ThermoGenesis Holdings, Inc. - Quarter Report: 2019 March (Form 10-Q)

 

 

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

 

X

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2019.

 

or

 

___

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition from _____________ to _______________.

 

Commission File Number: 000-16375 Cesca Therapeutics Inc. (Exact name of registrant as specified in its charter)
Delaware (State of incorporation)		94-3018487 (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:

 

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $.001 par value	KOOL	Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes [X] No [   ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit such files).

Yes [X] No [   ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [   ]      Accelerated filer [   ]	Smaller reporting company [X]
Non-accelerated filer [X]	Emerging growth company [   ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes [   ] No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class		Outstanding at May 10, 2019
Common stock, $.001 par value		23,649,147

 

 

 

Cesca Therapeutics Inc.

 

 

INDEX

 

Page Number

Part I Financial Information
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of  Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 4.	Controls and Procedures	25
Part II Other Information
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults upon Senior Securities	26
Item 4.	Mine Safety Disclosure	26
Item 5.	Other Information	26
Item 6.	Exhibits	27
Signatures		28

 

 

 

		March 31 2019				December 31, 2018
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	2,237,000			$	2,400,000
Accounts receivable, net of allowance for doubtful accounts of $426,000 ($419,000 at December 31, 2018)			1,994,000				1,509,000
Inventories, net of reserves of $344,000 ($258,000 at December 31, 2018)			4,309,000				4,493,000
Prepaid expenses and other current assets			313,000				224,000
Total current assets			8,853,000				8,626,000
Restricted cash			1,000,000				1,000,000
Equipment and leasehold improvements, net			2,443,000				2,562,000
Right-of-use operating lease assets, net			941,000				--
Goodwill			781,000				781,000
Intangible assets, net			1,561,000				1,591,000
Other assets			51,000				51,000
Total assets		$	15,630,000			$	14,611,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	2,464,000			$	2,423,000
Accrued payroll and related expenses			470,000				703,000
Deferred revenue			764,000				485,000
Interest payable – related party			461,000				1,513,000
Other current liabilities			1,448,000				1,241,000
Total current liabilities			5,607,000				6,365,000
Convertible promissory note – related party, less debt discount of $6,953,000 ($6,026,000 at December 31, 2018)			1,760,000				1,174,000
Note payable			800,000				--
Derivative obligations			1,000				1,000
Long term operating lease obligations			854,000				--
Other non-current liabilities			329,000				340,000
Total liabilities			9,351,000				7,880,000
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized, none outstanding			--				--
Common stock, $0.001 par value; 350,000,000 shares authorized; 22,149,147 issued and outstanding (21,649,147 at December 31, 2018)			22,000				22,000
Paid in capital in excess of par			234,624,000				235,868,000
Accumulated deficit			(229,306,000	)			(227,435,000	)
Accumulated other comprehensive loss			(17,000	)			(13,000	)
Total Cesca Therapeutics Inc. stockholders’ equity			5,323,000				8,442,000
Noncontrolling interests			956,000				(1,711,000	)
Total equity			6,279,000				6,731,000
Total liabilities and stockholders’ equity		$	15,630,000			$	14,611,000

 

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		Three Months Ended March 31,
		2019				2018
Net revenues		$	2,962,000			$	1,867,000
Cost of revenues			1,704,000				1,515,000
Gross profit			1,258,000				352,000
Expenses:
Sales and marketing			341,000				325,000
Research and development			563,000				1,041,000
General and administrative			1,260,000				2,242,000
Total operating expenses			2,164,000				3,608,000
Loss from operations			(906,000	)			(3,256,000	)
Fair value change of derivative instruments			--				259,000
Interest expense			(1,132,000	)			(361,000	)
Other expenses			(9,000	)			(12,000	)
Net loss			(2,047,000	)			(3,370,000	)
Loss attributable to noncontrolling interests			(176,000	)			(410,000	)
Net loss attributable to common stockholders		$	(1,871,000	)		$	(2,960,000	)
Net loss		$	(2,047,000	)		$	(3,370,000	)
Other comprehensive income:
Foreign currency translation adjustments			(4,000	)			7,000
Comprehensive loss			(2,051,000	)			(3,363,000	)
Comprehensive loss attributable to noncontrolling interests			(176,000	)			(410,000	)
Comprehensive loss attributable to common stockholders		$	(1,875,000	)		$	(2,953,000	)
Per share data:
Basic and diluted net loss per common share		$	(0.08	)		$	(0.27	)
Weighted average common shares outstanding – basic and diluted			24,614,147				10,899,225

