UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
|
☒ |
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2020. |
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 ThermoGenesis Holdings, 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 |
THMO |
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 ☒ 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 ☒ 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 ☒ |
| Non-accelerated filer ☒ | 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 ☒
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 12, 2020 |
|
|
Common stock, $.001 par value |
6,360,991 |
INDEX
| Page Number | ||
|
ITEM 1. |
1 |
|
|
ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
21 |
|
ITEM 3. |
26 |
|
|
ITEM 4. |
27 |
|
|
ITEM 1. |
28 |
|
|
ITEM 1A. |
28 |
|
|
ITEM 2. |
28 |
|
|
ITEM 3. |
28 |
|
|
ITEM 4. |
28 |
|
|
ITEM 5. |
28 |
|
|
ITEM 6. |
28 |
|
| 30 | ||
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ThermoGenesis Holdings, Inc.
Condensed Consolidated Balance Sheets
|
March 31, 2020 |
December 31, 2019 |
|||||||
|
(Unaudited) |
||||||||
|
ASSETS |
||||||||
|
Current assets: |
||||||||
|
Cash and cash equivalents |
$ | 5,719,000 | $ | 3,157,000 | ||||
|
Restricted cash |
1,000,000 | 1,000,000 | ||||||
|
Accounts receivable, net of allowance for doubtful accounts of $227,000 ($226,000 at December 31, 2019) |
2,029,000 | 1,278,000 | ||||||
|
Inventories, net of reserves of $356,000 ($350,000 at December 31, 2019) |
4,218,000 | 3,824,000 | ||||||
|
Prepaid expenses and other current assets |
429,000 | 602,000 | ||||||
|
Total current assets |
13,395,000 | 9,861,000 | ||||||
|
Equipment and leasehold improvements, net |
1,904,000 | 2,028,000 | ||||||
|
Right-of-use operating lease assets, net |
829,000 | 859,000 | ||||||
|
Goodwill |
781,000 | 781,000 | ||||||
|
Intangible assets, net |
1,434,000 | 1,467,000 | ||||||
|
Other assets |
61,000 | 218,000 | ||||||
|
Total assets |
$ | 18,404,000 | $ | 15,214,000 | ||||
|
LIABILITIES AND EQUITY |
||||||||
|
Current liabilities: |
||||||||
|
Accounts payable |
$ | 2,457,000 | $ | 1,447,000 | ||||
|
Accrued payroll and related expenses |
406,000 | 288,000 | ||||||
|
Deferred revenue – short term |
617,000 | 620,000 | ||||||
|
Interest payable – related party |
443,000 | 1,869,000 | ||||||
|
Other current liabilities |
2,558,000 | 2,461,000 | ||||||
|
Total current liabilities |
6,481,000 | 6,685,000 | ||||||
|
Convertible promissory note – related party, less debt discount of $4,031,000 ($5,195,000 at December 31, 2019) |
3,550,000 | 3,518,000 | ||||||
|
Convertible promissory note, plus debt premium of $22,000 ($46,000 at December 31, 2019) |
209,000 | 413,000 | ||||||
|
Note payable |
1,000,000 | 1,000,000 | ||||||
|
Operating lease obligations – long-term |
726,000 | 761,000 | ||||||
|
Deferred revenue – long-term |
1,814,000 | 1,901,000 | ||||||
|
Other noncurrent liabilities |
19,000 | 20,000 | ||||||
|
Total liabilities |
13,799,000 | 14,298,000 | ||||||
|
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; 5,768,885 issued and outstanding (2,843,601 at December 31, 2019) |
6,000 | 3,000 | ||||||
|
Additional paid in capital |
245,704,000 | 237,313,000 | ||||||
|
Accumulated deficit |
(241,534,000 | ) | (236,932,000 | ) | ||||
|
Accumulated other comprehensive loss |
40,000 | 2,000 | ||||||
|
Total ThermoGenesis Holdings, Inc. stockholders’ equity |
4,216,000 | 386,000 | ||||||
|
Noncontrolling interests |
389,000 | 530,000 | ||||||
|
Total equity |
4,605,000 | 916,000 | ||||||
|
Total liabilities and equity |
$ | 18,404,000 | $ | 15,214,000 | ||||
See accompanying notes.
ThermoGenesis Holdings, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
|
Three Months Ended |
||||||||
|
2020 |
2019 |
|||||||
|
Net revenues |
$ | 3,200,000 | $ | 2,962,000 | ||||
|
Cost of revenues |
1,708,000 | 1,704,000 | ||||||
|
Gross profit |
1,492,000 | 1,258,000 | ||||||
|
Expenses: |
||||||||
|
Sales and marketing |
444,000 | 341,000 | ||||||
|
Research and development |
609,000 | 563,000 | ||||||
|
General and administrative |
1,648,000 | 1,260,000 | ||||||
|
Total operating expenses |
2,701,000 | 2,164,000 | ||||||
|
Loss from operations |
(1,209,000 | ) | (906,000 | ) | ||||
|
Other expenses: |
||||||||
|
Interest expense |
(3,531,000 | ) | (1,132,000 | ) | ||||
|
Other income (expenses) |
10,000 | (9,000 | ) | |||||
|
Loss on equity method investments |
(13,000 | ) | -- | |||||
|
Total other expenses |
(3,534,000 | ) | (1,141,000 | ) | ||||
|
Net loss |
(4,743,000 | ) | (2,047,000 | ) | ||||
|
Loss attributable to noncontrolling interests |
(141,000 | ) | (176,000 | ) | ||||
|
Net loss attributable to common stockholders |
$ | (4,602,000 | ) | $ | (1,871,000 | ) | ||
|
COMPREHENSIVE LOSS |
||||||||
|
Net loss |
$ | (4,743,000 | ) | $ | (2,047,000 | ) | ||
|
Other comprehensive loss: |
||||||||
|
Foreign currency translation adjustments gain (loss) |
38,000 | (4,000 | ) | |||||
|
Comprehensive loss |
(4,705,000 | ) | (2,051,000 | ) | ||||
|
Comprehensive loss attributable to noncontrolling interests |
(141,000 | ) | (176,000 | ) | ||||
|
Comprehensive loss attributable to common stockholders |
$ | (4,564,000 | ) | $ | (1,875,000 | ) | ||
|
Per share data: |
||||||||
|
Basic and diluted net loss per common share |
$ | (1.11 | ) | $ | (0.76 | ) | ||
|
Weighted average common shares outstanding – basic and diluted |
4,135,644 | 2,461,415 | ||||||
See accompanying notes.
ThermoGenesis Holdings, Inc.
Condensed Consolidated Statements of Equity (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
|
Shares |
Common Stock |
Paid in Capital in Excess of Par |
Accumulated Deficit |
AOCL* |
Non- Controlling interests |
Total Equity |
||||||||||||||||||||||
|
Balance at January 1, 2020 |
2,843,601 | $ | 3,000 | $ | 237,313,000 | $ | (236,932,000 | ) | $ | 2,000 | $ | 530,000 | $ | 916,000 | ||||||||||||||
|
Stock-based compensation expense |
-- | -- | 67,000 | -- | -- | -- | 67,000 | |||||||||||||||||||||
|
Exercise of pre-funded warrants |
100,000 | -- | 10,000 | -- | -- | -- | 10,000 | |||||||||||||||||||||
|
Exercise of warrants |
7,866 | -- | 47,000 | -- | -- | -- | 47,000 | |||||||||||||||||||||
|
Discount due to beneficial conversion features |
-- | -- | 1,869,000 | -- | -- | -- | 1,869,000 | |||||||||||||||||||||
|
Conversion of related party note payable to common stock |
1,666,670 | 2,000 | 2,998,000 | -- | -- | -- | 3,000,000 | |||||||||||||||||||||
|
Conversion of note payable to common stock |
100,000 | -- | 180,000 | -- | -- | -- | 180,000 | |||||||||||||||||||||
|
Issuance of common stock for cash in a registered direct offering, net of issuance costs |
1,000,002 | 1,000 | 3,106,000 | -- | -- | -- | 3,107,000 | |||||||||||||||||||||
|
Sale of stock thru At-the-Market offering, net |
50,746 | -- | 114,000 | -- | -- | -- | 114,000 | |||||||||||||||||||||
|
Foreign currency translation gain |
-- | -- | -- | -- | 38,000 | -- | 38,000 | |||||||||||||||||||||
|
Net loss |
-- | -- | -- | (4,602,000 | ) | -- | (141,000 | ) | (4,743,000 | ) | ||||||||||||||||||
|
Balance at March 31, 2020 |
5,768,885 | $ | 6,000 | $ | 245,704,000 | $ | (241,534,000 | ) | $ | 40,000 | $ | 389,000 | $ | 4,605,000 | ||||||||||||||
|
Balance at January 1, 2019 |
2,168,337 | $ | 2,000 | $ | 235,888,000 | $ | (227,435,000 | ) | $ | (13,000 | ) | $ | (1,711,000 | ) | $ | 6,731,000 | ||||||||||||
|
Stock-based compensation expense |
-- | -- | 81,000 | -- | -- | -- | 81,000 | |||||||||||||||||||||
|
Exercise of pre-funded warrants |
50,000 | -- | 5,000 | -- | -- | -- | 5,000 | |||||||||||||||||||||
|
Discount due to beneficial conversion features |
-- | -- | 1,513,000 | -- | -- | -- | 1,513,000 | |||||||||||||||||||||
|
Reorganization of subsidiary and related change in non-controlling interest |
-- | -- | (2,843,000 | ) | -- | -- | 2,843,000 | -- | ||||||||||||||||||||
|
Foreign currency translation loss |
-- | -- | -- | -- | (4,000 | ) | -- | (4,000 | ) | |||||||||||||||||||
|
Net loss |
-- | -- | -- | (1,871,000 | ) | -- | (176,000 | ) | (2,047,000 | ) | ||||||||||||||||||
|
Balance at March 31, 2019 |
2,218,337 | $ | 2,000 | $ | 234,644,000 | $ | (229,306,000 | ) | $ | (17,000 | ) | $ | 956,000 | $ | 6,279,000 | |||||||||||||
* Accumulated other comprehensive loss.
