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KOOL > SEC Filings for KOOL > Form 10-K on 4-Sep-2013All Recent SEC Filings

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Form 10-K for THERMOGENESIS CORP


4-Sep-2013

Annual Report


ITEM 7. MANAGEMENT'S 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 1A "RISK FACTORS" 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 consolidated financial statements contained in this report.


Table of Contents
(a) Overview

ThermoGenesis designs, develops, and commercializes devices and disposable tools for the processing, storage and administration of cell therapies. The Company was founded in 1986 and is located in Rancho Cordova, California. Our products automate the volume reduction and cryopreservation process of adult stem cells and growth factors from cord blood, peripheral blood and bone marrow for use in laboratory and point-of-care settings. Our growth strategy is to expand our offerings in regenerative medicine and partner with other pioneers in the stem cell arena to accelerate our worldwide penetration in this potentially explosive market.

Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to stock-based compensation, bad debts, inventories, warranties, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Revenue Recognition
Revenues from the sale of the Company's products are recognized when persuasive evidence of an arrangement exists, delivery has occurred (or services have been rendered), the price is fixed or determinable, and collectability is reasonably assured. The Company generally ships products freight on board ("F.O.B.") shipping point. There is no conditional evaluation on any product sold and recognized as revenue. All foreign sales are denominated in U.S. dollars.
Amounts billed in excess of revenue recognized are recorded as deferred revenue on the balance sheet.

The Company's sales are generally through distributors. There is no right of return provided for distributors. For sales of products made to distributors, the Company considers a number of factors in determining whether revenue is recognized upon transfer of title to the distributor, or when payment is received. These factors include, but are not limited to, whether the payment terms offered to the distributor are considered to be non-standard, the distributor history of adhering to the terms of its contractual arrangements with the Company, the level of inventories maintained by the distributor, whether the Company has a pattern of granting concessions for the benefit of the distributor, and whether there are other conditions that may indicate that the sale to the distributor is not substantive. The Company currently recognizes revenue primarily on the sell-in method with its distributors.

Revenue arrangements with multiple deliverables are divided into units of accounting if certain criteria are met, including whether the deliverable item(s) has value to the customer on a stand-alone basis. Revenue for each unit of accounting is recognized as the unit of accounting is delivered. Arrangement consideration is allocated to each unit of accounting based upon the relative estimated selling prices of the separate units of accounting contained within an arrangement containing multiple deliverables. Estimated selling prices are determined using vendor specific objective evidence of value ("VSOE"), when available, or an estimate of selling price when VSOE is not available for a given unit of accounting. Significant inputs for the estimates of the selling price of separate units of accounting include market and pricing trends and a customer's geographic location. The Company accounts for training and installation, and service agreements as separate units of accounting.


Table of Contents
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.

For licensing agreements pursuant to which the Company receives up-front licensing fees for products or technologies that will be provided by the Company over the term of the arrangements, the Company defers the up-front fees and recognizes the fees as revenue on a straight-line method over the term of the respective license. For license agreements that require no continuing performance on the Company's part, license fee revenue is recognized immediately upon grant of the license.

Shipping and handling fees billed to customers are included in net revenues, while the related costs are included in cost of revenues.

Stock-Based Compensation
The Company calculates stock-based compensation on the date of the grant using the Black Scholes-Merton option-pricing formula. The compensation expense is then amortized over the vesting period. The Company uses the Black-Scholes-Merton option-pricing formula in determining the fair value of the Company's options at the grant date and applies judgment in estimating the key assumptions that are critical to the model such as the expected term, volatility and forfeiture rate of an option. The Company's estimate of these key assumptions is based on historical information and judgment regarding market factors and trends. If any of the key assumptions change significantly, stock-based compensation expense for new awards may differ materially in the future from that recorded in the current period.

