 June 30, 2003
------------------------- --------------------------
Deferred tax assets:
Net operating loss carry-forwards $18,837,000 $16,448,000
Income tax credits 793,000 702,000
Capitalized research costs 660,000 560,000
Other 788,000 819,000
------------------------- --------------------------
Total deferred taxes 21,078,000 18,529,000
Valuation allowance (21,078,000) (18,529,000)
------------------------- --------------------------
Net deferred taxes $ - $ -
========================= ==========================
The valuation allowance increased by approximately $2.5 million, $2.1 million
and $1.8 million in 2004, 2003 and 2002, respectively. Approximately $1,344,000
of the valuation allowance at June 30, 2004 is related to the benefits of stock
option deductions, which will be credited to paid-in capital when realized.
Because of the "change of ownership" provisions of the Tax Reform Act of 1986, a
portion of the Company's federal net operating loss and credit carryovers may be
subject to an annual limitation regarding their utilization against taxable
income in future periods.
10. Employee Retirement Plan
------------------------
The Company sponsors an Employee Retirement Plan, generally available to all
employees, in accordance with Section 401 (k) of the Internal Revenue Code.
Employees may elect to contribute up to the Internal Revenue Service annual
contribution limit. Under this Plan, at the discretion of the Board of
Directors, the Company may match a portion of the employees' contributions. No
Company contributions have been made to the Plan as of June 30, 2004.
11. 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 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.
54
ThermoGenesis Corp.
NOTES TO FINANCIAL STATEMENTS (Continued)
12. Unaudited Quarterly Financial Data
----------------------------------
The following tables provide quarterly data for fiscal years ended June 30, 2004
and 2003.
First Quarter Second Quarter Third Quarter Fourth Quarter
Ended Ended Ended Ended
September 30, 2003 December 31, 2003 March 31, 2004 June 30, 2004
-------------------------------------------------------------------------------------------
Net revenues $2,143,000 $2,500,000 $3,367,000 $3,636,000
Gross Margin 589,000 802,000 1,167,000 1,244,000
Net loss ($1,239,000) ($1,223,000) ($1,218,000) ($1,097,000)
===================== ================== =============== ==================
Per share data:
Basic and diluted net loss per
common share ($0.03) ($0.03) ($0.03) ($0.02)
===================== ================== ================== ==================
Shares used in computing per
share data 39,460,449 40,265,493 42,742,891 44,650,439
===================== ================== ================== ==================
First Quarter Second Quarter Third Quarter Fourth Quarter
Ended Ended Ended Ended
September 30, 2002 December 31, 2002 March 31, 2003 June 30, 2003
-------------------------------------------------------------------------------------------
Net revenues $2,053,000 $2,350,000 $2,886,000 $2,898,000
Gross Margin 356,000 412,000 511,000 1,008,000
Net loss ($1,362,000) ($1,584,000) ($1,666,000) ($991,000)
======================= ================== ================== ==================
Per share data:
Basic and diluted net loss per
common share ($0.04) ($0.04) ($0.05) ($0.03)
======================= ================== ================== ==================
Shares used in computing per
share data 35,265,271 35,266,004 36,570,697 39,246,038
======================= ================== ================== ==================
55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
--------------------
None
ITEM 9A. OTHER INFORMATION
-----------------
None
ITEM 9B. CONTROLS AND PROCEDURES
-----------------------
The Company's management with the participation of principal executive and
financial officers evaluated the effectiveness of the Company's disclosure
controls and procedures as defined by Rule 13a-15(c) of the Exchange Act 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 reports it files or submits under the Exchange Act are
recorded, processed, summarized and reported on a timely basis. Based upon their
evaluation, the Company's principal executive and financial officers concluded
that the Company's disclosure controls and procedures are effective to
accumulate and communicate to the Company's management as appropriate to allow
timely decisions regarding disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this Item will be included in and is hereby
incorporated by reference from our Proxy Statement for the 2004 Annual Meeting
of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this Item will be included in and is hereby
incorporated by reference from our Proxy Statement for the 2004 Annual Meeting
of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this Item will be included in and is hereby
incorporated by reference from our Proxy Statement for the 2004 Annual Meeting
of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this Item will be included in and is hereby
incorporated by reference from our Proxy Statement for the 2004 Annual Meeting
of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
--------------------------------------
The information required by this Item will be included in and is hereby
incorporated by reference from our Proxy Statement for the 2004 Annual Meeting
of Stockholders.
56
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
------------------------------------------
The following documents are filed as a part of this report on Form 10-K.
Page Number
-----------
(a) (1) Financial Statements
Report of Ernst & Young LLP, Independent Registered
Public Accounting Firm........................................32
Balance Sheets at June 30, 2004 and 2003.........................33
Statements of Operations for the years ended
June 30, 2004, 2003 and 2002................................34
Statements of Stockholders' Equity for the years
ended June 30, 2004, 2003 and 2002..........................35
Statements of Cash Flows for the years ended
June 30, 2004, 2003 and 2002................................36
Notes to Financial Statements....................................37
(a) (2) Financial Statement Schedules
Schedule II, Valuation and Qualifying Accounts...................65
(b) Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the
Exhibit Index on the next page, which is incorporated here in by this
reference.
57
Exhibit Description
- -------------------
3.1 (a) Amended and Restated Certificate of Incorporation (1)
(b) Revised Bylaws (2)
4.1 Certificate of Designation Series A Convertible Redeemable
Preferred Stock (3)
4.2 Certificate of Designation of Series B Convertible Preferred
Stock (4)
4.3 Warrant (form) (5)
10.1 (a) License Agreement between Stryker Corp. and ThermoGenesis Corp.
(6)
(b) Executive Development and Distribution Agreement between
ThermoGenesis Corp. and Daido Hoxan Inc. (7)
(c) License Agreement with Pall/Medsep Corporation (8)
(d) Distribution Agreement with Dideco S.p.A. (9)
(e) Employment Agreement for Philip H. Coelho (10)
(f) Employment Agreement for Renee Ruecker (11)
(g) Employment Agreement for Dan Segal (12)
(h) Employment Agreement for Kevin Simpson (13)
(i) Securities Purchase Agreement dated March 10, 2004 (form) (14)
23.2 Consent of Ernst & Young LLP, Independent Registered Public Accounting
Firm
31.1 Rule 13(a) - 14(a)/15(d) - 14(a) Certification (Principal Executive
Officer)
31.2 Rule 13(a)-14(a)/15(d)-14(a)Certification (Principal Financial Officer)
32 Section 1350 Certifications
Footnotes to Exhibit Index
(1) Incorporated by reference to Form 10-K for the year ended June 30, 1999
(2) Incorporated by reference to Form 10-KSB for the year ended June 30, 1994.
(3) Incorporated by reference to Form 8-K dated January 14, 1999.
(4) Incorporated by reference to Form 8-K dated December 23, 1999.
(5) Incorporated by reference to Form 8-K dated April 5, 2002
(6) Incorporated by reference to Form 8-K dated September 27, 1995.
(7) Incorporate by reference to Form 8-K dated March 27, 1997
(8) Incorporated by reference to Form 8-K for March 27, 1997.
(9) Incorporated by reference to Form 8-K for February 16, 1998.
(10) Incorporated by reference to Form 10-K for the year ended June 30, 2002.
(11) Incorporated by reference to Form 10-Q for the quarter ended March 31,
2003.
(12) Incorporated by reference to Form 10-K for the year ended June 30, 2000.
(13) Incorporated by reference to Form 10-Q for quarter ended December 31,
2002.
(14) Incorporated by reference from Form 8-K dated March 10, 2004.
58
GLOSSARY OF CERTAIN TECHNICAL TERMS
- -----------------------------------
510(k): Formal notification to FDA obtain clearance to market the medical
device. The device must be substantially equivalent to devices manufactured
prior to 1976, or which have been found substantially equivalent after that
date.
AUTOLOGOUS: Autogenous; related to self; originating within an organism itself,
as obtaining blood from the patient for use in the same patient.
COAGULATION: (1) the process of clot formation; (2) in surgery, the disruption
of tissue by physical means to form a blockage or clot.
THERMOLINE PRODUCTS: (1) Device for the ultra-rapid freezing of human blood
plasma; (2) Portable device for the ultra-rapid freezing of human blood plasma;
(3) Device for the rapid thawing of frozen plasma for hospital patient care.
CRYOPRECIPITATE: Any precipitate (substance that is separated out of a solution
of plasma) that results from cooling, as cryoglobulin or antihemophilic factor.
When used in the context of the CryoSeal FS System, cryoprecipitate means a
"fibrinogen-rich" cryoprecipitate.
CRYOPRESERVATION: Maintaining the life of excised tissue or organs by freezing
and storing at very low temperatures.
CRYOSEAL: System for harvesting fibrinogen-rich cryoprecipitate from a donor's
blood plasma, a blood component that is currently licensed by the FDA for the
treatment of clotting protein deficient patients.
DEWAR: Container that keeps its contents at a constant and generally low
temperature by means of two external walls between which a vacuum is maintained.
FIBRINOGEN: A blood protein that is converted to fibrin in the clotting of
blood.
HEMOSTATIC: (1) checking the flow of blood; (2) an agent that stops the flow of
blood.
PLURIPOTENT: The ability to develop into all three embryonic tissue layers which
in turn form all the cells of every body organ. Used to describe stem cells that
can form and all cells and tissues in the body.
PROGENITOR: A parent or ancestor.
STEM CELLS: Undifferentiated, primitive cells in the bone marrow with the
ability both to multiply and to differentiate into specific blood cells.
THROMBIN: Generated in blood clotting that acts on fibrinogen to produce fibrin.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By:/s/ PHILIP H. COELHO
--------------------------------
Philip H. Coelho, Chairman & CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By:/s/ PHILIP H. COELHO Date: September 9, 2004
- ------------------------------------------
Philip H. Coelho, Chief Executive
Officer and Chairman of the Board
(Principal Executive Officer)
By:/s/ RENEE M. RUECKER Dated: September 9, 2004
- ------------------------------------------
Renee M. Ruecker, Chief Financial
Officer
(Principal Financial and Accounting
Officer)
By:/s/ KEVIN M. SIMPSON Dated: September 9, 2004
- ------------------------------------------
Kevin M. Simpson, President/COO
and Director
By:/s/ GEORGE BARRY Dated: September 9, 2004
- ------------------------------------------
George Barry, Director
By: /s/ HUBERT HUCKEL Dated: September 9, 2004
- ------------------------------------------
Hubert Huckel, Director
By: /s/ PATRICK MCENANY Dated: September 9, 2004
- ------------------------------------------
Patrick McEnany, Director
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