 

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		Common Stock								Paid in capital in				Accumulated				Accumulated other comprehensive				Total stockholders’				Non- controlling interests in
		Shares				Amount				excess of par				deficit				loss				equity				subsidiary				Total equity
Balance at January 1, 2019			21,649,147			$	22,000			$	235,868,000			$	(227,435,000	)		$	(13,000	)		$	8,442,000			$	(1,711,000	)		$	6,731,000
Stock-based compensation expense			--				--				81,000				--				--				81,000				--				81,000
Exercise of pre-funded warrants			500,000				--				5,000				--				--				5,000				--				5,000
Discount due to beneficial conversion features			--				--				1,513,000				--				--				1,513,000				--				1,513,000
Reorganization of subsidiary and related change in non-controlling interest			--				--				(2,843,000	)			--				--				(2,843,000	)			2,843,000				--
Foreign currency translation			--				--				--				--				(4,000	)			(4,000	)			--				(4,000	)
Net loss			--				--				--				(1,871,000	)			--				(1,871,000	)			(176,000	)			(2,047,000	)
Balance at March 31, 2019			22,149,147			$	22,000			$	234,624,000			$	(229,306,000	)		$	(17,000	)		$	5,323,000			$	956,000			$	6,279,000
Balance at January 1, 2018			10,872,428			$	11,000			$	221,371,000			$	(187,640,000	)		$	(43,000	)		$	33,699,000			$	(487,000	)		$	33,212,000
Stock-based compensation expense			--				--				137,000				--				--				137,000				--				137,000
Issuance of common stock and warrants in financing, net of offering costs			609,636				--				1,213,000				--				--				1,213,000				--				1,213,000
Cumulative-effect adjustment from adoption of ASC 606			--				--				--				(79,000	)			--				(79,000	)			--				(79,000	)
Foreign currency translation			--				--				--				--				7,000				7,000				--				7,000
Net loss			--				--				--				(2,960,000	)			--				(2,960,000	)			(410,000	)			(3,370,000	)
Balance at March 31, 2018			11,482,064			$	11,000			$	222,721,000			$	(190,679,000	)		$	(36,000	)		$	32,017,000			$	(897,000	)		$	31,120,000

 

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		Three Months Ended March 31,
		2019				2018
Cash flows from operating activities:
Net loss		$	(2,047,000	)		$	(3,370,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			212,000				159,000
Stock based compensation expense			81,000				137,000
Amortization of debt discount			586,000				--
(Recovery of) reserve for excess and slow-moving inventories			86,000				(29,000	)
Change in fair value of derivative			--				(259,000	)
Net change in operating assets and liabilities:
Accounts receivable			(485,000	)			896,000
Inventories			99,000				(224,000	)
Prepaid expenses and other assets			(90,000	)			39,000
Accounts payable			38,000				69,000
Accrued payroll and related expenses			(232,000	)			(92,000	)
Deferred revenue			278,000				259,000
Other current liabilities			(932,000	)			356,000
Other noncurrent liabilities			(37,000	)			(4,000	)
Net cash used in operating activities			(2,443,000	)			(2,063,000	)
Cash flows from investing activities:
Capital expenditures			(38,000	)			(290,000	)
Net cash used in investing activities:			(38,000	)			(290,000	)
Cash flows from financing activities:
Proceeds from long-term debt-related party			1,513,000				500,000
Proceeds from note payable			800,000				--
Proceeds from exercise of pre-funded warrants			5,000				--
Proceeds from issuance of common stock, net			--				1,213,000
Net cash provided by financing activities			2,318,000				1,713,000
Effects of foreign currency rate changes on cash and cash equivalents			--				(1,000	)
Net decrease in cash, cash equivalents and restricted cash			(163,000	)			(641,000	)
Cash, cash equivalents and restricted cash at beginning of period			3,400,000				4,513,000
Cash, cash equivalents and restricted cash at end of period		$	3,237,000			$	3,872,000
Supplemental disclosures of cash flow information:
Cash paid for interest		$	1,514,000			$	3,000
Supplemental non-cash financing and investing information:
Recording of beneficial conversion feature on debt		$	1,513,000				--
Right-to-use asset acquired under operating lease		$	966,000				--
Transfer of equipment to inventories		$	--			$	172,000