See accompanying notes.
ThermoGenesis Holdings, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
|
Three Months Ended March 31, |
||||||||
|
2020 |
2019 |
|||||||
|
Cash flows from operating activities: |
||||||||
|
Net loss |
$ | (4,743,000 | ) | $ | (2,047,000 | ) | ||
|
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
|
Depreciation and amortization |
199,000 | 206,000 | ||||||
|
Stock-based compensation expense |
67,000 | 81,000 | ||||||
|
Amortization of debt discount/premium, net |
522,000 | 586,000 | ||||||
|
Amortization of accelerated debt discount due to conversion |
2,486,000 | -- | ||||||
|
Reserve for excess and slow-moving inventories |
6,000 | 86,000 | ||||||
|
Reserve for bad debt expense |
1,000 | 6,000 | ||||||
|
Net change in operating assets and liabilities: |
||||||||
|
Accounts receivable |
(752,000 | ) | (485,000 | ) | ||||
|
Inventories |
(400,000 | ) | 99,000 | |||||
|
Prepaid expenses and other assets |
330,000 | (90,000 | ) | |||||
|
Accounts payable |
1,035,000 | 38,000 | ||||||
|
Interest payable – related party |
(1,426,000 | ) | (1,053,000 | ) | ||||
|
Accrued payroll and related expenses |
118,000 | (232,000 | ) | |||||
|
Deferred revenue – short term |
(3,000 | ) | 278,000 | |||||
|
Other current liabilities |
129,000 | 121,000 | ||||||
|
Long-term deferred revenue and other noncurrent liabilities |
(110,000 | ) | (30,000 | ) | ||||
|
Net cash used in operating activities |
(2,541,000 | ) | (2,436,000 | ) | ||||
|
Cash flows from investing activities: |
||||||||
|
Capital expenditures |
(23,000 | ) | (38,000 | ) | ||||
|
Net cash used in investing activities: |
(23,000 | ) | (38,000 | ) | ||||
|
Cash flows from financing activities: |
||||||||
|
Proceeds from convertible promissory note-related party |
1,869,000 | 1,513,000 | ||||||
|
Payment on finance lease obligations |
(13,000 | ) | (7,000 | ) | ||||
|
Proceeds from issuance of common stock, net of expenses |
3,220,000 | -- | ||||||
|
Proceeds from the exercise of options, warrants and pre-funded warrants |
57,000 | 5,000 | ||||||
|
Proceeds from note payable |
-- | 800,000 | ||||||
|
Net cash provided by financing activities |
5,133,000 | 2,311,000 | ||||||
|
Effects of foreign currency rate changes on cash and cash equivalents |
(5,000 | ) | -- | |||||
|
Net increase (decrease) in cash, cash equivalents and restricted cash |
2,562,000 | (163,000 | ) | |||||
|
Cash, cash equivalents and restricted cash at beginning of period |
4,157,000 | 3,400,000 | ||||||
|
Cash, cash equivalents and restricted cash at end of period |
$ | 6,719,000 | $ | 3,237,000 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
|
Cash paid for interest |
$ | 1,950,000 | $ | 1,514,000 | ||||
|
Supplemental non-cash financing and investing information: |
||||||||
|
Recording of beneficial conversion feature on debt |
$ | 1,869,000 | $ | 1,513,000 | ||||
|
Right-to-use asset acquired under operating lease |
-- | $ | 966,000 | |||||
|
Related party promissory note converted to common stock |
$ | 3,000,000 | $ | -- | ||||
|
Convertible promissory note converted to common stock |
$ | 180,000 | $ | -- | ||||
See accompanying notes.
ThermoGenesis Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Organization and Basis of Presentation
ThermoGenesis Holdings, Inc. (“ThermoGenesis Holdings,” the “Company,” “we,” “our,” “us”), formerly known as Cesca Therapeutics Inc., develops, commercializes and markets a range of automated technologies for CAR-T and other cell-based therapies. The Company currently markets a full suite of solutions for automated clinical biobanking, point-of-care applications, and automation for immuno-oncology, including its semi-automated, functionally closed CAR-TXpress™ platform, which streamlines the manufacturing process for the emerging CAR-T immunotherapy market. The Company was founded in 1986 and is registered in the State of Delaware and headquartered in Rancho Cordova, CA.
The Company previously had two reportable segments, a Device Segment and Clinical Development Segment. Due to the winding down of the Clinical Development Segment in 2019, the Company no longer has any material revenues or expenses in that segment. As a result, the Company’s chief operating decision maker no longer reviews unconsolidated operating results. The Company will no longer report in two segments. The Company 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. The Company and its subsidiaries currently manufactures and markets the following products:
For Clinical Bio-Banking Applications:
|
● |
AXP® Automated Cell Separation System – an automated, fully closed cell separation system for isolating and retrieving stem and progenitor cells from umbilical cord blood. |
|
● |
BioArchive® Automated Cryopreservation System – an automated, robotic, liquid nitrogen controlled-rate-freezing and cryogenic storage system for cord blood samples and cell therapeutic products used in clinical applications. |
For Point-of-Care Applications:
|
● |
PXP® Point-of-Care System – an automated, fully closed, sterile system allows for the rapid, automated processing of autologous peripheral blood or bone marrow aspirate derived stem cells at the point-of-care, such as surgical centers or clinics. |
For Large Scale Cell Processing and Biomanufacturing:
|
● |
X-Series® Products: X-Lab® for cell isolation, X-Wash® System for cell washing and reformulation, X-Mini® for high efficiency small scale cell purification, and X-BACS™ System under development for large scale cell purification using our proprietary buoyance-activated cell sorting (BACS) technology. |
|
● |
CAR-TXpress™ Platform – a modular designed, functionally closed platform that addresses the critical unmet need for large scale cellular processing and chemistry, manufacturing and controls (“CMC”) needs for manufacturing chimeric antigen receptor (“CAR”) T cell therapies. CAR-TXpress Bio, Inc. (“CARTXpress Bio”) is owned and developed through a subsidiary in which we own 80% of the equity interest. |
On January 1, 2019, the Company entered into a reorganization of the business and equity ownership of its majority-owned ThermoGenesis Corp. subsidiary. Pursuant to the reorganization, the assets acquired by ThermoGenesis Corp. from SynGen Inc. in July 2017 were contributed to a newly formed Delaware subsidiary of ThermoGenesis Corp., CARTXpress Bio, and the 20% interest in ThermoGenesis Corp. held by a third party was exchanged for a 20% interest in CARTXpress Bio. As a result, the Company holds an 80% equity interest in CARTXpress Bio and the Company has become the owner of 100% of ThermoGenesis Corp. The purpose of the reorganization was to allow CARTXpress Bio to focus on the development and commercialization of the newly launched CARTXpress Bio cellular manufacturing platform.
In the reorganization, the Company reacquired the non-controlling interest shares in ThermoGenesis Corp., which had an accumulated deficit of $1,711,000, in exchange for a 20% equity interest in the newly formed subsidiary, CARTXpress Bio, which amounted to approximately $1,100,000. The total amount of $2,843,000 related to the reorganization of subsidiary and the related increase in non-controlling interest was offset by a charge to additional paid in capital in stockholders’ equity.