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 states inventories at lower of cost or market value determined on a first-in, first-out basis. The Company provides inventory allowances when conditions indicate that the selling price could be less than cost due to physical deterioration, obsolescence, changes in price levels, or other causes, which it includes as a component of cost of revenues. Additionally, the Company provides reserves for excess and slow-moving inventory on hand that are not expected to be sold to reduce the carrying amount of slow-moving inventory to its estimated net realizable value. The reserves are 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 inventories. As a result, actual demand may differ from forecasts and the Company may be required to record additional inventory reserves that could adversely impact our gross margins. Conversely, favorable changes in demand could result in higher gross margins when products previously reserved are sold.


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(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 consolidated financial statements.

Results of Operations for the Year Ended June 30, 2013 as Compared to the Year Ended June 30, 2012

Net Revenues
Net revenues for the year ended June 30, 2013 were $17,963,000 compared to $19,023,000 for the year ended June 30, 2012, a decrease of $1,060,000, or 6%.
The decrease in revenues is primarily due to the sale of the ThermoLine and CryoSeal product lines in the current fiscal year. These two product lines represented $2,240,000 in revenues for the year ended June 30, 2012 compared to $944,000 for the year ended June 30, 2013. This decrease in revenues was offset by an increase in revenues from Res-Q disposables of $403,000 primarily due to an increase in the number of bone marrow procedures performed and an increase in new customers. We anticipate the termination of the GE distribution agreement will impact our AXP revenues in the quarter ended September 30, 2013 by approximately $800,000 as GEHC sells-off their product inventory.

Sales analysis for the year ended June 30:

                                                             Percentage of                        Percentage of
                                               2013            Revenues             2012            Revenues
Disposable revenues:
Cord Blood
AXP                                        $  7,133,000                  40 %   $  7,224,000                  38 %
BioArchive                                    1,167,000                   6 %      1,421,000                   7 %
Manual                                        2,286,000                  13 %      2,200,000                  12 %
Bone Marrow
Res-Q                                         2,297,000                  13 %      1,894,000                  10 %
MXP                                              17,000                  --          112,000                  --
CryoSeal                                        118,000                  --          358,000                   2 %
                                             13,018,000                  72 %     13,209,000                  69 %
Non-disposable revenues:
BioArchive                                    2,481,000                  14 %      2,512,000                  13 %
Other non-disposable                            999,000                   6 %      1,772,000                  10 %
Other                                         1,465,000                   8 %      1,530,000                   8 %
Total Company revenues                     $ 17,963,000                 100 %   $ 19,023,000                 100 %

The following represents the Company's cumulative BioArchive System placements in the following geographies:

                                              June 30,
                                           2013      2012
                           Asia               88        86
                           United States      57        57
                           Europe             70        67
                           Rest of World      51        47
                                             266       257


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Gross Profit
The Company's gross profit was $6,365,000 or 35% of revenues for the year ended June 30, 2013, as compared to $6,333,000 or 33% of revenues for the year ended June 30, 2012. The increase in gross profit for the year ended June 30, 2013, is primarily due to lower inventory reserves and the mix of products sold in the prior fiscal year. We sold 25 CryoSeal devices to Asahi at cost during the quarter ended March 31, 2012. Inventory reserves recorded in the prior year were higher primarily due to the deceleration in sales of the ThermoLine freezers.

Sales and Marketing Expenses
Sales and marketing expenses were $2,955,000 for the year ended June 30, 2013, compared to $2,761,000 for the year ended June 30, 2012, an increase of $194,000 or 7%. The increase is primarily due to establishing direct representation in Asia.

Research and Development Expenses
Included in this line item are costs associated with our engineering, regulatory, scientific and clinical affairs functions. Research and development expenses for the year ended June 30, 2013, were $2,991,000, compared to $3,729,000 for fiscal 2012, a decrease of $738,000 or 20%. The decrease is primarily due to lower personnel costs primarily as a result of the January 2012 restructuring and lower costs for clinical studies, offset by an increase in consulting expenses for quality assurance and regulatory projects.