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1.     Description of Business and Basis of Presentation

 

Organization and Basis of Presentation

Cesca Therapeutics Inc. (“Cesca Therapeutics,” “Cesca,” the “Company”), a Delaware corporation, develops, commercializes and markets a range of automated technologies for CAR-T and other cell-based therapies. The Company was founded in 1986 and is headquartered in Rancho Cordova, CA. ThermoGenesis Corp. (“ThermoGenesis”), its device subsidiary, provides the AutoXpress^® and BioArchive^® platforms for automated clinical bio-banking, PXP^® platform for point-of-care cell-based therapies and CAR-TXpress™ platform under development for bio-manufacturing for immuno-oncology applications. Cesca is also leveraging its proprietary technology platforms to develop autologous cell-based therapies that address significant unmet needs in the vascular and orthopedic markets.

 

On January 1, 2019, the Company entered into a reorganization of the business and equity ownership of its majority-owned ThermoGenesis subsidiary. Pursuant to the reorganization, the assets acquired by ThermoGenesis from SynGen Inc. in July 2017 were contributed to a newly formed Delaware subsidiary

of ThermoGenesis named CARTXpress Bio, Inc. (“CARTXpress”) and the 20% interest in ThermoGenesis was exchanged for a 20% interest in CARTXpress. As a result, the Company holds an 80% equity interest in CARTXpress and the Company has become the owner of 100% of ThermoGenesis. The purpose of the reorganization is to allow CARTXpress to focus on the development and commercialization of the newly launched CARTXpress cellular manufacturing platform.

 

Cesca is an affiliate of the Boyalife Group, a China-based industry research alliance encompassing top research institutions for stem cell and regenerative medicine.

 

The Company reacquired the non-controlling interest shares in ThermoGenesis with a deficit of $1,711,000 in exchange for 20% equity interest in the newly created subsidiary, CARTXpress, which approximates $1,100,000.  The total amount of $2,843,000 related to reorganization of subsidiary and related change in non-controlling interest was recorded in the statement of stockholders’ equity.

 

Liquidity and Going Concern

The Company has a Revolving Credit Agreement (“Credit Agreement”) with Boyalife Asset Holding II, Inc. (Refer to Note 3). As of March 31, 2019, the Company had drawn down $8,713,000 of the $10,000,000 available under the Credit Agreement. Future draw-downs may be limited for various reasons including default or foreign government policies that restrict or prohibit transferring funds. At the time of this filing, we are currently unable to draw down on the line of credit. This may change in the near future but there is no assurance that the line of credit will become available at such time when it is needed. Boyalife Asset Holding II, Inc. is a wholly owned subsidiary of Boyalife Group Inc., which is owned and controlled by the Company’s Chief Executive Officer and Chairman of the Board.

 

At March 31, 2019, the Company had cash and cash equivalents of $2,237,000 and working capital of $3,246,000. The Company has incurred recurring operating losses and as of March 31, 2019 had an accumulated deficit of $229,306,000. These recurring losses raise substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date. The Company anticipates requiring additional capital to grow the device business, to fund other operating expenses and to make interest payments on the line of credit with Boyalife Asset Holding II, Inc. The Company’s ability to fund its cash needs is subject to various risks, many of which are beyond its control. The Company plans to seek additional funding through bank borrowings or public or private sales of debt or equity securities or strategic partnerships. The Company cannot guarantee that such funding will be available on a timely basis, in needed quantities or on terms favorable to the Company, if at all.

 

 

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern; however, the above conditions raise substantial doubt about the Company’s ability to do so. The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

 

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Cesca and its wholly-owned subsidiaries, ThermoGenesis and TotipotentRX Cell Therapy, Pvt. Ltd and ThermoGenesis’ majority-owned subsidiary, CARTXpress Bio, Inc. All significant intercompany accounts and transactions have been eliminated upon consolidation.