On November 26, 2019 the Company entered into a joint venture agreement with HealthBanks Biotech Inc. (“HealthBanks”), an affiliate of the Boyalife Group, to form a new company called ImmuneCyte Life Sciences, Inc. (“ImmuneCyte”) to commercialize the Company’s proprietary cell processing platform, CAR-TXpress™, for use in immune cell banking as well as for cell-based contract development and manufacturing services (CMO/CDMO). Under the terms of the JV Agreement, ImmuneCyte was initially owned 80% by HealthBanks and 20% by the Company. The Company currently owns approximately 19% of the equity of ImmuneCyte.
ThermoGenesis Holdings is an affiliate of the Boyalife Group, a global diversified life science holding company that focuses on stem cell technology and cell-based therapeutics.
Reverse Stock Split
On June 4, 2019, the Company effected a one (1) for ten (10) reverse split of its issued and outstanding common stock. The total number of shares of common stock authorized for issuance by the Company of 350,000,000 shares did not change in connection with the reverse stock split. All historical share amounts disclosed herein have been retroactively restated to reflect the reverse split and subsequent share exchange.
Liquidity and Going Concern
The Company has a Revolving Credit Agreement (“Credit Agreement”) with Boyalife Asset Holding II, Inc. (Refer to Note 4), allowing the Company to borrow up to $10,000,000 in principal amount outstanding at any time. As of March 31, 2020, the Company had an outstanding balance of $7,582,000 under the Credit Agreement. 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 our Board of Directors.
At March 31, 2020, the Company had cash and cash equivalents of $5,719,000 and working capital of $6,914,000. The Company has incurred recurring operating losses and as of March 31, 2020 had an accumulated deficit of $241,534,000. These recurring losses raise substantial doubt about the Company’s ability to continue as a going concern within one year from the filing of this report. The Company may need to raise additional capital to grow its business, fund operating expenses and make interest payments. The Company’s ability to fund its cash needs is subject to various risks, many of which are beyond its control. The Company may seek additional funding through debt borrowings, 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 consolidated financial statements include the accounts of ThermoGenesis Holdings and its wholly-owned subsidiaries, ThermoGenesis Corp. and TotipotentRX Cell Therapy, Pvt. Ltd and ThermoGenesis Corp’s majority-owned subsidiary, CARTXpress Bio. All significant intercompany accounts and transactions have been eliminated upon consolidation.
Non-controlling Interests
The 20% ownership interest of CARTXpress Bio that is not owned by ThermoGenesis Holdings is accounted for as a non-controlling interest as the Company has an 80% ownership interest in CARTXpress Bio. Earnings or losses attributable to other stockholders of a consolidated affiliated company are classified separately as "non-controlling interest" in the Company's consolidated statements of operations. Net loss attributable to non-controlling interests reflects only its share of the after-tax earnings or losses of an affiliated company. The Company's condensed consolidated balance sheets reflect non-controlling interests within the equity section.
Interim Reporting
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 8 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, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in ThermoGenesis Holdings’ Annual Report on Form 10-K for the year ended December 31, 2019.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recently Adopted Accounting Standards
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting of Income Taxes”, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (“Topic 820”): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The standard was adopted and did not have a material impact on the Company’s financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (“Topic 326”).” The ASU introduces a new accounting model, the Current Expected Credit Losses model (“CECL”), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. ASU 2016-13 is effective for annual period beginning after December 15, 2022, including interim reporting periods within those annual reporting periods. We expect that the impact of adoption will not have a material impact.
Revenue Recognition
Revenue is recognized based on the five-step process outlined in Accounting Standards Codification (“ASC”) 606:
The following tables summarize revenues by product line:
|
Three Months Ended March 31, 2020 |
||||||||||||||||
|
Device Revenue |
Service Revenue |
Other Revenue |
Total Revenue |
|||||||||||||
|
AXP |
$ | 2,208,000 | $ | 24,000 | $ | -- | $ | 2,232,000 | ||||||||
|
BioArchive |
164,000 | 332,000 | -- | 496,000 | ||||||||||||
|
CAR-TXpress |
152,000 | 12,000 | 71,000 | 235,000 | ||||||||||||
|
Manual Disposables |
203,000 | -- | -- | 203,000 | ||||||||||||
|
Other |
14,000 | -- | 20,000 | 34,000 | ||||||||||||
|
Total |
$ | 2,741,000 | $ | 368,000 | $ | 91,000 | $ | 3,200,000 | ||||||||
|
Three Months Ended March 31, 2019 |
||||||||||||||||
|
Device Revenue |
Service Revenue |
Other Revenue |
Total Revenue |
|||||||||||||
|
AXP |
$ | 1,267,000 | $ | 55,000 | $ | -- | $ | 1,322,000 | ||||||||
|
BioArchive |
599,000 | 415,000 | -- | 1,014,000 | ||||||||||||
|
CAR-TXpress |
307,000 | -- | -- | 307,000 | ||||||||||||
|
Manual Disposables |
300,000 | -- | -- | 300,000 | ||||||||||||
|
Other |
5,000 | -- | 14,000 | 19,000 | ||||||||||||
|
Total |
$ | 2,478,000 | $ | 470,000 | $ | 14,000 | $ | 2,962,000 | ||||||||
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, 2020 that were included in the beginning balance of deferred revenue were $293,000. Short-term deferred revenues were $617,000 and $620,000 at March 31, 2020 and December 31, 2019, respectively. Long-term deferred revenue, included in other noncurrent liabilities, were $1,814,000 and $1,901,000 at March 31, 2020 and December 31, 2019, respectively.
Exclusivity Fee
On August 30, 2019, the Company entered into a Supply Agreement with Corning Incorporated (the “Supply Agreement”). The Supply Agreement has an initial term of five years with automatic two-year renewal terms, unless terminated by either party in accordance with the terms of the Supply Agreement (collectively, the “Term”). Pursuant to the Supply Agreement, the Company has granted to Corning exclusive worldwide distribution rights for substantially all X-Series® products under the CAR-TXpress™ platform (the “Products”) manufactured by its subsidiary, ThermoGenesis Corp., for the duration of the Term, subject to certain geographical and other exceptions. As consideration for the exclusive worldwide distribution rights for the Products, Corning paid a $2,000,000 exclusivity fee, in addition to any amounts payable throughout the Term for the Products.
The Company performed an evaluation of the revenue recognition of the $2,000,000 fee under ASC 606. It determined that the $2,000,000 will be recognized over time, based on the term of the contract. It was determined that the most likely outcome is the agreement is extended for one additional two-year term after the initial five-year contract is complete. Consequently, the term to recognize the exclusivity fee is over seven years. The Company will allocate the upfront fee evenly to each daily performance obligation of providing exclusivity and recognize the revenue ratably over the seven-year period. As each day passes, the Company will recognize the portion of the exclusivity fee allocated to that day. For the three months ended March 31, 2020, the Company recorded revenue of $71,000 related to the exclusivity fee. The remaining balance of the $2,000,000 payment of $1,834,000 was recorded to deferred revenue, with $286,000 in short term deferred revenue and $1,548,000 recorded in long-term deferred revenue.
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.
|
Remainder of 2020 |
2021 |
2022 |
2023 |
2024 and beyond |
Total |
|||||||||||||||||||
|
Service revenue |
$ | 807,000 | $ | 751,000 | $ | 324,000 | $ | 184,000 | $ | 38,000 | $ | 2,104,000 | ||||||||||||
|
Clinical revenue |
3,000 | 13,000 | 13,000 | 13,000 | 176,000 | 218,000 | ||||||||||||||||||
|
Exclusivity Fee |
214,000 | 286,000 | 286,000 | 286,000 | 762,000 | 1,834,000 | ||||||||||||||||||
|
Total |
$ | 1,024,000 | $ | 1,050,000 | $ | 623,000 | $ | 483,000 | $ | 976,000 | $ | 4,156,000 | ||||||||||||
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 which are supported by little or no market activity.
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 derivative obligation is not material to the financial statements of the Company. The impairment of goodwill and intangible assets is a non-recurring Level 3 fair value measurement.
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 224,445 and 246,500 pre-funded warrants included in the quarter ended March 31, 2020 and 2019 calculation, respectively. 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:
|
2020 |
2019 |
|||||||
|
Common stock equivalents of convertible promissory note and accrued interest |
5,159,496 | 5,096,721 | ||||||
|
Vested Series A warrants |
40,441 | 40,441 | ||||||
|
Unvested Series A warrants(1) |
69,853 | 69,853 | ||||||
|
Warrants – other |
1,273,461 | 1,557,884 | ||||||
|
Stock options |
287,849 | 290,933 | ||||||
|
Total |
6,831,100 | 7,055,832 | ||||||
|
(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
HealthBanks Biotech (USA) Inc.
