To Our Stockholders:
The Company’s performance in the third quarter of fiscal year 2010 was disappointing as we did not achieve expected revenue levels and break-even as we had anticipated. These results did not reflect underlying, long-term issues with our business as there were several late-in-the-quarter events that contributed to our revenue performance. We believe we have adjusted our operating plans to better meet our financial targets going forward.
At the same time, we continued to accomplish a number of key milestones as we build a stronger company that is well positioned for long-term growth. Our principal achievement is the five significant distribution agreements we have completed since the end of January. These agreements, which cover both our bone marrow and cord blood products, are not only important with respect to their potential for generating revenues, but they also enable us to expand into new geographies and new indications, provide validation for our offerings and are representative of the momentum ThermoGenesis is building in regenerative medicine.
On May 6, 2010, we announced the completion of a non-exclusive, worldwide agreement—excluding orthopedic indications in the U.S.—with GE Healthcare covering our Res-Q™60 BMC (Res-Q) System used to process stem cells from bone marrow aspirates. We believe that GE Healthcare will be able to leverage their strong presence in markets such as cardiology to expand the use of the Res-Q beyond orthopedics as we pursue our line extension strategy.
The relationship between our two organizations has flourished since the completion of our enhanced distribution agreement for the AXP® AutoXpress™ (AXP) product line in January. GE’s sell through of AXP bag sets to end customers during the third quarter was more than 40 percent higher than in recent quarters and they have recently brought on two new AXP customers, a major cord blood bank in Hong Kong and one in Portugal.
A second major distribution agreement was completed in mid-March with Fenwal, Inc., for the distribution of the AXP and BioArchive® Systems in China, India and Japan. Fenwal is a leading global medical technology company that has a strong footprint in the Asian markets, where we see exciting potential for cord blood products. Other recent agreements include a three-year agreement for the Res-Q and MXP™ MarrowXpress™ (MXP) Systems for India, Malaysia and Thailand with TotipotentSC, and the amendment of an existing distribution contract with CEI—a long-time distributor of our cord blood products—that has been expanded to include distribution rights for the Res-Q and MXP Systems in Mexico and a half dozen Central and South American countries.
In terms of our financial performance, revenues for the third quarter of fiscal year 2010 were $4.8 million versus $5.1 million in the third quarter a year ago. However, we ended the quarter with $600,000 in AXP bag set backorders and a total backlog of $3.9 million. The factors contributing to our revenue performance, included:
· Late in the quarter, we experienced lower-than-anticipated orders from our MXP and Res-Q distributor Celling Technologies. This was the result of slowness in hospital purchase approvals and we have adjusted our expectations for future sales from Celling Technologies to reflect this trend.
· The timing of production ramp with our second-source supplier for AXP bag sets, ATEK Medical. While adding ATEK is an important milestone in our ability to meet anticipated demand, it took longer than we expected to reach projected production levels. We expect to fill the majority of AXP bag set backlog during the fourth quarter.
· Finally, we experienced lower than anticipated BioArchive sales. Three orders were postponed at the very end of the quarter due to internal funding delays at two of our existing cord blood bank customers.
Had we not experienced these bumps in the road, we would have achieved our revenue target for the quarter and been at or close to break-even. However, as a result of our expanded AXP bag set manufacturing capacity, expanded distribution channels, strong product backlog and visibility of incoming orders, we have good reason to believe our revenues for the fourth quarter of fiscal year 2010 will exceed $7 million, which we believe will get us to break-even for the period.
We have also continued to successfully manage operating expenses as they were $2.8 million in the quarter versus $2.9 million a year ago. Our net loss for the quarter was $1.4 million, or $0.02 per share, versus a net loss of $1.1 million, or $0.02 per share, in the same period last year.
We are experiencing good progress on the clinical front. Celling Technologies has received approval to begin the first of what we expect will be a number of clinical evaluations of the Res-Q and MXP Systems. We expect the outcomes will demonstrate compelling data regarding the comparative effectiveness of using Res-Q derived stem cells for bone growth processed with our devices versus the current standard of care. In addition, the initial outcomes from our Critical Limb Ischemia trial for the MXP at the University of Naples in Italy have been positive. The six-month follow up for the first six patients has shown increased perfusion in the treated limbs, which is an important measure of blood circulation.
Despite our revenue shortfall in the quarter, ThermoGenesis is a much stronger company today. Our expenses are under control and we now have a number of leading organizations
marketing and distributing our products that we believe will lead to sustainable revenue growth as we expand into new geographies and into new indications. In addition, we have enhanced both the management team and board of directors, including David Carter who joined our board in early May. David has extensive experience with growing companies in the cell therapy, medical device, blood product and biotechnology sectors, and I look forward to his contributions to our efforts.
We have technology leadership and strategies in place to achieve our goals, and appreciate your support as we move forward and realize ThermoGenesis’ exciting potential.
J. Melville Engle
Chief Executive Officer