 

Interim Reporting

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such Securities and Exchange Commission (SEC) rules and regulations and accounting principles applicable for interim periods. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Events subsequent to the balance sheet date have been evaluated for inclusion in the accompanying condensed consolidated financial statements through the date of issuance. Operating results for the three month period ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in Cesca’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

2.     Summary of Significant Accounting Policies

 

Recently Adopted Accounting Standards

In June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting”, which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The Company adopted the standard on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s financial statements.

 

In February 2016, the FASB issued ASU 2016-02 “Leases,” which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The Company adopted the standard on January 1, 2019.

 

 

The new standard requires lessees to recognize both the right-of-use assets and lease liabilities in the balance sheet for most leases, whereas under previous GAAP only finance lease liabilities (previously referred to as capital leases) were recognized in the balance sheet. In addition, the definition of a lease has been revised which may result in changes to the classification of an arrangement as a lease. Under the new standard, an arrangement that conveys the right to control the use of an identified asset by obtaining substantially all of its economic benefits and directing how it is used as a lease, whereas the previous definition focuses on the ability to control the use of the asset or to obtain its output. Quantitative and qualitative disclosures related to the amount, timing and judgements of an entity’s accounting for leases and the related cash flows are expanded. Disclosure requirements apply to both lessees and lessors, whereas previous disclosures related only to lessees. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. Lessor accounting is also largely unchanged.

 

The new standard provides a number of transition practical expedients, which the Company has elected, including:

 

	●	A “package of three” expedients that must be taken together and allow entities to (1) not reassess whether existing contracts contain leases, (2) carryforward the existing lease classification, and (3) not reassess initial direct costs associated with existing leases, and
	●	An implementation expedient which allows the requirements of the standard in the period of adoption with no restatement of prior periods.

 

The impact of adoption did not have a material impact to the Company as of January 1, 2019 as the Company’s finance leases are immaterial and its operating leases had terms shorter than one year. In January 2019, the Company signed an amendment to its lease for office space at its corporate headquarters in Rancho Cordova, CA. The amendment extended the lease term by five years and was accounted for as a modification. At that time, the Company recorded lease assets and liabilities of $966,000.

 

Revenue Recognition

Revenue is recognized based on the five-step process outlined in Accounting Standards Codification (“ASC”) 606:

 

The following tables summarize the revenues of the Company’s reportable segments:

 

 

 

 

Contract Balances

Generally, all sales are contract sales (with either an underlying contract or purchase order). The Company does not have any material contract assets. When invoicing occurs prior to revenue recognition a contract liability is recorded (as deferred revenue on the consolidated balance sheet). Revenues recognized during the three months ended March 31, 2019 that were included in the beginning balance of deferred revenue were $383,000. Short term deferred revenues was $764,000 and $485,000 at March 31, 2019 and December 31, 2018, respectively. Long term deferred revenue, included in other noncurrent liabilities, was $300,000 and $303,000 at March 31, 2019 and December 31, 2018, respectively.

 

Backlog of Remaining Customer Performance Obligations

The following table includes revenue expected to be recognized and recorded as sales in the future from the backlog of performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period.

 

 

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

 

 

Fair Value Measurements

In accordance with ASC 820, “Fair Value Measurements and Disclosures,” fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date.

 

The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions.

 

The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short duration. The fair value of the Company’s derivative obligation liability is classified as Level 3 within the fair value hierarchy since the valuation model of the derivative obligation is based on unobservable inputs. The impairment of goodwill and intangible assets is a non-recurring Level 3 fair value measurement.

 

Segment Reporting

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (CODM), or decision-making group, whose function is to allocate resources to and assess the performance of the operating segments. The Company has identified its chief executive officer as the CODM. In determining its reportable segments, the Company considered the markets and the products or services provided to those markets.

 

The Company has two reportable business segments:

 

	●	The Clinical Development Segment, is developing autologous (utilizing the patient’s own cells) stem cell-based therapeutics that address significant unmet medical needs for applications within the vascular, cardiology and orthopedic markets.
	●	The Device Segment, engages in the development and commercialization of automated technologies for cell-based therapeutics and bio-processing. The device division is operated through the Company’s ThermoGenesis subsidiary.

 

 

Net Loss per Share

Net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding plus the pre-funded warrants. For the purpose of calculating basic net loss per share, the additional shares of common stock that are issuable upon exercise of the pre-funded warrants have been included since the shares are issuable for a negligible consideration and have no vesting or other contingencies associated with them. There were 2,465,000 pre-funded warrants included in the quarter ended March 31, 2019 calculation. 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 noted below is anti-dilutive due to the Company’s net loss position for all periods presented. Anti-dilutive securities consisted of the following at March 31:

 

 

(1)

The unvested Series A warrants were subject to vesting based upon the amount of funds actually received by the Company in the second close of the August 2015 financing which never occurred. The warrants will remain outstanding but unvested until they expire in February 2021.

 

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassifications did not have an impact on net loss as previously reported.

 

3.     Related Party Transactions

 

Convertible Promissory Note and Revolving Credit Agreement

In March 2017, Cesca entered into a Credit Agreement with Boyalife Investment Fund II, Inc., which later merged into Boyalife Asset Holding II, Inc. (the “Lender”). The Lender is a wholly owned subsidiary of Boyalife Group Inc., which is owned and controlled by the Company’s Chief Executive Officer and Chairman of the Board of Directors. The Credit Agreement and its subsequent amendments, grants to the Company the right to borrow up to $10,000,000 (the “Loan”) at any time prior to March 6, 2022 (the “Maturity Date”). The Company has drawn down a total of $8,713,000 and $7,200,000 as of March 31, 2019 and December 31, 2018, respectively. The Company’s ability to draw-down the remaining $1,287,000 may be impacted by reasons such as default or foreign government policies that restrict or prohibit transferring funds. At the time of this filing, we are currently unable to draw down on the line of credit other than to make the annual interest payment. This may change in the near future but there is no assurance that the line of credit will become available at such time when it is needed.

 

The Credit Agreement and the Convertible Promissory Note issued thereunder (the “Note”) provide that the principal and all accrued and unpaid interest under the Loan will be due and payable on the Maturity Date, with payments of interest-only due on the last day of each calendar year. The Loan bears interest at 22% per annum, simple interest. The Company has five business days after the Lender demands payment to pay the interest due before the Loan is considered in default. The Note can be prepaid in whole or in part by the Company at any time without penalty.

 

The Maturity Date of the Note is subject to acceleration at the option of the Lender upon customary events of default, which include; a breach of the Loan documents, termination of operations, or bankruptcy. The Lender’s obligation to make advances under the Loan is subject to the Company’s representations and warranties in the Credit Agreement continuing to be true at all times and there being no continuing event of default under the Note. The Credit Agreement provides that if the Lender at any time in the future purchases the Company’s blood and bone marrow processing device business, the Lender would refund to the Company legal fees expended by the Company in connection with certain litigation expenses funded by the Company with proceeds of the Loan.

 

 

The Credit Agreement and Note were amended in April 2018. The amendment granted the Lender the right to convert, at any time, outstanding principal and accrued but unpaid interest into shares of Common Stock at a conversion price of $1.61 per share and if the Company issues shares of Common Stock at a lower price per share, the conversion price of the Note is lowered to the reduced amount. The Company completed two transactions in 2018, lowering the conversion price to $0.18.

 

It was concluded that the conversion option did contain a beneficial conversion feature and as a result of the modifications to the conversion price, the Company recorded a debt discount in the amount of $7,200,000 and added $1,513,000 to the debt discount as a result of the draw-down during the quarter ended March 31, 2019. Such discount represented the fair value of the incremental shares up to the proceeds received from the convertible notes. The Company amortized $586,000 of such debt discount to interest expense for the three months ended March 31, 2019.

 

The Company recorded interest expense of $1,047,000 and $360,000 for the three months ended March 31, 2019 and 2018, respectively, and had an interest payable balance of $461,000 and $1,513,000 at March 31, 2019 and December 31, 2018, respectively related to the Note.

 

Distributor Agreement

On August 21, 2017, ThermoGenesis entered into an International Distributor Agreement with Boyalife W.S.N. Under the terms of the agreement, Boyalife W.S.N. was granted the exclusive right, subject to existing distributors and customers (if any), to develop, sell to, and service a customer base for ThermoGenesis’ AXP^® (AutoXpress^®) System and BioArchive^® System in the People’s Republic of China (excluding Hong Kong and Taiwan), Singapore, Indonesia, and the Philippines (the “Territories”). Boyalife W.S.N. is an affiliate of our Chief Executive Officer and Chairman of our Board of Directors, and Boyalife (Hong Kong) Limited, our largest stockholder. Boyalife W.S.N.’s rights under the agreement include the exclusive right to distribute AXP^® Disposable Blood Processing Sets and use rights to the AutoXpress^® System, BioArchive System and other accessories used for the processing of stem cells from cord blood in the Territories. Boyalife W.S.N. is also appointed as the exclusive service provider to provide repairs and preventative maintenance to ThermoGenesis products in the Territories.

 

The term of the agreement is for three years with ThermoGenesis having the right to renew the agreement for successive two-year periods at its option. However, ThermoGenesis has the right to terminate the agreement early if Boyalife W.S.N. fails to meet specified minimum purchase requirements.

 

Revenues

During the three months ended March 31, 2019 and 2018, the Company recorded $266,000 and $226,000, respectively, of revenues from Boyalife related to the aforementioned distributor agreement.

 

License Agreement

On March 12, 2018, ThermoGenesis entered into a License Agreement (the “Agreement”) with IncoCell Tianjin Ltd., a Chinese company and wholly-owned subsidiary of China-based Boyalife Group (“IncoCell”). Boyalife Group is an affiliate of the Company’s Chief Executive Officer and Chairman of the Board of Directors, and Boyalife (Hong Kong) Limited, the Company’s largest stockholder.  Under the terms of the Agreement, IncoCell was granted the exclusive license to use the ThermoGenesis X-Series^® products in the conduct of IncoCell’s contract manufacturing and development operations in the People’s Republic of China, Japan, South Korea, Taiwan, Hong Kong, Macau, Singapore, Malaysia, Indonesia and India (the “Territories”).

 

 

Pursuant to the terms of the Agreement, ThermoGenesis has granted IncoCell an exclusive license to purchase and use, at a discounted purchase price, X-Series cellular processing research devices, consumables, and kits for use in the conduct of contract manufacturing and development services in the Territories. In exchange, ThermoGenesis is entitled to a percentage of IncoCell’s gross contract development revenues, including any potential upfront payments, future milestones or royalty payments, during the term of the Agreement. The term of the Agreement is ten years, provided that either party may terminate the Agreement earlier upon ninety (90) days’ prior notice to the other party. The Company did not record any revenues related to this license agreement during the three months ended March 31, 2019 or 2018.

 

4.     Note Payable

 

On January 29, 2019, the Company agreed to issue and sell an unsecured note payable for an aggregate of $800,000 face value (the “Note”) that, after six months and subject to the receipt of stockholders’ approval of the conversion feature of the Note (“Stockholder Approval”), is convertible into shares of the Company's common stock, par value $0.001 per share, at a conversion price equal to the lower of (a) $0.18 per share or (2) 90% of the closing sale price of the Company’s common stock on the date of conversion (subject to a floor conversion price of $0.05) (the “Conversion Price”).

 

The Note bears interest at the rate of twenty-four percent (24%) per annum and is payable quarterly in arrears. Unless sooner converted in the manner described below, all principal under the Note, together with all accrued and unpaid interest thereupon, will be due and payable eighteen (18) months from the date of the issuance of the Note (the “Maturity Date”). However, if the Stockholder Approval does not occur at the Company’s next annual meeting of stockholders, the Maturity Date will accelerate to the date that is fourteen days after the next annual meeting. The Note may be prepaid without penalty at any time after the Note becomes convertible (at which time the holder will have the right to convert the Note before prepayment thereof).

 

On the date that is six months after the issuance of the Note but subject to Stockholder Approval, and for so long thereafter as any principal and accrued but unpaid interest under the Note remains outstanding, any holder of the Note may convert such holder’s Note, in whole or in part, into a number of shares of Company common stock equal to (i) the principal amount being converted, together with any accrued or unpaid interest thereon, divided by (ii) the Conversion Price in effect at the time of conversion. The Note has customary conversion blockers at 4.99% and 9.99% unless otherwise agreed to by the Company and the holder of the Note. The Company has accounted for the Note Payable as a debt instrument until such time as the conversion feature receives stockholder approval and then the Company will perform an analysis of the applicable accounting at that point.

 

The Note contains customary events of default, including the suspension or failure of the Company’s common stock to be traded on a trading platform, our failure to pay interest or principal when due, or if the Company files for bankruptcy or takes some other similar action for the benefit of creditors. In the event of any default under the Note, the holder may accelerate all outstanding interest and principal due on the Note.

 

5.     Leases

 

The Company determines if a contract contains a lease at inception. Our material operating lease consists of office space which has a remaining term of 5.2 years. Generally, the lease term is the minimum of the noncancelable period of the lease or the lease term inclusive of reasonably certain renewal periods.

 

 

Operating Leases

Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we use the Company’s cost of capital based on existing debt instruments. Our material leases typically contain rent escalations over the lease term. We recognize expense for these leases on a straight-line basis over the lease term.

 

The following summarizes the Company’s operating leases:

 

 

 

Maturities of lease liabilities by year for our operating leases are as follows:

 

 

Statement of Cash Flows

In January 2019, the Company signed a new amendment to its lease for office space at its corporate headquarters in Rancho Cordova, CA. The amendment was accounted for as a modification and resulted in a right-of-use asset of $966,000 being recognized as a non-cash addition during the first quarter of 2019. Cash paid for amounts included in the measurement of operating lease liabilities was $71,000 during the first quarter of 2019 and is included in cash flows from operating activities.

 

Operating Lease Costs

Operating lease costs were $103,000 during the first quarter 2019. These costs are primarily related to long-term operating leases, but also include immaterial amounts for variable lease costs and short term leases with terms greater than 30 days.

 

Finance Leases

Finance leases are included in equipment and other current and non-current liabilities on the condensed consolidated balance sheet. The amortization and interest expense are included in general and administrative expense and interest expense, respectively on the statement of operations. These leases are not material as of March 31, 2019.

 

 

 

6.     Commitments and Contingencies

 

Financial Covenants

Effective May 15, 2017, the Company entered into a Sixth Amended and Restated Technology License and Escrow Agreement with CBR Systems, Inc. which modified the financial covenant that the Company must meet in order to avoid an event of default. The Company must maintain a cash balance and short-term investments net of debt or borrowed funds that are payable within one year of not less than $2,000,000. The Company was in compliance with this financial covenant as of March 31, 2019.

 

Warranty

The Company offers a warranty on all of its non-disposable products of one to two years. The Company warrants disposable products through their expiration date. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

 

The warranty liability is included in other current liabilities in the unaudited condensed consolidated balance sheets. The change in the warranty liability for the three months ended March 31, 2019 is summarized in the following table:

 

 

 

 

Contingencies and Restricted Cash

In fiscal 2016, the Company signed an engagement letter with a strategic consulting firm (“Mavericks”). Included in the engagement letter was a success fee due upon the successful conclusion of certain transactions. On May 4, 2017, a lawsuit was filed against the Company and its CEO by the consulting firm as the consulting firm argues that it is owed a transaction fee of $1,000,000 (and interest of approximately $300,000 as of March 31, 2019) under the terms of the engagement letter due to the conversion of the Boyalife debentures in August 2016. In October 2017, to streamline the case by providing for the dismissal of claims against the Company’s CEO based on alter ego theories and without acknowledging any liability, the Company deposited $1,000,000 with the Court. The Company filed a Motion for Summary Judgment, which was denied by the Court on June 26, 2018. On September 24, 2018, Mavericks filed an amended complaint, adding back the Company’s CEO as a named defendant, as well as Boyalife Investment, Inc. (a dissolved company) and Boyalife (Hong Kong) Limited under new theories of liability, namely intentional interference with contract and inducement of breach of contract. No trial date has been set. The Company denies liability and intends to defend the lawsuit vigorously and no accrual has been recorded for this contingent liability as of March 31, 2019.

 

In the normal course of operations, the Company may have disagreements or disputes with customers, employees or vendors. Such potential disputes are seen by management as a normal part of business. As of March 31, 2019, management believes any liability that may ultimately result from the resolution of these matters will not have a material adverse effect on the Company’s consolidated financial position, operating results or cash flows.