On November 26, 2019 the Company entered into a joint venture agreement with HealthBanks Biotech (USA) Inc. (the “JV Agreement”) to form a new company called ImmuneCyte Life Sciences, Inc. (“ImmuneCyte”) to commercialize the Company’s proprietary cell processing platform, CAR-TXpress™, for use in immune cell banking as well as for cell-based contract development and manufacturing services (CMO/CDMO). Under the terms of the JV Agreement, ImmuneCyte was initially owned 80% by HealthBanks Biotech and 20% by the Company. The Company currently owns 18.87% of the equity of ImmuneCyte. ImmuneCyte will be among the first immune cell banks in the U.S. and offer customers the ability to preserve younger, healthier and uncontaminated immune cells for future potential use in dendritic and chimeric antigen receptor (“CAR-T”) cell therapies in a GMP compliant processing environment. The Company’s principal contribution to ImmuneCyte was a supply agreement under which ImmuneCyte will have the exclusive right to purchase the Company’s proprietary cell processing equipment in the immune cell banking business and a non-exclusive right to purchase it for other cell-based contract development and manufacturing (“CMO/CDMO”) services at a price equal to 115% of the Company’s cost. The Company also contributed to ImmuneCyte intellectual property and trademarks relating to the Company’s clinical development assets, which were fully impaired by the Company in 2018 and had no book value. HealthBanks contributed to ImmuneCyte a paid-up, royalty free license to use its proprietary business management system, customer relationship management software, and laboratory information statement, and it will also make available a $1,000,000 unsecured, non-convertible line of credit to ImmuneCyte to provide initial operating capital. Healthbanks is a subsidiary of Boyalife Group, Inc. (USA), the owner of Boyalife Asset Holding II, Inc., which is the largest stockholder of the Company, and is owned by Dr. Xiaochun (Chris) Xu, the Company’s Chief Executive Officer and Chairman of our Board of Directors.
In December 2019, ImmuneCyte closed a $3,000,000 equity investment with a private institution. The investor received 600,000 shares of Class A common stock at $5.00 per share, representing a 5.66% ownership in the joint venture. As a result of this equity investment in ImmuneCyte, the Company’s equity in the joint venture is no longer subject to anti-dilution provisions. After this investment, ImmuneCyte is owned 75.47% by HealthBanks, 18.87% by the Company and 5.66% by the private institution.
The Company initially determined that ImmuneCyte would be considered a variable interest entity, as a result of the significant influence the Company has over operations and its’ lack of sufficient equity at inception. After the additional investment of $3,000,000, ImmuneCyte’s equity at risk was considered sufficient and the Company determined it would no longer be classified as a variable interest entity. The Company’s investment in ImmuneCyte will be accounted for under the equity method based on management’s conclusion that the Company can exercise significant influence over ImmuneCyte via its equity interest and the related Supply Agreement. The Company recorded the investment initially at the value of the nonfinancial assets contributed of $28,000, which consisted of the book value of certain assets contributed at the time of formation.
The Company entered into a supply agreement with ImmuneCyte with an effective date of April 22, 2020. Under the supply agreement, ImmuneCyte will sell a COVID anti body detection test kit under the name SARS-CoV-2 (COVID-19) Antibody Fast Detection Kit (Colloidal Gold) to the Company. The supply agreement has a term of one year from the effective date, thirty (30) day renewal terms and contains the Company’s standard supply contract provisions.
In April 2020, ImmuneCyte purchased intellectual property for developing monoclonal antibody therapeutics for COVID-19. The intellectual property includes four fully human high-affinity monoclonal antibody drug candidates against SARS-CoV-2 (COVID-19) and tools for screening and quantifying efficacy of such neutralizing antibodies.
For the quarter ended March 31, 2020, the Company recorded a $13,000 loss on its investment in ImmuneCyte. At March 31, 2020 the value of the Company’s investment in ImmuneCyte is recorded at $0 and will remain at that value until ImmuneCyte generates income. For the quarter ended March 31, 2020, ImmuneCyte had a net loss of $264,000. As of March 31, 2020, its current assets were $2,561,000 and current liabilities were $50,000.
Convertible Promissory Note and Revolving Credit Agreement
In March 2017, ThermoGenesis Holdings 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 our 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”). In February 2020, the Company and the Lender completed a series of transactions in which the Company completed a draw down for $1,869,000 and the Lender converted a total of $3,000,000 of the outstanding balance of the convertible note into an aggregate of 1,666,670 shares of our common stock in two conversions. As of March 31, 2020, the outstanding principal balance of the Loan was $7,582,000. As a result of the conversions, the Company recorded a $2,486,000 charge to interest expense for the unamortized portion of the beneficial conversion feature related to the unamortized portion of the beneficial conversion feature of outstanding principal balance that was converted.
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 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 $16.10 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 $1.80.
It was concluded that the conversion option of the draw down in February 2020 of $1,869,000 contained a beneficial conversion feature and the Company recorded a debt discount in the amount of $1,869,000 for the quarter ended March 31, 2020. Such discount represented the fair value of the incremental shares up to the proceeds received from the convertible notes. The Company amortized $546,000 and $586,000 of debt discount to interest expense for the three months ended March 31, 2020 and 2019, respectively. The Company also recorded interest expense of $443,000 and $461,000 for the quarter ended March 31, 2020 and 2019, respectively.
Distributor Agreement
On August 21, 2017, ThermoGenesis Corp. 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 Corp’s 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 related to our Chief Executive Officer and Chairman of our Board of Directors, and an affiliate of Boyalife (Hong Kong) Limited. 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 AXP® 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 Corp. products in the Territories.
The term of the agreement is for three years with ThermoGenesis Corp. having the right to renew the agreement for successive two-year periods at its option. However, ThermoGenesis Corp. 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, 2020 and 2019, the Company recorded $0 and $266,000, respectively, of revenues from Boyalife related to the aforementioned distributor agreement.
4. CONVERTIBLE PROMISSORY NOTE
On January 29, 2019, the Company agreed to issue and sell an unsecured note payable to an accredited investor (the “Accredited Investor”) for an aggregate of $800,000 face value (the “January 2019 Note”) that, after six months, is convertible into shares of the Company's common stock at a conversion price equal to the lower of (a) $1.80 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 $0.50).
The January 2019 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 January 2019 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 January 2019 Note. The January 2019 Note may be prepaid without penalty at any time after it becomes convertible (at which time the holder will have the right to convert it before prepayment thereof).
On the date that is six months after the issuance of the January 2019 Note, and for so long thereafter as any principal and accrued but unpaid interest under the January 2019 Note remains outstanding, the holder of the January 2019 Note may convert such holder’s January 2019 Note, in whole or in part, into a number of shares of the Company’s 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 January 2019 Note has customary conversion blockers at 4.99% and 9.99% unless otherwise agreed to by the Company and the holder. It was concluded that the conversion option was beneficial. Accordingly, the Company recorded a debt discount in the amount of $800,000, upon stockholder approval of the conversion feature, which occurred on May 30, 2019. The discount represented the fair value of the incremental shares up to the proceeds received from the convertible note.
The January 2019 Note contains customary events of default, including the suspension or failure of the Company’s common stock to be traded on a trading platform, the Company’s 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 January 2019 Note, the holder may accelerate all outstanding interest and principal due on the January 2019 Note.
On July 23, 2019, the Company entered into Amendment No. 1 to the January 2019 Note (“Amended Note”). Under the terms of the amendment, the maturity date of the January 2019 Note was extended from July 29, 2020 to July 31, 2022. All other terms of the January 2019 Note remain the same. The Amended Note was accounted for as an extinguishment of the January 2019 Note as the change in the fair value of the embedded conversion option featured in the January 2019 Note immediately before and after the amendment exceeded 10% of the carrying amount of the January 2019 Note. Accordingly, the Company recorded a loss on the constructive extinguishment of this debt in the amount of $840,000 for the year ended December 31, 2019. The fair value of the Amended Note, which amounted to $1,473,000 was recorded as a liability. The Company also evaluated the conversion option embedded in the Amended Note and determined it was beneficial. Accordingly, the Company recorded a debt discount in the amount of $556,000 on the Amended Note for the year ended December 31, 2019. The Company amortized $77,000 of the debt discount for the January 2019 Note to interest expense for the year ended December 31, 2019. The Company utilized a Monte Carlo simulation model to determine the fair value of the Amended Note.