General and Administrative Expenses
General and administrative expenses were $5,645,000 for the year ended June 30, 2013, compared to $5,222,000 for the year ended June 30, 2012, an increase of $423,000 or 8%. The increase is primarily due to legal and professional fees of $835,000 associated with the proposed merger with TotipotentRX and $670,000 due to the legal diligence associated with the Res-Q patent litigation and the development of our counterclaim. These increases were offset by a decrease in severance costs of $360,000 as a result of the January 2012 restructuring.

Gain on Sale of Product Lines
During the year ended June 30, 2013, the Company recognized a gain of $2,000,000 on the sale of certain intangible assets related to the CryoSeal product line, including all associated patents and engineering files and $161,000 on the sale of the ThermoLine product line.

Adjusted EBITDA
The Adjusted EBITDA loss was $3,961,000 for the year ended June 30, 2013 compared to $3,984,000 for the year ended June 30, 2012. The adjusted EBITDA loss was consistent with the prior year as we offset a decrease in revenues from a change in the mix of products sold in our global markets with a decrease in expenses resulting from our cost reduction initiatives.


Table of Contents
Results of Operations for the Year Ended June 30, 2012 as Compared to the Year Ended June 30, 2011

Net Revenues
Net revenues for the year ended June 30, 2012, were $19,023,000 compared to $23,400,000 for the year ended June 30, 2011, a decrease of $4,377,000 or 19%.
BioArchive device revenues decreased $2,600,000 as there were fewer devices sold in fiscal 2012 than in the prior year. The global economy has tightened capital budgets and lowered collection volumes which have impacted our BioArchive device sales. We also experienced a $740,000 decrease in our ThermoLine device revenues as we have stopped manufacturing devices due to our decision to divest the product line and a minimum of sales resources are devoted to the remaining devices in inventory. These decreases were offset by an increase in CryoSeal device and spare part revenues of $790,000 as we shipped a final device order of 25 units to Asahi during fiscal 2012.

Sales analysis for the year ended June 30:

                                             Percentage                         Percentage
                               2012          of Revenues          2011          of Revenues
Disposable revenues:
Cord Blood
AXP                        $  7,224,000                38 %   $  7,354,000                31 %
BioArchive                    1,421,000                 7 %      1,398,000                 6 %
Manual                        2,200,000                12 %      2,162,000                 9 %
Bone Marrow
Res-Q                         1,894,000                10 %      2,024,000                 9 %
MXP                             112,000                --          252,000                 1 %
CryoSeal                        358,000                 2 %        607,000                 3 %
                             13,209,000                69 %     13,797,000                59 %
Non-disposable revenues:
BioArchive                    2,512,000                13 %      5,111,000                22 %
Other non-disposable          1,772,000                10 %      2,176,000                 9 %
Other                         1,530,000                 8 %      2,316,000                10 %
Total Company revenues     $ 19,023,000               100 %   $ 23,400,000               100 %

The following represents the Company's cumulative BioArchive System placements in the following geographies:

                                              June 30,
                                           2012      2011
                           Asia               86        81
                           United States      57        56
                           Europe             67        64
                           Rest of World      47        46
                                             257       247

Gross Profit
The Company's gross profit was $6,333,000 or 33% of net revenues for the year ended June 30, 2012, as compared to $8,837,000 or 38% for the year ended June 30, 2011. The lower gross profit is primarily due to the mix of products sold and an increase in inventory and warranty reserves. We delivered a final order to Asahi of 25 CryoSeal devices, at cost. Inventory reserves increased primarily due to the deceleration in sales of the ThermoLine freezers and warranty reserves increased primarily due to the AXP disposable.


Table of Contents
Sales and Marketing Expenses
Sales and marketing expenses were $2,761,000 for the year ended June 30, 2012, compared to $3,195,000 for the year ended June 30, 2011, a decrease of $434,000 or 14%. The decrease is primarily due to a decrease in commissions and a decrease in stock compensation due to the prior year amortization of the initial grant of restricted stock to Nanshan upon signing the distribution agreement.

Research and Development Expenses
Included in this line item are costs associated with our engineering, regulatory, scientific and clinical affairs functions. Research and development expenses for the year ended June 30, 2012, were $3,729,000 compared to $3,003,000 for fiscal 2011, an increase of $726,000 or 24%. The increase is primarily due to funding of clinical studies and higher salaries and benefits due to an increase in personnel.

General and Administrative Expenses
General and administrative expenses were $5,222,000 for the year ended June 30, 2012, compared to $5,474,000 for the year ended June 30, 2011, a decrease of $252,000 or 5%. The decrease is primarily due to a decrease in professional fees of $366,000 for strategic consultants and advisor expenses incurred in the prior year. Also, stock compensation expense decreased $129,000 mainly due to options granted in the prior year to the independent members of our Board of Directors. These decreases were offset by an increase in severance pay accruals as a result of the restructuring.

Interest and Other Income, Net
At June 30, 2012, we recognized other income of $327,000 due to the early termination of the Asahi Amendment. The $327,000 represented excess funds allocated to offset research and development costs we had expected to incur.

(c) Liquidity and Capital Resources

At June 30, 2013, the Company had a cash and cash equivalents balance of $6,884,000 and working capital of $11,125,000. This compared to a cash and cash equivalents balance of $7,879,000 and working capital of $14,034,000 at June 30, 2012. In addition to revenues, the Company has primarily financed operations through the private and public placement of equity securities and has raised approximately $112 million, net of expenses, through common and preferred stock financings and option and warrant exercises.

Net cash used in operating activities for the year ended June 30, 2013 was $3,082,000, primarily due to the net loss of $3,086,000, offset by depreciation and stock-based compensation expense of $538,000 and $563,000, respectively.
Inventories provided $795,000 of cash due to lower levels of our BioArchive and manual disposables.

Based on our cash balance, historical trends, planned cost reductions and future revenue projections, we believe our current funds are sufficient to provide for our projected needs to maintain operations and working capital requirements for at least the next 12 months. However, we intend to raise capital for other purposes and may need to raise additional funds should we not be able to maintain compliance with, or obtain forbearance of, our financial covenants.
See Part I Item 1-Business, CBR. In addition, should we change distributors and take on the responsibility for maintaining significant product inventory levels for certain end user customers, we may need to raise additional funding.
In order to maximize the value of our clinical trials and accelerate the planned commercialization of our products in connection with the proposed merger with TotipotentRX, we intend to raise approximately $15 to $20 million for investing in the planned clinical development strategy over 36 months. Our ability to fund our longer-term cash needs is subject to various risks, many of which are beyond our control. Should we require additional funding, such as additional capital investments, we may need to raise the required additional funds through bank borrowings or public or private sales of debt or equity securities. We cannot assure that such funding will be available in needed quantities or on terms favorable to us, if at all see Part I Item 1A - Risk Factors.


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The Company generally does not require extensive capital equipment to produce or sell its current products. In fiscal 2011, the Company spent $266,000 for products at customer sites and tooling. In fiscal 2012 and 2013, the Company spent $545,000 and $391,000, respectively. These expenditures were primarily for tooling at contract manufacturers.

At June 30, 2013, we had four distributors that accounted for 28%, 18%, 10% and 10% of accounts receivable. At June 30, 2012, we had one distributor that accounted for 22% of accounts receivable and four distributors that individually accounted for 13%, 13%, 12% and 10% of accounts receivable.

Revenues from one significant distributor, GEHC, totaled $3,755,000 or 21%, $6,746,000 or 35% and $7,824,000 or 33% of net revenues during the years ended June 30, 2013, 2012 and 2011, respectively. Revenues from another distributor, Celling, totaled $2,299,000 or 13% and $1,870,000 or 10% of net revenues for the years ended June 30, 2013 and 2012, respectively. Revenues from two other distributors/customers, Golden Meditech and Golden Profit Technology, totaled $2,058,000 and $1,992,000, respectively, for the year ended June 30, 2013.

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.

(d) Off Balance Sheet Arrangements The Company has no off-balance sheet arrangements.

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