 

7.     Derivative Obligations

 

Series A Warrants

Series A warrants to purchase 404,412 common shares were issued and vested during the year ended June 30, 2016. At the time of issuance, the Company determined that as such warrants can be settled for cash at the holders’ option in a future fundamental transaction they constituted a derivative liability. The Company has estimated the fair value of the derivative liability, using a Binomial Lattice Valuation Model with the following assumptions:

 

 

Expected volatilities are based on the historical volatility of the Company’s common stock. Contractual term is based on remaining term of the respective warrants. The discount rate represents the yield on U.S. Treasury bonds with a maturity equal to the contractual term.

 

 

The Company recorded a gain of $0 and $259,000 during the three months ended March 31, 2019 and 2018, respectively, representing the net change in the fair value of the derivative liability, which is presented as fair value change of derivative instruments, in the accompanying condensed consolidated statements of operations and comprehensive loss.

 

The following table represents the Company’s fair value hierarchy for its financial liabilities measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018:

 

 

The following table reflects the change in fair value of the Company’s derivative liabilities for the three months ended March 31, 2019:

 

 

 

8.     Stockholders’ Equity

 

Common Stock

On March 28, 2018, the Company sold 609,636 shares of common stock at a price of $2.27 per share. The net proceeds to the Company from the sale and issuance of the shares, after deducting the offering expenses borne by the Company of approximately $171,000, were $1,213,000. Additionally, the investors received unregistered warrants in a simultaneous private placement to purchase up to 304,818 shares of common stock. The warrants have an exercise price of $2.68 per share and shall be exercisable commencing six months following the issuance date. They have a term of 5.5 years and were accounted for as equity by the Company.

 

 

Stock Based Compensation

The Company recorded stock-based compensation of $81,000 and $137,000 for the three months ended March 31, 2019 and 2018, respectively.

 

The following is a summary of option activity for the Company’s stock option plans:

 

 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock. There were no options exercised during the three months ended March 31, 2019.

 

Warrants

A summary of warrant activity for the three months ended March 31, 2019 follows:

 

 

 

 

9.     Segment Reporting

 

The Company has two reportable segments, which are the same as its operating segments:

 

The Clinical Development Segment is developing autologous (utilizing the patient’s own cells) stem cell-based therapeutics that address significant unmet medical needs for applications within the vascular, cardiology and orthopedic markets.

 

The Device Segment is a pioneer and market leader in the development and commercialization of automated technologies for cell-based therapeutics and bio-processing.

 

The following table summarizes the operating results of the Company’s reportable segments:

 

 

 

 

 

 

10.     Subsequent Events

 

On April 18, 2019, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an accredited investor (the “Investor”), pursuant to which the Company agreed to issue and sell to the Investor (the “Offering”) 4,444,444 pre-funded warrants of the Company’s common stock for a purchase price of $0.17 per pre-funded warrant. The gross proceeds to the Company, excluding the proceeds, if any, from the exercise of the pre-funded warrants, was approximately $755,555.

 

Each pre-funded warrant is immediately exercisable for one share of common stock at an exercise price of $0.01 per share and will remain exercisable until exercised in full. A holder of a pre-funded warrant will not have the right to exercise any portion of its warrant if the holder, together with its affiliates, would beneficially own in excess of 4.99% or 9.99%, as applicable, of the number of shares of the Company’s common stock outstanding immediately after giving effect to such exercise (the “Beneficial Ownership Limitation”); provided, however, that the holder may increase or decrease the Beneficial Ownership Limitation, although any increase will not be effective until the 61st day after a notice of increase is delivered to the Company and the holder may not increase the Beneficial Ownership Limitation in excess of 9.99%.

 

The Offering closed on April 26, 2019. In the event the Company sells or issues any shares of common stock or common stock equivalents during the period beginning on the closing date of the Offering and ending on the date that is three-hundred and sixty-five (365) days following such date, the Company is required to issue each Investor a number of shares of common stock (or additional pre-funded warrants to purchase shares of common stock) equal to the number of shares the Investor would have received had the purchase price for such shares been at such lower purchase price.

 

In April 2019, an additional 1,500,000 pre-funded warrants that were issued in the August 2018 Securities Purchase Agreement were exercised.  The Company received proceeds of $0.01 per share or $15,000 due to the exercise.

 

 

 

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