The key assumptions used in the simulation model were:
|
Stock price at date of issuance |
$ | 3.05 | ||
|
Exercise price(1) |
$ | 1.80 | ||
|
Risk-free interest rate |
1.8 | % | ||
|
Expected dividend yield |
-- | |||
|
Expected term (in years) |
3.02 | |||
|
Expected volatility |
93 | % |
|
(1) |
For the exercise price, the model inputs also accounted for the fair value protection under the Amended Note, which allows for the holder to convert at the lower of $1.80 share or 90% of the listed price of the stock on the day of conversion, whichever is lower (subject to a floor of $0.50). |
During the three months ended March 31, 2020, the holder converted a portion of the face value of the note into shares of common stock. In total, $180,000 was converted into 100,000 shares of common stock. Additionally, the unamortized premium for the portion of the note that was converted of $22,000 was recorded to interest income during the three months ended March 31, 2020.
On July 23, 2019, the Company entered into a private placement with the Accredited Investor, pursuant to which the Company issued and sold to such investor an unsecured convertible promissory note in the original principal amount of $1,000,000 (the “July 2019 Note”). After six months and subject to the receipt of stockholder approval of the conversion feature of the July 2019 Note, such note is convertible into shares of the Company's common stock at a conversion price equal to the lower of (a) $1.80 per share or (b) 90% of the closing sale price of the Company’s common stock on the date of conversion (subject to a floor conversion price of $0.50). The July 2019 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 July 2019 Note, together with all accrued and unpaid interest thereupon, will be due and payable three years from the date of the issuance on July 31, 2022. However, if stockholder approval of the conversion feature of the July 2019 Note is not obtained at the Company’s 2020 annual meeting of stockholders, the maturity date will accelerate to the date that is fourteen days after the next annual meeting.
The July 2019 Note may be prepaid without penalty at any time after it becomes convertible (at which time the holder will have the right to convert it before prepayment thereof). On the date that is six months after the issuance of the July 2019 Note and after receiving stockholder approval of the conversion feature described above, the holder may convert the July 2019 Note, in whole or in part, into a number of shares of the Company’s 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 Company has accounted for the July 2019 Note as a debt instrument until the conversion feature is approved by the Company’s stockholders. If approved, the Company will account for the conversion feature at the time of its effectiveness if approved.
5. LEASES
The Company leases the Rancho Cordova, California and Gurgaon, India facilities pursuant to operating leases. The Rancho Cordova lease expires in May 2024. The Gurgaon lease expires in September 2023; however, either party can terminate after September 2019 with three months’ notice. As such, it was accounted for as a short-term lease.
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:
|
March 31, 2020 |
||||
|
Right-of-use operating lease assets, net |
$ | 829,000 | ||
|
Current lease liability |
127,000 | |||
|
Non-current lease liability |
726,000 | |||
|
Weighted average remaining lease term |
4.2 | |||
|
Discount rate |
22 | % | ||
Maturities of lease liabilities by year for our operating leases are as follows:
|
2020 (remaining) |
$ | 227,000 | ||
|
2021 |
310,000 | |||
|
2022 |
319,000 | |||
|
2023 |
328,000 | |||
|
2024 |
139,000 | |||
|
Thereafter |
-- | |||
|
Total lease payments |
$ | 1,323,000 | ||
|
Less: imputed interest |
(494,000 | ) | ||
|
Present value of operating lease liabilities |
$ | 829,000 |
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 on the date of the amendment. Cash paid for amounts included in the measurement of operating lease liabilities was $74,000 and $71,000 for the quarter ended March 31, 2020 and 2019, respectively, and is included in cash flows from operating activities.
Operating Lease Costs
Operating lease costs were $103,000 and $103,000 for the quarter ended March 31, 2020 and 2019, respectively. 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 and were not material for the quarter ended March 31, 2020 or March 31, 2019.
6. COMMITMENTS AND CONTINGENCIES
Financial Covenants
On March 17, 2020, the Company’s wholly owned subsidiary ThermoGenesis Corp. entered into a Manufacturing and Supply Amending Agreement #1 with CBR Systems, Inc. (“CBR”) with an effective date of March 16, 2020 (the “Amendment”). The Amendment amends the Manufacturing and Supply Agreement entered into on May 15, 2017 by the Company and CBR (the “Original Agreement”). The Amendment, among other things, amends the Original Agreement by reducing from $2.0 million to $1.0 million the required amount of cash and short term investments, net of debt or borrowed funds, that the Company and ThermoGenesis Corp. must have at the end of any month to avoid being in default under the Original Agreement.
The Company was in compliance with this financial covenant as of March 31, 2020.
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, 2020 is summarized in the following table:
|
Balance at December 31, 2019 |
$ | 277,000 | ||
|
Warranties issued during the period |
30,000 | |||
|
Settlements made during the period |
(133,000 | ) | ||
|
Changes in liability for pre-existing warranties during the period |
(31,000 | ) | ||
|
Balance at March 31, 2020 |
$ | 143,000 |
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 in California Superior Court against the Company and its Chief Executive Officer by the consulting firm, which argued that it was owed a transaction fee of $1,000,000 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 Chief Executive Officer based on alter ego theories and without acknowledging any liability, the Company deposited $1,000,000 with the Court, which was recorded as restricted cash. The trial completed in February 2020 with an adverse jury verdict in favor of Mavericks in the total amount of $1,000,000. As a result, the Company recorded in other current liabilities a $1,400,000 loss in general and administrative expenses for the year ended December 31, 2019. The loss includes the $1,000,000 transaction fee and an estimated $400,000 in interest due. The $1,000,000 deposited with the court will be used to settle the transaction fee. At the conclusion of the trial, no judgment had been entered as the parties were disputing whether the defense of equitable estoppel should bar entry of judgment and the proper pre-judgment interest start date. In April 2020, the Company received notice that equitable estoppel defense was denied by the Court. After that ruling, Mavericks and the Company reached agreement for the interest start date and the total amount of Mavericks trial related expenses that must be reimbursed by the Company as result of the verdict. On May 1, 2020 the parties agreed that the Company would pay Mavericks $480,000, representing $369,000 for interest and $111,000 for trial related expenses. Additionally, the Company agreed not to contest the jury verdict and allowing the Court to release the $1,000,000 cash bond deposited by the Company early in the litigation to Mavericks, effectively ending the case.
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, 2020, except as disclosed, 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. STOCKHOLDERS’ EQUITY
Common Stock
On March 25, 2020, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with three institutional and accredited investors (the “Investors”), pursuant to which the Company agreed to issue and sell to the Investors, in a registered direct offering (the “RDO”), an aggregate of 1,000,002 shares of the Company’s common stock at an offering price of $3.50 per share, for gross proceeds of approximately $3.5 million before the deduction of $393,000 in placement agent fees and offering expenses. The shares were issued and sold by the Company pursuant to a registration statement on Form S-3 (File No. 333-235509), which was initially filed with the Securities and Exchange Commission (the “Commission”) on December 13, 2019 and was declared effective by the Commission on January 3, 2020, and the related prospectus supplement filed with the Commission on March 27, 2020. The closing of the RDO occurred on March 27, 2020. The Purchase Agreement also contains representations, warranties, indemnification and other provisions customary for transactions of this nature. Under the Purchase Agreement, (i) the Company and its subsidiaries are prohibited for a period of 30 days after the closing (subject to certain exceptions) from issuing, entering into any agreement to issue, or announcing the issuance or the proposed issuance of any shares of the Company’s common stock or any other securities that are at any time convertible into, or exercisable or exchangeable for, or otherwise entitle the holder thereof to receive, shares of the Company’s common stock and (ii) the Company is prohibited for a period of twelve (12) months after the closing (subject to certain exceptions) from effecting or entering into an agreement to effect any issuance by the Company or any of its subsidiaries of the Company’s common stock or any other securities that are at any time convertible into, or exercisable or exchangeable for, or otherwise entitle the holder thereof to receive, shares of the Company’s common stock involving a Variable Rate Transaction (as defined in the Purchase Agreement).
On December 13, 2019, the Company entered into an At The Market Offering Agreement, by and between the Company and H.C. Wainwright & Co., LLC, as agent (“H.C. Wainwright”) (the “ATM Agreement”), pursuant to which the Company may offer and sell, from time to time through H.C. Wainwright, shares of Common Stock, having an aggregate offering price of up to $4.4 million (the “HCW Shares”). The offer and sale of the HCW Shares is made pursuant to a shelf registration statement on Form S-3 and the related prospectus (File No. 333-235509). Pursuant to the ATM Agreement, H.C. Wainwright may sell the HCW Shares by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 of the Securities Act, including sales made by means of ordinary brokers’ transactions, including on The NASDAQ Capital Market, at market prices or as otherwise agreed with H.C. Wainwright. H.C. Wainwright will use commercially reasonable efforts consistent with its normal trading and sales practices to sell the HCW Shares from time to time, based upon instructions from the Company, including any price or size limits or other customary parameters or conditions the Company may impose. The Company is not obligated to make any sales of the HCW Shares under the ATM Agreement. The offering of HCW Shares pursuant to the ATM Agreement will terminate upon the earliest of (a) the sale of all of the HCW Shares subject to the ATM Agreement, (b) the termination of the ATM Agreement by H.C. Wainwright or the Company, as permitted therein, or (c) August 9, 2022. The Company will pay H.C. Wainwright a commission rate equal to 3% of the aggregate gross proceeds from each sale of HCW Shares and have agreed to provide H.C. Wainwright with customary indemnification and contribution rights. The Company will also reimburse H.C. Wainwright for certain specified expenses in connection with entering into the ATM Agreement. As of March 31, 2020, the Company sold a total of 50,746 shares of Common Stock for aggregate gross proceeds of $280,000 at an average selling price of $5.44 per share, resulting in net proceeds of approximately $114,000 after deducting legal expenses, audit fees, commissions and other transaction costs of approximately $167,000. The Company terminated the ATM Prospectus Supplement on March 25, 2020, but the ATM Agreement remains in effect.
Stock Based Compensation
The Company recorded stock-based compensation of $67,000 and $81,000 for the three months ended March 31, 2020 and 2019, respectively, as comprised of the following:
|
Three Months Ended March 31, |
||||||||
|
2020 |
2019 |
|||||||
|
Sales and marketing |
$ | 13,000 | $ | 12,000 | ||||
|
Research and development |
15,000 | 15,000 | ||||||
|
General and administrative |
39,000 | 54,000 | ||||||
| $ | 67,000 | $ | 81,000 | |||||
The following is a summary of option activity for the Company’s stock option plans:
|
Number of Shares |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Life |
Aggregate Intrinsic Value |
|||||||||||||
|
Outstanding at December 31, 2019 |
291,807 | $ | 13.96 | |||||||||||||
|
Forfeited |
(3,958 | ) | $ | 3.74 | ||||||||||||
|
Outstanding at March 31, 2020 |
287,849 | $ | 14.10 | 8.06 | $ | 101,074 | ||||||||||
|
Vested and expected to vest at March 31, 2020 |
226,960 | $ | 15.70 | 7.9 | $ | 75,434 | ||||||||||
|
Exercisable at March 31, 2020 |
143,479 | $ | 20.20 | 7.61 | $ | 40,430 | ||||||||||
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, 2020.
Warrants
A summary of warrant activity for the three months ended March 31, 2020 follows:
|
Number of Shares |
Weighted-Average Exercise Price Per Share |
|||||||
|
Balance at December 31, 2019 |
1,716,066 | $ | 25.23 | |||||
|
Warrants expired |
-- | -- | ||||||
|
Warrants exercised |
(107,866 | ) | $ | .53 | ||||
|
Outstanding at March 31, 2020 |
1,608,200 | $ | 26.89 | |||||
|
Exercisable at March 31, 2020 |
1,538,347 | $ | 24.47 | |||||
8. SUBSEQUENT EVENTS
The Company has evaluated events subsequent to the balance sheet date for inclusion in the accompanying consolidated financial statements through the date of issuance and determined that no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosures in the notes thereto other than as disclosed below.
On April 21, 2020, the Company entered into a promissory note and received a loan (collectively, the “PPP Loan”) from Comerica Bank (“Comerica”) under the Paycheck Protection Program (“PPP”), which was established under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration. The Company received net proceeds of $646,000 from the PPP Loan. The term of the PPP Loan is two years with an interest rate of 1.00% per annum, which shall be deferred for the first six months of the term of the loan. Pursuant to the terms of the CARES Act, the proceeds of the PPP Loan may be used for payroll costs, mortgage interest, rent or utility costs. The promissory note of the PPP Loan contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, or provisions of the promissory note. The occurrence of an event of default may result in a claim for the immediate repayment of the amount outstanding under the PPP Loan.
On April 28, 2020, the Company borrowed an additional $2,418,000 under the Credit Agreement (see Note 3, Related Party Transactions). As a result of such borrowing and after giving effect to the borrowing, the outstanding principal balance under the Note was $10,000,000 and accrued but unpaid interest was $580,000 as of April 28, 2020. The principal purpose of the borrowing was to provide working capital to fund the Company’s purchase of SARS-CoV-2 (COVID-19) IgM/IgG Antibody Fast Detection Kits from ImmuneCyte (see Note 3, Related Party Transactions).
Between April 7, 2020 – May 12, 2020, the Company received exercise notices for 263,216 warrants that were issued at $6 per share as part of the financing transaction the Company completed in May 2018. Approximately $1,600,000 in cash was received for the exercises. As of May 12, 2020, 626,821 of the warrants issued at $6 per share in the May 2018 transaction remain outstanding.
In April 2020, the remaining $188,000 of the convertible note issued in January 2019 was converted for 104,445 shares. Additionally, 224,445 pre-funded warrants that were issued in a financing transaction in April 2019 were exercised. As of the date of this filing, no pre-funded warrants remain outstanding from the April 2019 financing.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report contains forward-looking statements. The forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements contained herein. When used in this report, the words "anticipate," "believe," "estimate," "expect" and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. Actual results, performance or achievements could differ materially from the results expressed in, or implied by these forward-looking statements. Readers should be aware of important factors that, in some cases, have affected, and in the future could affect, actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. These factors include without limitation, the ability to obtain capital and other financing in the amounts and at the times needed to complete clinical trials and launch new products, market acceptance of new products, the nature and timing of regulatory approvals for both new products and existing products for which the Company proposes new claims, realization of forecasted revenues, expenses and income, initiatives by competitors, price pressures, failure to meet FDA regulated requirements governing the Company’s products and operations (including the potential for product recalls associated with such regulations), risks associated with initiating manufacturing for new products, failure to meet Foreign Corrupt Practice Act regulations, legal proceedings, uncertainty associated with the COVID-19 pandemic, and other risk factors listed from time to time in our reports with the Securities and Exchange Commission (“SEC”), including, in particular, those set forth in ThermoGenesis Holdings’ Form 10-K for the year ended December 31, 2019.
Business Overview
ThermoGenesis Holdings, Inc. (“ThermoGenesis Holdings,” the “Company,” “we,” “our,” “us”), formerly known as Cesca Therapeutics Inc., develops, commercializes and markets a range of automated technologies for CAR-T and other cell-based therapies. The Company currently markets a full suite of solutions for automated clinical biobanking, point-of-care applications, and automation for immuno-oncology, including its semi-automated, functionally closed CAR-TXpress™ platform, which streamlines the manufacturing process for the emerging CAR-T immunotherapy market. The Company was founded in 1986 and is registered in the State of Delaware and headquartered in Rancho Cordova, CA.
The Company previously had two reportable segments, a Device Segment and Clinical Development Segment. Due to the winding down of the Clinical Development Segment in 2019, the Company no longer has any material revenues or expenses in that segment. As a result, the Company’s chief operating decision maker no longer reviews unconsolidated operating results. The Company will no longer report in two segments. The Company 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. The Company and its subsidiaries currently manufactures and markets the following products:
For Clinical Bio-Banking Applications:
|
● |
AXP® Automated Cell Separation System – an automated, fully closed cell separation system for isolating and retrieving stem and progenitor cells from umbilical cord blood. |
|
● |
BioArchive® Automated Cryopreservation System – an automated, robotic, liquid nitrogen controlled-rate-freezing and cryogenic storage system for cord blood samples and cell therapeutic products used in clinical applications. |
For Point-of-Care Applications:
|
● |
PXP® Point-of-Care System – an automated, fully closed, sterile system allows for the rapid, automated processing of autologous peripheral blood or bone marrow aspirate derived stem cells at the point-of-care, such as surgical centers or clinics. |
For Large Scale Cell Processing and Biomanufacturing:
|
● |
X-Series® Products: X-Lab® for cell isolation, X-Wash® System for cell washing and reformulation, X-Mini® for high efficiency small scale cell purification, and X-BACS™ System under development for large scale cell purification using our proprietary buoyance-activated cell sorting (BACS) technology. |
|
● |
CAR-TXpress™ Platform – a modular designed, functionally closed platform that addresses the critical unmet need for large scale cellular processing and chemistry, manufacturing and controls (“CMC”) needs for manufacturing chimeric antigen receptor (“CAR”) T cell therapies. CAR-TXpress is owned and developed through CARTXpress Bio, Inc. (“CARTXpress Bio”), a subsidiary in which we own 80% of the equity interest. |
On January 1, 2019, the Company entered into a reorganization of the business and equity ownership of its majority-owned ThermoGenesis Corp. subsidiary. Pursuant to the reorganization, the assets acquired by ThermoGenesis Corp. from SynGen Inc. in July 2017 were contributed to a newly formed Delaware subsidiary of ThermoGenesis Corp., CARTXpress Bio and the 20% interest in ThermoGenesis Corp. held by a third party was exchanged for a 20% interest in CARTXpress Bio. As a result, the Company holds an 80% equity interest in CARTXpress Bio and the Company has become the owner of 100% of ThermoGenesis Corp. The purpose of the reorganization was to allow CARTXpress Bio to focus on the development and commercialization of the newly launched CARTXpress Bio cellular manufacturing platform.
In the reorganization, the Company reacquired the non-controlling interest shares in ThermoGenesis Corp., which had an accumulated deficit of $1,711,000, in exchange for a 20% equity interest in the newly formed subsidiary, CARTXpress Bio, which amounted to approximately $1,100,000. The total amount of $2,843,000 related to the reorganization of the subsidiary and the related increase in non-controlling interest was offset by a charge to additional paid in capital in stockholders’ equity.
On November 26, 2019 the Company entered into a joint venture agreement with HealthBanks Biotech Inc. (“HealthBanks”), an affiliate of the Boyalife Group, to form a new company called ImmuneCyte Life Sciences, Inc. (“ImmuneCyte”) to commercialize the Company’s proprietary cell processing platform, CAR-TXpress™, for use in immune cell banking as well as for cell-based contract development and manufacturing services (CMO/CDMO). Under the terms of the JV Agreement, ImmuneCyte was initially owned 80% by HealthBanks and 20% by the Company. The Company currently owns approximately 19% of the equity of ImmuneCyte.
ThermoGenesis Holdings is an affiliate of the Boyalife Group, a global diversified life science holding company that focuses on stem cell technology and cell-based therapeutics.
Recent Update on COVID-19 Rapid Test and Antibody Therapeutics
To effectively respond to the COVID-19 pandemic, the Company is seeking to leverage its expertise and global relationships and resources in the medical technology field bring to market in the U.S. a point-of-care COVID-19 antibody test that will allow rapid pre-screening of patients and allow for identification of individuals who have encountered the virus and have developed antibody immunity. In late March 2020, the Company announced that it filed notification with the FDA of its intent to register such a test under the name ThermoGenesis SARS-CoV-2 (COVID-19) IgM/IgG Antibody Fast Detection Kit (Colloidal Gold), which is intended for professional use at the point-of-care. On April 15, 2020, the Company received an acknowledgement letter noting that the required registrations and listings with FDA have been completed, which allows the kit to be distributed to the U.S. market. The detection kit is listed on the FDA website. The Company currently estimates that it will begin sales of the detection kits in the second quarter of 2020. The Company will purchase the detection kits from ImmuneCyte under an April 2020 supply agreement between the Company and ImmuneCyte.
In addition, in April 2020, the Company began working with ImmuneCyte to develop a convalescent plasma strategy for COVID-19 utilizing its SARS-CoV-2 (COVID-19) IgM/IgG Antibody Fast Detection Kit. Convalescent plasma therapy is an exploratory approach that involves giving patients an infusion of plasma from people who have recovered from COVID-19. The Antibody Fast Detection Kits can quickly identify individuals who may have developed protective immunity against the virus. The Company is researching the potential to leverage its technologies along with its proprietary automated cell processing platform, which could potentially allow for simultaneous isolation of convalescent plasma and immune cells for potential anti-COVID-19 antibody development.
There is significant uncertainty relating to the potential impact of COVID-19 on our business and the general business environment. The extent to which COVID-19 impacts our ability to obtain financing, as well as our results of operations and financial condition, generally, will depend on future developments which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions taken by governments and private businesses to contain COVID-19 or treat its impact, among others. If the disruptions posed by COVID-19 continue for an extended period of time, the markets may not be available to the Company for purposes of raising required capital. Should we not be able to obtain financing when required or on terms which are economically feasible, we may have to significantly delay, scale back, or discontinue the development and/or commercialization of one or more of our product candidates, restrict our operations, or obtain funds by entering into agreements on unfavorable terms.
Reverse Stock Split
On June 4, 2019, the Company effected a one (1) for ten (10) reverse split of its issued and outstanding common stock. The total number of shares of common stock authorized for issuance by the Company of 350,000,000 shares did not change in connection with the reverse stock split. All historical share amounts disclosed herein have been retroactively restated to reflect the reverse split and subsequent share exchange.
Critical Accounting Policies
Management’s discussion and analysis of its financial condition and results of operations is based upon the condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Estimates are based 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. For a full discussion of our accounting estimates and assumptions that have been identified as critical in the preparation of the Company’s condensed consolidated financial statements, please refer to ThermoGenesis Holdings’ Form 10-K for the year ended December 31, 2019.
Results of Operations for the Three Months Ended March 31, 2020 as Compared to the Three Months Ended March 31, 2019
Net Revenues
Net revenues for the three months ended March 31, 2020 were $3,200,000 compared to $2,962,000 for the three months ended March 31, 2019, an increase of $238,000 or 8%. The higher revenues were driven by AXP® disposable sales, which increased by approximately $950,000 in the first quarter of 2020 as compared to the first quarter in 2019. Units sold improved from 598 cases in the first quarter of 2019 to 989 cases sold in the same period in 2020. This increase was offset by a decrease of $514,000 in BioArchive® device sales, which had zero devices sold in the first quarter of 2020 as compared to two devices sold in the same period in 2019, manual disposables with revenues of $97,000 less in the first quarter of 2020 and CAR-TXpress™ sales which decreased by $72,000.
|
March 31, 2020 |
March 31, 2019 |
|||||||
|
AXP |
$ | 2,232,000 | $ | 1,322,000 | ||||
|
BioArchive |
496,000 | 1,014,000 | ||||||
|
CAR-TXpress |
235,000 | 307,000 | ||||||
|
Manual Disposables |
203,000 | 300,000 | ||||||
|
Other |
34,000 | 19,000 | ||||||
| $ | 3,200,000 | $ | 2,962,000 | |||||
Gross Profit
The Company’s gross profit was $1,492,000 or 47% of net revenues for the three months ended March 31, 2020, compared to $1,258,000 or 42% of net revenues for the three months ended March 31, 2019, an increase of $234,000. The gross profit improvement was driven by the revenue recognition for the Corning exclusivity fee, which was $71,000 for the first quarter of 2020 as compared to $0 for the first quarter of 2019. This also added approximately two points to the gross profit percentage of net revenue. The remainder of the increase was primarily due to increased sales of AXP® disposables. The 391 additional cases sold in the first quarter of 2020 contributed approximately $400,000 in additional gross profit, which was offset by a decrease of approximately $200,000 due to lower BioArchive® device sales in the quarter ended March 31, 2020 as compared to March 31, 2019.
Sales and Marketing Expenses
Sales and marketing expenses for the three months ended March 31, 2020 were $444,000 compared to $341,000 for the three months ended March 31, 2019, an increase of $103,000 or 30%. The increase was driven by higher salaries and benefit expenses in the first quarter of 2020 as compared to the same period in 2019.
Research and Development Expenses
Research and development expenses were $609,000 for the three months ended March 31, 2020, compared to $563,000 for the three months ended March 31, 2019, an increase of $46,000 or 8%. The increase was driven by expenses related the Company’s short term incentive program and other increases in employee benefits in the first quarter of 2020 as compared to the same period in 2019.
General and Administrative Expenses
General and administrative expenses for the three months ended March 31, 2020 were $1,648,000, compared to $1,260,000 for the three months ended March 31, 2019, an increase of $388,000 or 31%. The increase was driven by legal and other expenses related to the Mavericks lawsuit of approximately $220,000, expenses related to the Company’s short term incentive program of approximately $100,000 and increased expenses related to completing and filing the Company’s 2019 10-K were approximately $85,000 more than the first quarter of 2019.
Interest Expense
Interest expense for the three months ended March 31, 2020 was $3,531,000, as compared $1,132,000 for the three months ended March 31, 2019, an increase of $2,399,000 or 212%. The increase is driven the accelerated expense of the unamortized debt discount of $2,486,000 for the beneficial conversion feature associated with the portions of the Revolving Credit Agreement with Boyalife Asset Holding II, Inc. which was converted in the quarter ended March 31, 2020.
Liquidity and Capital Resources
At March 31, 2020, the Company had cash and cash equivalents of $5,719,000 and working capital of $6,914,000. This compares to cash and cash equivalents of $3,157,000 and working capital of $3,176,000 at December 31, 2019. We have primarily financed operations through private and public placement of equity securities and our line of credit facility.
The Company has a Revolving Credit Agreement with Boyalife Asset Holding II, Inc. In February 2020, the Lender converted a total of $3,000,000 of the outstanding balance of the convertible note into an aggregate of 1,666,670 shares of our common stock in two conversions. As of March 31, 2020, the outstanding principal balance of the Loan was $7,582,000 of the $10,000,000.
The Company anticipates that it may need to make pre-payments for all or a portion of the COVID-19 Antibody Fast Detection Kits it intends to begin selling in the second quarter of 2020. In order to address the cash required for those payments, the Company has improved its cash position subsequent to March 31, 2020 by completing a $2,418,000 draw-down from the Boyalife Revolving Credit Agreement and receipt of approximately $1,600,000 from exercises of 263,216 of warrants issued at $6 per share as part of a financing in 2018. As of the date of this filing, the Company has paid approximately $1,500,000 to ImmuneCyte as pre-payments for the purchase of kits.
The Company has incurred recurring operating losses and as of March 31, 2020 had an accumulated deficit of $241,534,000. These conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year from the filing of this report. The Company may require additional capital to grow the business, to fund other operating expenses and to make interest payments. The Company’s ability to fund its cash needs is subject to various risks, many of which are beyond its control. The Company may 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 us, if at all.
Non-GAAP Measures
In addition to the results reported in accordance with US GAAP, we also use a non-GAAP measure, adjusted EBITDA, to evaluate operating performance and to facilitate the comparison of our historical results and trends. The Company calculates adjusted EBITDA as income or (loss) from operations less depreciation, amortization, stock compensation, equity method investments and impairment of intangible assets. This financial measure is not a measure of financial performance under US GAAP and should not be considered in isolation or as a substitute for loss as a measure of performance. The calculation of this non-GAAP measure may not be comparable to similarly titled measures used by other companies. Reconciliations to the most directly comparable GAAP measure are provided below.
|
Three Months Ended March 31, |
||||||||
|
2020 |
2019 |
|||||||
|
Net loss |
$ | (4,743,000 | ) | $ | (2,047,000 | ) | ||
|
Deduct: |
||||||||
|
Interest expense |
(3,531,000 | ) | (1,132,000 | ) | ||||
|
Foreign exchange and other expense |
10,000 | (9,000 | ) | |||||
|
Loss on equity method investments |
(13,000 | ) | -- | |||||
|
Loss from operations |
$ | (1,209,000 | ) | $ | (906,000 | ) | ||
|
Add: |
||||||||
|
Depreciation and amortization |
199,000 | 206,000 | ||||||
|
Stock-based compensation expense |
67,000 | 81,000 | ||||||
|
Adjusted EBITDA |
$ | (943,000 | ) | $ | (619,000 | ) | ||
The adjusted EBITDA loss was $943,000 for the three months ended March 31, 2020 compared to a loss of $619,000 for the three months ended March 31, 2019, an increase in the adjusted EBITDA loss of $324,000. The primary drivers of the lower adjusted EBITDA in the quarter ended March 31, 2020 was the $388,000 increase in general and administrative due to legal expenses related to the Mavericks lawsuit, expenses related to the Company’s short term incentive program and increased expenses related to completing and filing the Company’s 2019 10-K and the $103,000 increase in sales and marketing expenses due to higher salaries and benefit expenses in the first quarter of 2020 as compared to the same period in 2019. These increases were offset by $234,000 more gross profit earned in the quarter ended March 31, 2020 as compared to the quarter ended March 31, 2019.
Off-Balance Sheet Arrangements
As of March 31, 2020, the Company had no off-balance sheet arrangements.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
ThermoGenesis Holdings is a smaller reporting company as defined by Rule 12b-2 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) and is not required to provide information under this item.
ITEM 4. Controls and Procedures
ThermoGenesis Holdings carried out an evaluation, under the supervision, and with the participation of management, including both the Company’s Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of the design and operation of ThermoGenesis Holdings’ disclosure controls and procedures (as defined by Exchange Act Rule 13a-15(e) or 15d-15(e)) as of March 31, 2020. Disclosure controls and procedures cover controls and other procedures that are designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, ThermoGenesis Holdings’ Chief Executive Officer and Chief Financial Officer have both concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2020.
There were no changes in ThermoGenesis Holdings, Inc. internal controls over financial reporting that occurred during the three months ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. Management believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within any company, have been detected.
|
LEGAL PROCEEDINGS. |
In the normal course of operations, we may have disagreements or disputes with distributors, vendors or employees. Such potential disputes are seen by management as a normal part of business and while the outcome of such disagreements and disputes cannot be predicted with certainty, except as described below, we do not believe that any pending legal proceedings are material. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
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 in California Superior Court against the Company and its Chief Executive Officer by the consulting firm, which argued that it was owed a transaction fee of $1,000,000 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 Chief Executive Officer based on alter ego theories and without acknowledging any liability, the Company deposited $1,000,000 with the Court, which was recorded as restricted cash. The trial completed in February 2020 with an adverse jury verdict in favor of Mavericks in the total amount of $1,000,000. As a result, the Company recorded in other current liabilities a $1,400,000 loss in general and administrative expenses for the year ended December 31, 2019. The loss includes the $1,000,000 transaction fee and an estimated $400,000 in interest due. The $1,000,000 deposited with the court will be used to settle the transaction fee. At the conclusion of the trial, no judgment had been entered as the parties were disputing whether the defense of equitable estoppel should bar entry of judgment and the proper pre-judgment interest start date. In April 2020, the Company received notice that equitable estoppel defense was denied by the Court. After that ruling, Mavericks and the Company reached agreement for the interest start date and the total amount of Mavericks trial related expenses that must be reimbursed by the Company as result of the verdict. On May 1, 2020 the parties agreed that the Company would pay Mavericks $480,000, representing $369,000 for interest and $111,000 for trial related expenses. Additionally, the Company agreed not to contest the jury verdict and allowing the Court to release the $1,000,000 cash bond deposited by the Company early in the litigation to Mavericks, effectively ending the case.
|
RISK FACTORS. |
There have been no material changes to the risk factors relating to the Company set forth in f, “Item IA. Risk Factors” of its Annual Report on Form 10-K for the year ended December 31, 2019.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
None.
|
DEFAULTS UPON SENIOR SECURITIES. |
None.
|
MINE SAFETY DISCLOSURE. |
Not applicable.
|
OTHER INFORMATION. |
None.
|
EXHIBITS. |
An index of exhibits is found on page 29 of this report.
|
ITEM 6. |
Exhibits. |
|
Exhibit No. |
Document Description |
Incorporated by Reference |
|
10.1 |
Incorporated by reference to Exhibit 10.1 to Form 8-K filed with the SEC on March 20, 2020. |
|
|
10.2 |
Incorporated by reference to Exhibit 10.1 to Form 8-K filed with the SEC on March 27, 2020. |
|
|
10.3 |
Incorporated by reference to Exhibit 10.2 to Form 8-K filed with the SEC on March 27, 2020. |
|
|
10.4 |
Incorporated by reference to Exhibit 10.1 to Form 8-K filed with the SEC on January 3, 2020. |
|
|
10.5 |
Incorporated by reference to Exhibit 10.1 to Form 8-K filed with the SEC on April 28, 2020. |
|
|
31.1 |
Filed herewith. |
|
|
31.2 |
Filed herewith. |
|
|
32 |
Filed herewith. |
|
|
101.INS |
XBRL Instance Document‡ |
|
|
101.SCH |
XBRL Taxonomy Extension Schema Document‡ |
|
|
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document‡ |
|
|
101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document‡ |
|
|
101.LAB |
XBRL Taxonomy Extension Label Linkbase Document‡ |
|
|
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document‡ |
Footnotes to Exhibit Index
|
‡ |
XBRL information is furnished and not filed for purpose of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document. |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
ThermoGenesis Holdings, Inc. (Registrant) |
|
|
Dated: May 14, 2020 |
/s/ Xiaochun (Chris) Xu, Ph.D. |
|
Xiaochun (Chris) Xu, Ph.D. Chief Executive Officer (Principal Executive Officer)
|
|
|
Dated: May 14, 2020 |
/s/ Jeff Cauble |
|
Jeff Cauble Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |