NOTES TO CONS
OLID
ATED FINANCIAL STATEMENTS
1.
Description of Business and Basis of Presentation
Organization and Basis of Presentation
Cesca Therapeutics Inc. (the “Company” or “Cesca”) develops and markets integrated cellular therapies and delivery systems that advance the safe and effective practice of regenerative medicine. Cesca’s product pipeline includes automated blood and bone marrow processing systems that enable the separation, processing and preservation of cell and tissue therapy products.
On March 4, 2016, the Company effected a one (1) for twenty (20) reverse split of its issued and outstanding common stock. There were no changes to its authorized number of shares of common stock of 350,000,000.
Liquidity
On July 7, 2017, the Company, thru its wholly-owned subsidiary, ThermoGenesis, acquired the business and substantially all of the assets of SynGen Inc. (“SynGen”). In exchange, ThermoGenesis issued to SynGen shares of ThermoGenesis common stock that, after giving effect to the issuance, constitute 20% of ThermoGenesis’ outstanding common shares, and ThermoGenesis also made a one-time cash payment of $1.0 million to SynGen. (Refer to Note 14).
On March 6, 2017, the Company entered into a Revolving Credit Agreement (“Credit Agreement”) with Boyalife Investment Fund II, Inc. (the “Lender”) (Refer to Note 5). As of June 30, 2017, the Company had drawn down $3,500,000 of the $5,000,000 available under the Credit Agreement.
The Company has drawn down an additional $1,500,000 subsequent to June 30, 2017 and through the date of this report.
Boyalife Investment Fund II, Inc. is a wholly owned subsidiary of Boyalife Group Inc., which is owned and controlled by the Company’s Chief Executive Officer and Chairman of the Board. On September 13, 2017, the Company entered into an amendment to the Revolving Credit Agreement with the Lender to increase the Company’s maximum borrowing availability thereunder from $5.0 million to $10.0 million.
On August 22, 2016, the Company elected to convert all outstanding principal and interest accrued and otherwise payable under February 2016 debentures aggregating $23,903,000 dating back to Cesca’s February 2016 financing. Upon conversion, 6,102,941 shares of common stock were issued and the Debentures plus all related security interests and liens were terminated.
On August 3, 2016, the Company sold 600,000 shares of common stock at a price of $4.10 per share.
The net proceeds to the Company from the sale and issuance of the shares, after deducting the offering expenses borne by the Company, were $2,092,000.
At June 30, 2017, the Company had cash and cash equivalents of $3,623,000 and working capital of $6,658,000. The Company has incurred recurring operating losses and as of June 30, 2017 had an accumulated deficit of $185,357,000. The Company anticipates requiring additional capital in order to grow the Device business, initiate the Phase III Critical Limb Ischemia trial, to fund other operating expenses and to make interest payments on the line of credit with Boyalife. These conditions raised substantial doubt about the Company’s ability to meet its obligations. To alleviate the substantial doubt, management plans to use existing cash and cash equivalents balances, revenue generating activities and draw down on the available balance from the line of credit. Other sources of liquidity could include additional potential issuances of debt or equity securities in public or private financings and strategic partnerships.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1
.
Description of Business and Basis of Presentation
(Continued)
Liquidity
(Continued)
Based upon the additional funds available to draw down under the amended Credit Agreement, the Company’s cash balance, historical trends, expected outflows and projections for revenues, management believes it will have sufficient cash to provide for its projected needs to maintain operations and working capital requirements for at least the next 12 months from the date of filing this annual report.
Principles of Consolidation
The consolidated financial statements include the accounts of Cesca Therapeutics Inc. and its wholly owned subsidiaries, ThermoGenesis Corp. (“ThermoGenesis”), TotipotentRX Cell Therapy, Pvt. Ltd. and TotipotentSC Scientific Product Pvt. Ltd. All significant intercompany accounts and transactions have been eliminated upon consolidation.
After completion of the acquisition of SynGen by ThermoGenesis on July 7, 2017, ThermoGenesis was no longer a wholly owned subsidiary of the Company.
2.
Summary of Significant Accounting Policies
Use of Estimates
Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to, the allowance for doubtful accounts, slow-moving inventory reserves, depreciation, warranty costs, assumptions made in valuing equity instruments issued for services or acquisitions, deferred income taxes and related valuation allowance and the fair values of intangibles and goodwill. Actual results could materially differ from the estimates and assumptions used in the preparation of the Company’s consolidated financial statements. Events subsequent to the balance sheet date have been evaluated for inclusion in the accompanying consolidated financial statements through the date of issuance.
Revenue Recognition
Revenues from the sale of the Company’s products and services are recognized when persuasive evidence of an arrangement exists, delivery has occurred (or services have been rendered), the price is fixed or determinable, and collectability is reasonably assured. The Company generally ships products F.O.B. shipping point. There is no conditional evaluation on any product sold and recognized as revenue. Amounts billed in excess of revenue recognized are recorded as deferred revenue on the balance sheet.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.
Summary of Significant Accounting Policies (Continued)
Revenue Recognition
(Continued)
The Company’s sales are generally through distributors. There is no right of return provided for distributors. For sales of products made to distributors, the Company considers a number of factors in determining whether revenue is recognized upon transfer of title to the distributor, or when payment is received. These factors include, but are not limited to, whether the payment terms offered to the distributor are considered to be non-standard, the distributor’s history of adhering to the terms of its contractual arrangements with the Company, the level of inventories maintained by the distributor, whether the Company has a pattern of granting concessions for the benefit of the distributor, and whether there are other conditions that may indicate that the sale to the distributor is not substantive. The Company currently recognizes revenue primarily on the sell-in method with its distributors.
Revenue arrangements with multiple deliverables are divided into units of accounting if certain criteria are met, including whether the deliverable item(s) has (have) value to the customer on a stand-alone basis. Revenue for each unit of accounting is recognized as the unit of accounting is delivered. Arrangement consideration is allocated to each unit of accounting based upon the relative estimated selling prices of the separate units of accounting contained within an arrangement containing multiple deliverables. Estimated selling prices are determined using vendor specific objective evidence of value (VSOE), when available, or an estimate of selling price when VSOE is not available for a given unit of accounting. Significant inputs for the estimates of the selling price of separate units of accounting include market and pricing trends and a customer’s geographic location. The Company accounts for training and installation, and service agreements and the collection, processing and testing of the umbilical cord blood and the storage as separate units of accounting.
Service revenue generated from contracts for providing maintenance of equipment is amortized over the life of the agreement. Revenue generated from storage contracts is deferred and recorded ratably over the life of the agreement, up to 21 years. All other service revenue is recognized at the time the service is completed.
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents. The Company’s cash is maintained in checking accounts, money market funds and certificates of deposits with reputable financial institutions that may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation. The Company has cash and cash equivalents of $46,000 and $104,000 at June 30, 2017 and 2016, respectively in India. The Company has not experienced any realized losses on the Company’s deposits of cash and cash equivalents.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.
Summary of Significant Accounting Policies (Continued)
Foreign Currency Translation
The Company’s reporting currency is the US dollar. The functional currency of the Company’s subsidiaries in India is the Indian rupee (INR). Assets and liabilities are translated into US dollars at period end exchange rates. Revenue and expenses are translated at average rates of exchange prevailing during the periods presented. Cash flows are also translated at average exchange rates for the period, therefore, amounts reported on the consolidated statement of cash flows do not necessarily agree with changes in the corresponding balances on the consolidated balance sheet. Equity accounts other than retained earnings are translated at the historic exchange rate on the date of investment. A translation loss of $1,000 and $32,000 was recorded for the years ended June 30, 2017 and 2016, respectively, as a component of other comprehensive income.
Goodwill, Intangible Assets and Impairment Assessments
Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. Intangible assets that are not considered to have an indefinite useful life are amortized over their useful lives, which generally range from three to ten years. Clinical protocols are not expected to provide economic benefit until they are introduced to the marketplace or licensed to an independent entity. Each period the Company evaluates the estimated remaining useful lives of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization.
For goodwill and indefinite-lived intangible assets (clinical protocols), the carrying amounts are periodically reviewed for impairment (at least annually) and whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. According to Accounting Standard Codification (“
ASC
”)
350, Intangibles-Goodwill and Other
, the Company can opt to perform a qualitative assessment or a quantitative assessment; however, if the qualitative assessment determines that it is more likely than not (i.e., a likelihood of more than 50 percent) the fair value is less than the carrying amount, a quantitative assessment must be performed. If the quantitative assessment determines that the fair value is less than the carrying amount, an impairment loss equal to the difference would be recorded.
The Company performed a quantitative assessment as of April 1, 2017 and performed a qualitative assessment through June 30, 2017 and computed a fair value based on a combination of the income approach and market approach, which determined that the fair value exceeded the carrying amount. Accordingly, there was no impairment of goodwill or the indefinite-lived intangible assets.
For the definite-lived intangible assets other than the covenants not to compete, there were no facts or changes in circumstances that indicated the carrying value may not be recoverable. As such, no assessment was required and there was no impairment of these assets. There was a $310,000 impairment of the covenants not to compete intangible assets during the year ended June 30, 2017 as the assumed revenues that were in the fair value estimate have been delayed due to the delay in the clinical trial.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.
Summary of Significant Accounting Policies (Continued)
Fair Value of Financial Instruments
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 for the sale of 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:
|
Other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
|
|
Level 3:
|
Unobservable inputs reflecting the reporting entity’s own assumptions.
|
The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities 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.
Accounts Receivable and Allowance for Doubtful Accounts
The Company’s receivables are recorded when billed and represent claims against third parties that will be settled in cash. The carrying value of the Company’s receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value. The Company estimates the allowance for doubtful accounts based on historical collection trends, age of outstanding receivables and existing economic conditions. If events or changes in circumstances indicate that a specific receivable balance may be impaired, further consideration is given to the collectability of those balances and the allowance is adjusted accordingly. A customer’s receivable balance is considered past-due based on its contractual terms. Past-due receivable balances are written-off when the Company’s internal collection efforts have been unsuccessful in collecting the amount due.
Inventories
Inventories are stated at the lower of cost or market and include the cost of material, labor and manufacturing overhead. Cost is determined on the first-in, first-out basis. The Company writes-down inventory to its estimated net realizable value when conditions indicate that the selling price could be less than cost due to physical deterioration, obsolescence, changes in price levels, or other causes, which it includes as a component of cost of revenues. Additionally, the Company provides valuation allowances for excess and slow-moving inventory on hand that are not expected to be sold to reduce the carrying amount of slow-moving inventory to its estimated net realizable value. The valuation allowances are based upon estimates about future demand from its customers and distributors and market conditions. Because some of the Company’s products are highly dependent on government and third-party funding, current customer use and validation, and completion of regulatory and field trials, there is a risk that the Company will forecast incorrectly and purchase or produce excess inventories.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.
Summary of Significant Accounting Policies (Continued)
Inventories
(Continued)
As a result, actual demand may differ from forecasts and the Company may be required to record additional inventory valuation allowances that could adversely impact its gross margins. Conversely, favorable changes in demand could result in higher gross margins when those products are sold.
Equipment, Net
Equipment consisting of office furniture, computer, machinery and equipment is recorded at cost less accumulated depreciation and amortization. Repairs and maintenance costs are expensed as incurred. Depreciation for office furniture, computer, machinery and equipment is computed under the straight-line method over the estimated useful lives. Leasehold improvements are amortized under the straight line method over their estimated useful lives or the remaining lease period, whichever is shorter. When equipment is sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and the impact of any resulting gain or loss is recognized within Other income and (expenses) in the consolidated statement of operations for the period.
Warranty
The Company provides for the estimated cost of product warranties at the time revenue is recognized. The Company’s warranty obligation is calculated based on estimated product failure rates, material usage and estimated service delivery costs incurred in correcting a product failure.
Debt Issue Costs
The Company amortizes debt issue costs to interest expense over the life of the associated debt instrument, using the straight-line method which approximates the interest rate method.
Debt
Discount
The Company amortizes debt discount over the life of the associated debt instrument, using the straight-line method which approximates the interest rate method. Such amortized cost is included with the other income (expense) in the accompanying consolidated statements of operations.
Derivative Financial Instruments
In connection with the sale of convertible debt and equity instruments, the Company may also issue freestanding warrants. If freestanding warrants are issued and accounted for as derivative instrument liabilities (rather than as equity), the proceeds are first allocated to the fair value of those instruments. The remaining proceeds, if any, are then allocated to the convertible instrument, usually resulting in that instrument being recorded at a discount from its face amount. Derivative financial instruments are initially measured at their fair value using a Binomial Lattice Valuation Model and then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income.
Stock-Based Compensation
The Company has three stock-based compensation plans, which are described more fully in Note 9.
Valuation and Amortization Method – The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option-pricing formula. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The formula does not include a discount for post-vesting restrictions, as we have not issued awards with such restrictions.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.
Summary of Significant Accounting Policies (Continued)
Stock-Based Compensation
(Continued)
Expected Term – For options which the Company has limited available data, the expected term of the option is based on the simplified method. This simplified method averages an award’s vesting term and its contractual term. For all other options, the Company's expected term represents the period that the Company's stock-based awards are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior.
Expected Volatility – Expected volatility is based on historical volatility. Historical volatility is computed using daily pricing observations for recent periods that corresponded to the expected term of the options.
Expected Dividend – The Company has not declared dividends and does not anticipate declaring any dividends in the foreseeable future. Therefore, the Company uses a zero value for the expected dividend value factor to determine the fair value of options granted.
Risk-Free Interest Rate – The Company bases the risk-free interest rate used in the valuation method on the implied yield currently available on U.S. Treasury zero-coupon issues with the same expected term.
Estimated Forfeitures – When estimating forfeitures, the Company considers voluntary and involuntary termination behavior as well as analysis of actual option forfeitures.
Research and Development
Research and development costs, consisting of salaries and benefits, costs of clinical trials, costs of disposables, facility costs, contracted services and stock-based compensation from the engineering, regulatory, scientific and clinical affairs departments, that are useful in developing and clinically testing new products, services, processes or techniques, as well as expenses for activities that may significantly improve existing products or processes are expensed as incurred. Costs to acquire technologies that are utilized in research and development and that have no future benefit are expensed when incurred.
A
cquired In-Process Research and Development
Acquired in-process research and development (“clinical protocols”) that the Company acquires through business combinations represents the fair value assigned to incomplete research projects which, at the time of acquisition, have not reached technological feasibility. The amounts are capitalized and are accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, the Company will make a determination as to the then useful life of the intangible asset, generally determined by the period in which the substantial majority of the cash flows are expected to be generated, and begin amortization. The Company tests clinical protocols for impairment at least annually, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the clinical protocols intangible asset is less than its carrying amount. If the Company concludes it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the clinical protocol intangible asset with its carrying value is performed. If the fair value is less than the carrying amount, an impairment loss is recognized in operating results. The Company conducted the fiscal 2017 annual impairment assessment as of April 1, 2017. As the fair value exceeded book value, the Company concluded there was no impairment of the subject clinical protocol.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.
Summary of Significant Accounting Policies (Continued)
Patent Costs
The costs incurred in connection with patent applications, in defending and maintaining intellectual property rights and litigation proceedings are expensed as incurred.
Credit Risk
Currently, the Company primarily manufactures and sells cellular processing systems and thermodynamic devices principally to the blood and cellular component processing industry and performs ongoing evaluations of the credit worthiness of the Company’s customers. The Company believes that adequate
provisions for uncollectible accounts have been made in the accompanying consolidated financial statements. To date, the Company has not experienced significant credit related losses.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”), or decision making group, whose function is to allocate resources to and assess the performance of the operating segments. The Company has identified its chief executive officer and chief operating officer as the CODM. In determining its reportable segments, the Company considered the markets and the products or services provided to those markets.
The Company has two reportable business segments:
The Clinical Development Division is devel
op
ing autologous (utilizing the patient’s own cells) stem cell-based
therapeutics
that address significant unmet medical needs for applications within the
vascular, cardiology and orthopedic
markets.
The Device Division
is a pioneer and market leader in the development and commercialization of
automated technologies for c
ell-based t
herapeutics
and bio-processing.
Income Taxes
The tax years 1999-2015 remain open to examination by the major taxing jurisdictions to which the Company is subject; however, there is no current examination. The Company’s policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense. To date, there have been no interest or penalties charged to the Company in relation to the underpayment of income taxes. There were no unrecognized tax benefits during the periods presented.
The Company’s estimates of income taxes and the significant items resulting in the recognition of deferred tax assets and liabilities reflect the Company’s assessment of future tax consequences of transactions that have been reflected in the financial statements or tax returns for each taxing jurisdiction in which the Company operates. The Company bases the provision for income taxes on the Company’s current period results of operations, changes in deferred income tax assets and liabilities, income tax rates, and changes in estimates of uncertain tax positions in the jurisdictions in which the Company operates. The Company recognizes deferred tax assets and liabilities when there are temporary differences between the financial reporting basis and tax basis of assets and liabilities and for the expected benefits of using net operating loss and tax credit loss carryforwards. The Company establishes valuation allowances when necessary to reduce the carrying amount of deferred income tax assets to the amounts that the Company believes are more likely than not to be realized. The Company evaluates the need to retain all or a portion of the valuation allowance on recorded deferred tax assets. When a change in the tax rate or tax law has an impact on deferred taxes, the Company applies the change based on the years in which the temporary
differences are expected to reverse. As the Company operates in more than one state, changes in the state apportionment factors, based on operational results, may affect future effective tax rates and the value of recorded deferred tax assets and liabilities. The Company records a change in tax rates in the consolidated financial statements in the period of enactment.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.
Summary of Significant Accounting Policies (Continued)
Income Taxes
(Continued)
Income tax consequences that arise in connection with a business combination include identifying the tax basis of assets and liabilities acquired and any contingencies associated with uncertain tax positions assumed or resulting from the business combination. Deferred tax assets and liabilities related to temporary differences of an acquired entity are recorded as of the date of the business combination and are based on the Company’s estimate of the appropriate tax basis that will be accepted by the various taxing authorities and its determination as to whether any of the acquired deferred tax liabilities could be a source of taxable income to realize the Company’s pre-existing deferred tax assets.
Net Loss per Share
Net loss per share is computed by dividing the net loss to common stockholders by the weighted average number of common shares outstanding. The calculation of the basic and diluted earnings per share is the same for all periods presented, as the effect of the potential common stock equivalents is anti-dilutive due to the Company’s net loss position for all periods presented. Anti-dilutive securities consisted of the following at June 30:
|
|
2017
|
|
|
2016
|
|
Common stock equivalents of convertible debentures
|
|
|
--
|
|
|
|
3,676,471
|
|
Vested Series A warrants
|
|
|
404,412
|
|
|
|
404,412
|
|
Unvested Series A warrants
|
|
|
698,529
|
(1)
|
|
|
698,529
|
(1)
|
Warrants – other
|
|
|
3,725,782
|
|
|
|
3,725,782
|
|
Stock options
|
|
|
397,388
|
|
|
|
104,378
|
|
Restricted stock units
|
|
|
59,694
|
|
|
|
63,566
|
|
Total
|
|
|
5,285,805
|
|
|
|
8,673,138
|
|
|
(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.
|
Recently Adopted Accounting
Standards
In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-12, “
Compensation - Stock Compensation (Topic 718); Accounting for Share-Based
Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
”. The amendments in ASU 2014-12 apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition that affects the vesting of the award. The Company adopted ASU 2014-12 effective July 1, 2016. The Company applies the amendments in ASU 2014-12 prospectively to all awards granted or modified after the effective date. Adoption of the new update to ASU 2014-12 did not have any impact on the financial statements of the Company.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.
Summary of Significant Accounting Policies (Continued)
Recently Issued Accounting
Standards
In July 2017, the FASB issued ASU No. 2017-11, “
Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception
”. ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity's own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The guidance in ASU 2017-11 can be applied using a full or modified retrospective approach. The Company has not yet determined the effect that ASU 2017-11 will have on its results of operations, statement of financial position or financial statement disclosures.
In May 2017, the FASB issued ASU No. 2017-09 “Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting (ASU 2017-09).” ASU 2017-09 clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The standard is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of its adoption of this standard on its financial statements.
In January 2017, the FASB issued ASU 2017-04 which removes Step 2 from the goodwill impairment test. It is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for an interim or annual goodwill impairment test performed with a measurement date after January 1, 2017. The Company has not yet determined the effect that ASU 2017-04 will have on its results of operations, statement of financial position or financial statement disclosures.
In March 2016, the FASB issued ASU 2016-09, “
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”.
ASU 2016-09 simplifies several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. The Company has not yet determined the effect that ASU 2016-09 will have on its results of operations, statement of financial position or financial statement disclosures.
In March 2016, the FASB issued ASU No. 2016-06, “
Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments
” (“ASU 2016-06”). This new standard simplifies the embedded derivative analysis for debt instruments containing contingent call or put options by removing the requirement to assess whether a contingent event is related to interest rates or credit risks. ASU 2016-06 is effective for annual periods beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. The adoption of this standard is not expected to have an impact on the Company’s financial position or results of operations.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.
Summary of Significant Accounting Policies
(Continued)
Recently Issued Accounting
Standards (Continued)
In February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842)”
. ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods therein. The Company has not yet determined the effect that ASU 2016-02 will have on its results of operations, statement of financial position or financial statement disclosures.
In July 2015, the FASB issued ASU No. 2015-11, “
Inventory: Simplifying the Measurement of Inventory
”, that requires inventory not measured using either the last in, first out (LIFO) or the retail inventory method to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable cost of completion, disposal and transportation. The new standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and will be applied prospectively. Early adoption is permitted. The Company is evaluating the impact that this standard will have on its consolidated financial statements.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.
Summary of Significant Accounting Policies (Continued)
Recently Issued Accounting Standards (Continued)
In May 2014, the FASB issued ASU 2014-09, “
Revenue from Contracts with Customers (Topic 606)
” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and some cost guidance included in ASC Subtopic 605-35, "
Revenue Recognition
- Construction-Type and Production-Type Contracts
.” The core principle of ASU 2014-09 is that revenue is recognized when the transfer of goods or services to customers occurs in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. ASU 2014-09 requires the disclosure of sufficient information to enable readers of the Company’s financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 also requires disclosure of information regarding significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 provides two methods of retrospective application. The first method would require the Company to apply ASU 2014-09 to each prior reporting period presented. The second method would require the Company to retrospectively apply ASU 2014-09 with the cumulative effect recognized at the date of initial application. ASU 2014-09 will be effective for the Company beginning in fiscal 2019 as a result of ASU 2015-14, "
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
," which was issued by the FASB in August 2015 and extended the original effective date by one year. The Company is currently evaluating the impact of adopting the available methodologies of ASU 2014-09 and 2015-14 upon its financial statements in future reporting periods. The Company has not yet selected a transition method. The Company is also in the process of evaluating the new standard against its existing accounting policies, including the timing of revenue recognition, and its contracts with customers to determine the effect the guidance will have on its financial statements and what changes to systems and controls may be warranted.
There have been four new ASUs issued amending certain aspects of ASU 2014-09, ASU 2016-08, "
Principal versus Agent Considerations (Reporting Revenue Gross Versus Net)
" was issued in March 2016 to clarify certain aspects of the principal versus agent guidance in ASU 2014-09. In addition, ASU 2016-10, "
Identifying Performance Obligations and Licensing
," issued in April 2016, amends other sections of ASU 2014-09 including clarifying guidance related to identifying performance obligations and licensing implementation. ASU 2016-12, "
Revenue from Contracts with Customers - Narrow Scope Improvements and Practical Expedients
" provides amendments and practical expedients to the guidance in ASU 2014-09 in the areas of assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification of using the full retrospective
approach to adopt ASU 2014-09. Finally, ASU 2016-20, “
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
” was issued in December 2016, and provides elections regarding the disclosures required for remaining performance obligations in certain cases and also makes other technical corrections and improvements to the standard. With its evaluation of the impact of ASU 2014-09, the Company will also consider the impact on its financial statements related to the updated guidance provided by these four new ASUs.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3.
Intangible Assets
Intangible assets consist of the following based on the Company’s determination of the fair value of identifiable assets acquired:
As of June 30, 2017
|
|
|
|
Weighted
Average
Amortization
Period
(in Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulate
d
Amortization
|
|
|
Impairment
|
|
|
Net
|
|
Trade names
|
|
|
7
|
|
|
$
|
30,000
|
|
|
$
|
14,000
|
|
|
|
|
|
|
$
|
16,000
|
|
Licenses
|
|
|
7
|
|
|
|
482,000
|
|
|
|
233,000
|
|
|
|
|
|
|
|
249,000
|
|
Customer relationships
|
|
|
3
|
|
|
|
443,000
|
|
|
|
443,000
|
|
|
|
|
|
|
|
--
|
|
Device registration
|
|
|
7
|
|
|
|
90,000
|
|
|
|
60,000
|
|
|
|
|
|
|
|
30,000
|
|
Covenants not to compete
|
|
|
5
|
|
|
|
955,000
|
|
|
|
645,000
|
|
|
$
|
310,000
|
|
|
|
--
|
|
Amortizable intangible assets
|
|
|
|
|
|
|
2,000,000
|
|
|
|
1,395,000
|
|
|
|
310,000
|
|
|
|
295,000
|
|
Clinical protocols
|
|
|
|
|
|
|
19,870,000
|
|
|
|
--
|
|
|
|
|
|
|
|
19,870,000
|
|
Total
|
|
|
|
|
|
$
|
21,870,000
|
|
|
$
|
1,395,000
|
|
|
$
|
310,000
|
|
|
$
|
20,165,000
|
|
As of June 30, 2016
|
|
|
|
Weighted
Average
Amortization
Period
(in Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Trade names
|
|
|
7
|
|
|
$
|
29,000
|
|
|
$
|
10,000
|
|
|
$
|
19,000
|
|
Licenses
|
|
|
7
|
|
|
|
462,000
|
|
|
|
157,000
|
|
|
|
305,000
|
|
Customer relationships
|
|
|
3
|
|
|
|
424,000
|
|
|
|
335,000
|
|
|
|
89,000
|
|
Device registration
|
|
|
7
|
|
|
|
86,000
|
|
|
|
49,000
|
|
|
|
37,000
|
|
Covenants not to compete
|
|
|
5
|
|
|
|
955,000
|
|
|
|
454,000
|
|
|
|
501,000
|
|
Amortizable intangible assets
|
|
|
|
|
|
|
1,956,000
|
|
|
|
1,005,000
|
|
|
|
951,000
|
|
Clinical protocols
|
|
|
|
|
|
|
19,870,000
|
|
|
|
--
|
|
|
|
19,870,000
|
|
Total
|
|
|
|
|
|
$
|
21,826,000
|
|
|
$
|
1,005,000
|
|
|
$
|
20,821,000
|
|
The change in the gross carrying amount is due to foreign currency exchange fluctuations. There was a $310,000 impairment of the covenants not to compete intangible assets during the year ended June 30, 2017 as the assumed revenues that were in the fair value estimate have been delayed due to the delay in the clinical trial. Amortization of intangible assets was $359,000 and $438,000 for the years ended June 30, 2017 and 2016. Clinical protocols have not yet been introduced to the market place and are therefore not yet subject to amortization. The Company’s estimated future amortization expense for subsequent years are as follows:
Year Ended June 30,
|
|
|
|
|
2018
|
|
$
|
81,000
|
|
2019
|
|
|
81,000
|
|
2020
|
|
|
81,000
|
|
2021
|
|
|
52,000
|
|
Total
|
|
$
|
295,000
|
|
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4.
Equipment, Net
Equipment consisted of the following at June 30:
|
|
2017
|
|
|
2016
|
|
|
Estimated Useful Life (years)
|
|
Machinery and equipment
|
|
$
|
5,772,000
|
|
|
$
|
6,604,000
|
|
|
|
2.5
|
-
|
10
|
|
Computer and software
|
|
|
733,000
|
|
|
|
397,000
|
|
|
|
2
|
-
|
5
|
|
Office equipment
|
|
|
427,000
|
|
|
|
260,000
|
|
|
|
5
|
-
|
10
|
|
Leasehold improvements
|
|
|
227,000
|
|
|
|
149,000
|
|
|
|
Shorter of 5 years or remaining lease term
|
|
Total equipment
|
|
|
7,159,000
|
|
|
|
7,410,000
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(4,829,000
|
)
|
|
|
(4,448,000
|
)
|
|
|
|
|
|
|
Total equipment, net
|
|
$
|
2,330,000
|
|
|
$
|
2,962,000
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the years ended June 30, 2017 and 2016 was $408,000 and $630,000, respectively.
5
.
Related Party
Transactions
Bill Payment Arrangement
The Company entered into a bill payment arrangement whereby Boyalife Group Ltd. (“Payor”), the Company’s largest shareholder, agreed to pay the Company’s legal expenses payable to the Company’s attorney related to certain litigation involving SynGen Inc. (the “Bill Payment Arrangement”), although the Company remains jointly and severally liable for the payment of such legal fees. The terms of the Bill Payment Arrangement provided that the Company will reimburse Payor for any and all amounts paid by Payor in connection with the Bill Payment Arrangement under certain specified events. There is no interest payable on outstanding balance of related party payable. As the Company is using a different attorney than specified in the bill payment arrangement for this litigation, the arrangement is no longer active. As of June 30, 2017, invoices totaling $606,000 had been paid by Payor and are included in related party payable as the Company anticipates repaying this within a year.
Revolving Credit Agreement
On March 6, 2017, Cesca entered into the Credit Agreement with Boyalife Investment Fund II, Inc. (the “Lender”). The Lender is a wholly owned subsidiary of Boyalife Group Inc., which is owned and controlled by the Company’s Chief Executive Officer and Chairman of the Board of Directors. The Credit Agreement grants to the Company the right to borrow up to $5,000,000 in amounts of $500,000 per advance on an unsecured basis (the “Loan”) at any time prior to March 6, 2022 (the “Maturity Date”). On the date of the Credit Agreement, the Company made an initial draw of $1,500,000 and drew down an additional $2,000,000 during the quarter ended June 30, 2017, and $1,500,000 during the quarter ended September 30, 2017.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5
.
Related Party
Transactions (Continued)
Revolving Credit Agreement
(Continued)
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, except that certain borrowed amounts used to pay legal expenses under the bill payment arrangement will not bear interest. The Note can be prepaid in whole or in part by the Company at any time without penalty. If the Note is not repaid in full on or before the Maturity Date, the Lender has the right after the Maturity Date to convert any unpaid principal and accrued interest into shares of the Company’s common stock at a conversion price equal to 90% of the average daily volume-weighted average trading price of the Company’s common stock during the 10 trading days immediately prior to the Maturity Date, provided that the number of shares issuable upon such conversion may not exceed 19.99% of the number of outstanding shares of common stock of the Company on the date of the Credit Agreement (unless the Company obtains stockholder approval for such issuance in the manner required by the Marketplace Rules of the Nasdaq Stock Market, Inc.).
The Maturity Date of the Note is subject to acceleration at the option of the Lender upon customary events of default, which include a breach of the Loan documents, termination of operations, or bankruptcy. The Lender’s obligation to make advances under the Loan is subject to the Company’s representations and warranties in the Credit Agreement continuing to be true at all times and there being no continuing event of default under the Note. The Credit Agreement provides that if the Lender at any time in the future purchases the Company’s blood and bone marrow processing device business, the Lender would refund to the Company legal fees expended by the Company in connection with certain litigation expenses funded by the Company with proceeds of the Loan. No default has occurred through the date of filing.
The Company recorded interest expense of $122,000 for the year ended June 30, 2017.
On September 13, 2017, the Company entered into Amendment No. 1 to the Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement amends the Credit Agreement originally entered into by the Company and Lender on March 6, 2017, by increasing the Company’s maximum borrowing availability thereunder from $5.0 million to $10.0 million. In connection with such amendment, the Company and Lender entered into an amended and restated convertible promissory note to reflect the new aggregate maximum principal amount of $10.0 million.
Distributor Agreement
and Subsequent Event
On August 21, 2017, ThermoGenesis entered into an International Distributor Agreement with Boyalife W.S.N. Under the terms of the agreement, Boyalife W.S.N. was granted the exclusive right, subject to existing distributors and customers (if any), to develop, sell to, and service a customer base for ThermoGenesis’ AXP® (AutoXpress
®
) System and BioArchive System in the People’s Republic of China (excluding Hong Kong and Taiwan), Singapore, Indonesia, and the Philippines (the “Territories”). Boyalife W.S.N. is an affiliate of our Chief Executive Officer and Chairman of our Board of Directors, and Boyalife (Hong Kong) Limited, our largest stockholder. Boyalife W.S.N,’s rights under the agreement include the exclusive right to distribute AXP
®
Disposable Blood Processing Sets and use rights to the 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 products in the Territories.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5
.
Related Party
Transactions (Continued)
Distributor Agreement
and Subsequent Even
t(Continued)
The term of the agreement is for three years with ThermoGenesis having the right to renew the agreement for successive two-year periods at its option. However, ThermoGenesis has the right to terminate the agreement early if Boyalife W.S.N. fails to meet specified minimum purchase requirements.
Revenues
During the year ended June 30, 2017, the Company recorded $308,000 of revenues from Boyalife and had an accounts receivable balance of $308,000 at June 30, 2017. As of September 5, 2017 the Company has collected all of this accounts receivable.
6
.
Convertible Debentures
February 2016
Financing Transaction
In February 2016 in exchange for aggregate proceeds of $15,
000,000 the Company sold and issued to Boyalife Investment Inc. and Boyalife (Hong Kong) Limited (i) 735,294 shares of common stock at a purchase price of $3.40 per share (the “Stock Price”) for gross proceeds of $2,500
,000 (ii) Secured Convertible Debentures for $12,500,000 (the “Debentures”) which are convertible into 3,676,471 shares of common stock
, and (iii) warrants to purchase 3,529,412 additional shares of common stock at an exercise price of $8.00 per share for a period of five years. The amount of warrants was based on 80% coverage of the shares issued or to be issued for the equity transaction in (i) and the debt transaction in (ii) above. The warrants were exercisable on August 13, 2016 and are outstanding at June 30, 2017.
On August 22, 2016, the Company notified Boyalife Investment Inc., that the Company elected to convert all outstanding principal and interest accrued and otherwise payable under the Debentures, which included the conversion of $12,500,000 of principal and $8,250,000 of interest up to and including the maturity date of the Debentures. Upon conversion, 6,102,941 shares of common stock were issued and the Debentures and all related security interest and liens were terminated. The 2,426,470 common shares that were issued for payment of the interest, had a fair market value of $11,403,000 on August 22, 2016. Accordingly, an additional $3,153,000 of interest expense was recorded on the date of conversion.
At the time of the conversion, the remaining debt discount of $9,538,000 and debt issue costs of $155,000 were fully amortized.
Thirty-Year Debenture Restructuring Transaction
On August 31, 2015, the Company sold senior secured convertible debentures in a financing to raise up to $15,000,000 (“Thirty-Year Debentures”), Series A warrants to purchase up to 1,102,942 shares of the Company’s common stock at an exercise price equal to $13.60 per share for a period of five and one-half years (“Series A warrants”) and Series B warrants to purchase up to 606,618 shares of the Company’s common stock at an exercise price equal to $13.60 per share for a period of eighteen months (“Series B warrants”). At the initial closing on August 31, 2015, the Company received gross proceeds of $5,500,000 and 404,412 Series A warrants vested and 222,427 Series B warrants vested. The second closing for up to an additional $9,500,000 was dependent on a number of items including receipt by the Company of approval from the California Institute for Regenerative Medicine (“CIRM”) for a grant in the amount of $10,000,000 to support the Company’s pivotal trial for CLIRST III. The Company applied for the CIRM grant in August 2015. The Company withdrew its application for the CIRM grant.
For financial reporting purposes, the net proceeds of $4,720,000 was allocated first to the residual fair value of the Series A warrants, amounting to $3,385,000 then to the residual fair value of the obligation to issue the Series B warrants of $897,000 the remaining value to the intrinsic value of the beneficial conversion feature on the Thirty-Year Debentures of $438,000 resulting in an initial carrying value of the Thirty-Year Debentures of $0. The initial debt discount on the Thirty-Year Debentures totaled $4,720,000 and was amortized over the 30 year life of the convertible debentures.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6
.
Convertible Debentures
(Continued)
Thirty-Year Debenture Restructuring Transaction
(Continued)
The Company entered into a registration rights agreement pursuant to which the Company agreed to register all of the shares of common stock then issued and issuable upon conversion in full of the Thirty-Year Debentures and all warrant shares issuable upon exercise of the Series A warrants and Series B warrants. The holders were entitled to receive liquidated damages upon the occurrence of a number of events relating to filing, getting an effective and maintaining an effective registration statement, including the failure of the Company to have such registration statement declared effective by October 26, 2015. As the Company did not file an effective registration statement until November 24, 2015 and the Company was precluded by the SEC from registering all of the registrable securities on a single registration statement, management considered it probable that five months of liquidated damages would be due and accrued $1,100,000 during the year ended June 30, 2016. Management made one liquidated damages payment of $220,000 during the three months ended December 31, 2015.
In connection with the February 2016 financing transaction described above, the Company concurrently entered into a Consent, Repayment and Release Agreement, pursuant to which the Company repaid the Thirty-Year Debentures and all related interest and liquidated damages. Upon the Company’s payment of $7.5 million, the Thirty-Year Debentures were deemed repaid in full and cancelled, all liquidated damages due and payable were deemed paid and satisfied in full, the registration rights agreement was terminated and the exercise price of the Series A warrants was changed from $13.60 to $8.00. The Company recomputed the fair value of the Series A warrants before and after the modification using the Binomial option pricing model with the following assumptions: expected volatility of 91%, discount rate of 1.2%, contractual term of 5 years and dividend rate of 0%. The loss on modification of $149,000 was recorded in the accompanying consolidated statements of operations and comprehensive loss for the year ended June 30, 2016.
Pursuant to the terms of the Consent Repayment and Release Agreement, the holders of the Series B warrants made a single, one-time cashless exercise of Series B warrants for 125,000 shares of common stock. The Company recomputed the fair value of the Series B warrants using the Binomial option pricing model. All remaining Series B warrants valued at $159,000 were cancelled.
This restructuring transaction occurred on February 16, 2016 and the Company recorded a loss on extinguishment of debt of $795,000 during the year ended June 30, 2016. The loss on extinguishment was calculated as follows:
Payment
|
|
$
|
7,500,000
|
|
Repayment of Thirty-Year debentures
|
|
|
(5,500,000
|
)
|
Payment of accrued liquidated damages and interest
|
|
|
(897,000
|
)
|
Loss on modification of Series A warrants
|
|
|
(149,000
|
)
|
Cancellation of Series B derivative obligation
|
|
|
(159,000
|
)
|
Loss on extinguishment of debt
|
|
$
|
795,000
|
|
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6
.
Convertible Debentures
(Continued)
Thirty-Year Debenture Restructuring Transaction
(Continued)
At the time of the repayment, the remaining debt discount of $4,648,000 and debt issue costs of $765,000 were fully amortized. For the year ended June 30, 2016, the Company amortized $4,720,000 of debt discount and $777,000 of debt issue costs.
7
.
Derivative Obligations
Series A Warrants
Series A warrants to purchase 404,412 common shares were issued and vested during the year ended June 30, 2016. At the time of issuance, the Company determined that because such warrants can be settled for cash at the holders’ option in a future fundamental transaction they constituted a derivative liability. The Company has estimated the fair value of the derivative liability, using a Binomial Lattice Valuation Model and the following assumptions:
|
|
Series A
|
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
Market price of common stock
|
|
$
|
3.17
|
|
|
$
|
2.93
|
|
Expected volatility
|
|
|
110
|
%
|
|
|
99
|
%
|
Contractual term (years)
|
|
|
3.7
|
|
|
|
4.7
|
|
Discount rate
|
|
|
1.66
|
%
|
|
|
1.01
|
%
|
Dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
Exercise price
|
|
$
|
8.00
|
|
|
$
|
8.00
|
|
Expected volatilities are based on the historical volatility of the Company’s common stock. Contractual term is based on remaining term of the respective warrants. The discount rate represents the yield on U.S. Treasury bonds with a maturity equal to the contractual term.
The Company recorded a (loss)gain of ($60,000) and $3,395,000 during the years ended June 30, 2017 and 2016, respectively representing the net change in the fair value of the derivative liability, which is presented as fair value change of derivative instruments, in the accompanying consolidated statements of operations and comprehensive loss.
The following table represents the Company’s fair value hierarchy for its financial liabilities measured at fair value on a recurring basis as of June 30, 2017 and 2016:
|
|
Balance at
June 30, 2017
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative obligation
|
|
$
|
730,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
730,000
|
|
|
|
Balance at
June 30, 2016
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative obligation
|
|
$
|
670,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
670,000
|
|
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7
.
Derivative Obligations
(Continued)
Series A Warrants
(Continued)
The following table reflects the change in fair value of the Company’s derivative liabilities for the year ended June 30, 2017:
|
|
Amount
|
|
Balance – July 1, 2016
|
|
$
|
670,000
|
|
Change in fair value of derivative obligation
|
|
|
60,000
|
|
Balance – June 30, 2017
|
|
$
|
730,000
|
|
8
.
Commitments and Contingencies
Operating Leases
The Company leases the Rancho Cordova and Gurgaon, India facilities pursuant to operating leases, which contain scheduled rent increases. The leases expire in May 2019 and March 2018, respectively. The Company has terminated the existing Gurgaon lease and signed a new one which terminates September 14, 2023. However, either party can terminate the lease after September 2019 with three months notice. The Company recognizes rent expense on a straight-line basis over the term of the facility lease. The annual future minimum lease payments for the Company’s non-cancelable operating leases are as follows:
2018
|
|
|
297,000
|
|
2019
|
|
|
279,000
|
|
2020
|
|
|
3,000
|
|
Total
|
|
$
|
579,000
|
|
Rent expense was $291,000 and $657,000 for the years ended June 30, 2017 and 2016, respectively.
Financial Covenants
Effective May 15, 2017, the Company entered into a Sixth Amended and Restated Technology License and Escrow Agreement with Cbr Systems, Inc. which modified the financial covenant that the Company must meet in order to avoid an event of default. The Company must maintain a cash balance and short-term investments net of debt or borrowed funds that are payable within one year of not less than $2,000,000. The Company was in compliance with this financial covenant as of June 30, 2017 and August 31, 2017.
Potential Severance Payments
The Company’s Chief Operating Officer (“COO”) has rights upon termination under her employment agreement. The agreement provides, among other things, for the payment of twelve months of severance compensation upon termination under certain circumstances. With respect to this agreement at June 30, 2017, potential severance amounted to $320,000.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8
.
Commitments and Contingencies (Continued)
Contingencies
In fiscal 2016, the Company signed an engagement letter with a strategic consulting firm. Included in the engagement letter was a success fee due upon the successful conclusion of certain strategic transactions. On May 4, 2017, a lawsuit was filed against the Company by the consulting firm as the consulting firm believes that it is 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. The Company intends to defend the lawsuit vigorously and no accrual has been recorded for this contingent liability as of June 30, 2017.
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 June 30, 2017, 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.
Warranty
The Company offers a warranty on all of the Company’s non-disposable products of one to two years. The Company warrants disposable products through their expiration date. The Company periodically assesses the adequacy of the Company’s recorded warranty liabilities and adjusts the amounts as necessary.
Changes in the Company’s product liability which is included in other current liabilities during the period are as follows:
|
|
For years ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
566,000
|
|
|
$
|
627,000
|
|
Warranties issued during the period
|
|
|
120,000
|
|
|
|
97,000
|
|
Settlements made during the period
|
|
|
(93,000
|
)
|
|
|
(287,000
|
)
|
Changes in liability for pre-existing warranties during the period
|
|
|
(5,000
|
)
|
|
|
129,000
|
|
Ending balance
|
|
$
|
588,000
|
|
|
$
|
566,000
|
|
9
.
Stockholders’ Equity
Common Stock
On August 22, 2016, the Company notified Boyalife Investment Inc., that it elected to convert all outstanding principal and interest accrued and otherwise payable under the Debentures, which included the conversion of $12,500
,000 of principal and $8,250
,000 of interest up to and including the maturity date of the Debentures. Upon conversion, 6,102,941 shares of common stock were issued and the Debentures and all related security interest and liens were terminated. (See note 6)
On August 3, 2016, the Company sold 600,000 shares of common stock at a price of $4.10 per share. The net proceeds to the Company from the sale and issuance of the shares, after deducting the offering expenses borne by the Company of $369
,000, were $2,092,000
.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9
.
Stockholders’ Equity (Continued)
In July 2016, the Compensation Committee of the Board of Directors granted 118,288 shares of fully vested common stock to employees in partial payment of amounts earned under the Company’s 2016 short term incentive plan. The election was made by some of the employees to satisfy the applicable federal income tax withholding obligation by a net share settlement, pursuant to which the Company withheld 46,879 shares and used the deemed proceeds from those shares to pay the income tax withholding. The net share settlement is deemed to be a repurchase by the Company of its common stock.
Warrants
A summary of warrant activity is as follows:
|
|
2017
|
|
|
2016
|
|
|
|
Number
of Shares
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
|
Number
of Shares
|
|
|
Weighted
-
Average
Exercise
Price Per
Share
|
|
Beginning balance
|
|
|
4,828,723
|
|
|
$
|
9.37
|
|
|
|
252,620
|
|
|
$
|
44.18
|
|
Warrants granted
|
|
|
--
|
|
|
|
|
|
|
|
5,238,971
|
|
|
$
|
9.83
|
|
Warrants exercised (cashless)
|
|
|
--
|
|
|
|
|
|
|
|
(51,712
|
)
|
|
$
|
13.60
|
|
Warrants expired/canceled
|
|
|
--
|
|
|
|
|
|
|
|
(611,156
|
)
|
|
$
|
17.21
|
|
Outstanding at June 30
|
|
|
4,828,723
|
|
|
$
|
9.37
|
|
|
|
4,828,723
|
|
|
$
|
9.37
|
|
Exercisable at June 30
|
|
|
4,130,192
|
|
|
$
|
9.60
|
|
|
|
600,782
|
|
|
$
|
19.02
|
|
Equity Plans and Agreements
The Company recorded stock-based compensation of $1,461,000 and $742,000 for the years ended June 30, 2017 and 2016.
On May 5, 2017, the stockholders approved the Amended 2016 Equity Incentive Plan (“Amended 2016 Plan”) under which up to 600,000 shares may be issued pursuant to grants of shares, options, or other forms of incentive compensation. As of June 30, 2017, 254,224 awards were available for issuance under the Amended 2016 Plan.
The 2012 Independent Director Plan (“2012 Plan”) permits the grant of stock or options to independent directors. A total of 25,000 shares were approved by the stockholders for issuance under the 2012 Plan. Options are granted at prices that are equal to 100% of the fair market value on the date of grant, and expire over a term not to exceed ten years. Options generally vest in monthly increments over one year, unless otherwise determined by the Board of Directors. As of June 30, 2017, there were 194 shares available for issuance.
The 2006 Equity Incentive Plan (“2006 Plan”) permitted the grant of options, restricted stock units, stock bonuses and stock appreciation rights to employees, directors and consultants. The 2006 Plan, but not the awards granted thereunder, expired in 2016. As of June 30, 2017, 134,164 option and restricted stock unit awards remained outstanding.
On July 7, 2016, the Compensation Committee also adopted a short term incentive program under which cash awards and shares of common stock may be granted to employees of the Company (the “Short Term Program”). The aggregate amount of the cash awards issuable pursuant to the Short Term Plan is approximately $276,000. Up to 104,000 shares of common stock from the Company’s 2006 Plan, subject to vesting, are issuable pursuant to the Short Term Program. On July 26, 2016, 98,417 shares and
$266,000 of cash awards were granted under the Short Term Program. The cash awards granted pursuant to the Short Term Program were payable and the shares of common stock issued pursuant to the Short Term Program fully vested on July 1, 2017, provided, that such award recipients were employed by the Company as of July 1, 2017 or immediately if terminated without cause. Three of the eight employees were terminated without cause during the year ended June 30, 2017, as such, 51,636 shares vested. The remaining 46,781 shares vested on July 1, 2017.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9
.
Stockholders’ Equity (Continued)
Equity Plans and Agreements (Continued)
Upon the termination of the employment of the Company’s Chief Executive Officer (“CEO”) in November 2016 and Chief Financial Officer (“CFO”) in March 2017, in accordance with their employment agreements, all outstanding options and restricted stock unit awards immediately vested. As a result, the Company recognized (i) $539,000 of stock compensation expense in general and administrative for the quarter ended December 31, 2016, as the vesting accelerated on the CEO’s options to purchase 72,496 shares of common stock and 79,720 restricted stock unit awards, and (ii) $94,000 of stock compensation expense in general and administrative for the quarter ended March 31, 2017 as the vesting accelerated on the CFO’s options to purchase 16,248 shares of common stock and 15,914 restricted stock unit awards. Additionally, the terms of the options were modified upon the executives’ termination such that the options were deemed to be exercisable for longer than 90 days from the date of termination. There was no incremental compensation cost recorded for this modification as the fair-value-based measure of the modified award on the date of modification was less than the fair-value-based measure of the original award immediately before the modification.
On February 24, 2017, the Company appointed a Chief Operating Officer. As part of the terms of her employment agreement, she received an annual grant of 25,000 restricted stock units (“RSUs”) and options to purchase 25,000 common shares under the 2016 Equity Incentive Plan (“2016 Plan”). The annual grant of RSUs and stock options will vest in four equal installments: 25% on March 31, 25% on June 30, 25% on September 30 and 25% on December 31 of each year. The stock options granted in February 2017 have an exercise price of $2.89, which was the closing price on the date of grant.
In December 2016, the Compensation Committee of the Board of Directors granted 50,000 options to the Company’s CEO under the 2016 Plan. The options have an exercise price of $2.91, the closing price on the date of grant, they vest in five equal installments on each of December 16, 2016, February 4, 2017, May 4, 2017, August 4, 2017 and November 4, 2017 and have a seven year life.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9
.
Stockholders’ Equity (Continued)
Stock Options
The Company issues new shares of common stock upon exercise of stock options. 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 June 30, 2016
|
|
|
104,378
|
|
|
$
|
14.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
318,324
|
|
|
$
|
2.98
|
|
|
|
|
|
|
|
|
|
Forfeited/cancelled
|
|
|
(22,814
|
)
|
|
$
|
6.39
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(2,500
|
)
|
|
$
|
18.46
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
397,388
|
|
|
$
|
5.80
|
|
|
|
6.2
|
|
|
$
|
69,000
|
|
Vested and Expected to Vest at June 30, 2017
|
|
|
376,595
|
|
|
$
|
5.94
|
|
|
|
6.2
|
|
|
$
|
64,000
|
|
Exercisable at June 30, 2017
|
|
|
242,073
|
|
|
$
|
7.38
|
|
|
|
5.5
|
|
|
$
|
43,000
|
|
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 that were exercised during the years ended June 30, 2017 and 2016.
On July 7, 2016, the Compensation Committee of the Board of Directors granted options to purchase a total of 156,100 common shares to various employees under the 2016 Plan. The options have an exercise price of $2.86, the closing price on the date of grant, vest ratably every six months over a three year period, and have a seven year life.
Non-vested stock option activity for the year ended June 30, 2017, is as follows:
|
|
Non-vested Stock
Options
|
|
|
Weighted-Average
Grant Date Fair Value
|
|
Outstanding at June 30, 2016
|
|
|
43,107
|
|
|
$
|
7.46
|
|
Granted
|
|
|
318,325
|
|
|
$
|
2.16
|
|
Vested
|
|
|
(185,019
|
)
|
|
$
|
3.07
|
|
Forfeited
|
|
|
(21,097
|
)
|
|
$
|
3.31
|
|
Outstanding at June 30, 2017
|
|
|
155,316
|
|
|
$
|
2.39
|
|
The fair value of the Company’s stock options granted for the years ended June 30, 2017 and 2016 was estimated using the following weighted-average assumptions:
|
|
2017
|
|
|
2016
|
|
Expected life (years)
|
|
|
4
|
|
|
|
5
|
|
Risk-free interest rate
|
|
|
1.3
|
%
|
|
|
1.5
|
%
|
Expected volatility
|
|
|
102
|
%
|
|
|
80
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9
.
Stockholders’ Equity (Continued)
The weighted average grant date fair value of options granted during the years ended June 30, 2017 and 2016 was $2.16 and $5.75, respectively.
At June 30, 2017, the total compensation cost related to options granted under the Company’s stock option plans but not yet recognized was $275,000. This cost will be amortized on a straight-line basis over a weighted-average period of approximately one and a half years and will be adjusted for subsequent changes in estimated forfeitures. The total fair value of options vested during the years ended June 30, 2017 and 2016 was $572,000 and $354,000.
Common Stock Restricted Awards
The following is a summary of restricted stock unit activity:
|
|
2017
|
|
|
2016
|
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
|
Number o
f
Shares
|
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Balance at June 30
|
|
|
63,566
|
|
|
$
|
14.96
|
|
|
|
72,589
|
|
|
$
|
22.40
|
|
Granted
|
|
|
123,417
|
|
|
$
|
4.55
|
|
|
|
10,000
|
|
|
$
|
2.98
|
|
Vested
|
|
|
(125,513
|
)
|
|
$
|
9.47
|
|
|
|
(6,120
|
)
|
|
$
|
28.94
|
|
Forfeited
|
|
|
(1,776
|
)
|
|
$
|
27.05
|
|
|
|
(12,903
|
)
|
|
$
|
41.15
|
|
Outstanding at June 30
|
|
|
59,694
|
|
|
$
|
4.62
|
|
|
|
63,566
|
|
|
$
|
14.96
|
|
In connection with the vesting of the restricted stock unit awards, the election was made by some of the employees to satisfy the applicable federal income tax withholding obligation by a net share settlement, pursuant to which the Company withheld 145 and 1,300 shares for the years ended June 30, 2017 and 2016, respectively and used the deemed proceeds from those shares to pay the income tax withholding. The net share settlement is deemed to be a repurchase by the Company of its common stock.
As of June 30, 2017, the Company had $43,000 in total unrecognized compensation expense related to the Company’s restricted stock unit awards, which will be recognized over a weighted average period of approximately seven months.
10
.
Concentrations
One distributor had an accounts receivable balance of $1,388,000 or 36% and $901,000 or 28% at June 30, 2017 and 2016, respectively. The Company did not renew the contract with this distributor in August 2017 and signed a contract with a new distributor. A customer had an accounts receivable balance of $259,000 or 7% and $620,000 or 19% at June 30, 2017 and 2016, respectively. A second distributor had an accounts receivable balance of $304,000 or 8% and $320,000 or 10% at June 30, 2017 and 2016, respectively.
Revenues from a customer totaled $3,263,000 or 22% and $2,475,000 or 21% for the years ended June 30, 2017 and 2016, respectively. Revenues from one distributor totaled $2,842,000 or 20% and $2,797,000 or 23% of net revenues for the years ended June 30, 2017 and 2016, respectively. The Company did not renew the contract with this distributor in August 2017 and replaced it with a different distributor.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10
.
Concentrations
(Continued)
The following represents the Company’s revenues by product platform for the years ended June 30:
|
|
2017
|
|
|
2016
|
|
AXP
|
|
$
|
8,715,000
|
|
|
$
|
6,932,000
|
|
BioArchive
|
|
|
3,318,000
|
|
|
|
2,465,000
|
|
Manual Disposables
|
|
|
1,195,000
|
|
|
|
1,507,000
|
|
Bone Marrow
|
|
|
745,000
|
|
|
|
459,000
|
|
Other
|
|
|
552,000
|
|
|
|
566,000
|
|
|
|
$
|
14,525,000
|
|
|
$
|
11,929,000
|
|
The Company had sales to customers as follows for the years ended June 30:
|
|
2017
|
|
|
2016
|
|
United States
|
|
$
|
6,675,000
|
|
|
$
|
5,122,000
|
|
China
|
|
|
3,296,000
|
|
|
|
2,797,000
|
|
Asia – other
|
|
|
1,951,000
|
|
|
|
1,955,000
|
|
Europe
|
|
|
1,739,000
|
|
|
|
1,343,000
|
|
Other
|
|
|
864,000
|
|
|
|
712,000
|
|
|
|
$
|
14,525,000
|
|
|
$
|
11,929,000
|
|
The Company attributes revenue to different geographic areas based on where items are shipped or services are performed.
Two suppliers accounted for 64% and 20% of total inventory purchases during the year ended June 30, 2017. Two suppliers accounted for 65% and 21% of total inventory purchases during the year ended June 30, 2016.
The Company has a contract manufacturer in Costa Rica that produces certain disposables. The Company’s equipment, net of accumulated depreciation, is summarized below by geographic area:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
United States
|
|
$
|
1,559,000
|
|
|
$
|
2,030,000
|
|
Costa Rica
|
|
|
322,000
|
|
|
|
367,000
|
|
India
|
|
|
261,000
|
|
|
|
279,000
|
|
All other countries
|
|
|
188,000
|
|
|
|
286,000
|
|
Total equipment, net
|
|
$
|
2,330,000
|
|
|
$
|
2,962,000
|
|
11.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”), or decision making group, whose function is to allocate resources to and assess the performance of the operating segments. The Company has identified its Chief Executive Officer and Chief Operating Officer as the CODM. In determining its reportable segments, the Company considered the markets and the products or services provided to those markets.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11
.
Segment Reporting (Continued)
During the quarter ended June 30, 2017, the Company developed a plan to begin separately operating its device and therapeutics businesses. The Company identified the following two reportable segments, which are the same as its operating segments:
The Clinical Development Division is devel
op
ing autologous (utilizing the patient’s own cells) stem cell-based
therapeutics
that address significant unmet medical needs for applications within the
vascular, cardiology and orthopedic
markets.
The Device Division
is a pioneer and market leader in the development and commercialization of
automated technologies for c
ell-based t
herapeutics
and bio-processing.
The following table summarizes the operating results of the Company’s reportable segments:
|
|
Year Ended June 30, 2017
|
|
|
|
|
|
|
|
Clinical Development
|
|
|
Device
|
|
|
Total
|
|
Net revenues
|
|
$
|
492,000
|
|
|
$
|
14,033,000
|
|
|
$
|
14,525,000
|
|
Cost of revenues
|
|
|
466,000
|
|
|
|
8,220,000
|
|
|
|
8,686,000
|
|
Gross profit
|
|
|
26,000
|
|
|
|
5,813,000
|
|
|
|
5,839,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
8,966,000
|
|
|
|
6,113,000
|
|
|
|
15,079,000
|
|
Operating profit (loss)
|
|
$
|
(8,940,000
|
)
|
|
$
|
(300,000
|
)
|
|
$
|
(9,240,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
501,000
|
|
|
$
|
329,000
|
|
|
$
|
830,000
|
|
Stock-based compensation expense
|
|
$
|
970,000
|
|
|
$
|
491,000
|
|
|
$
|
1,461,000
|
|
|
|
Year Ended June 30, 2016
|
|
|
|
|
|
|
|
Clinical Development
|
|
|
Device
|
|
|
Total
|
|
Net revenues
|
|
$
|
646,000
|
|
|
$
|
11,283,000
|
|
|
$
|
11,929,000
|
|
Cost of revenues
|
|
|
574,000
|
|
|
|
8,611,000
|
|
|
|
9,185,000
|
|
Gross profit
|
|
|
72,000
|
|
|
|
2,672,000
|
|
|
|
2,744,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
8,312,000
|
|
|
|
5,297,000
|
|
|
|
13,609,000
|
|
Operating profit (loss)
|
|
$
|
(8,240,000
|
)
|
|
$
|
(2,625,000
|
)
|
|
$
|
(10,865,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
644,000
|
|
|
$
|
524,000
|
|
|
$
|
1,168,000
|
|
Stock-based compensation expense
|
|
$
|
548,000
|
|
|
$
|
194,000
|
|
|
$
|
742,000
|
|
The Company has not yet allocated assets on a segment basis.
12
.
Income Taxes
Loss before income tax benefits was comprised of $29,005,000 from US and $763,000 from foreign jurisdictions in 2017 and $17,789,000 from US and $799,000 from foreign jurisdictions in 2016.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12
.
Income Taxes
(Continued)
The reconciliation of federal income tax attributable to operations computed at the federal statutory tax rate of 34% to income tax benefit is as follows for the years ended June 30:
|
|
2017
|
|
|
2016
|
|
Statutory federal income tax benefit
|
|
$
|
(10,121,000
|
)
|
|
$
|
(6,300,000
|
)
|
|
|
|
|
|
|
|
|
|
Unbenefited net operating losses and credits
|
|
|
2,281,000
|
|
|
|
3,391,000
|
|
Disallowed financing costs
|
|
|
6,959,000
|
|
|
|
2,607,000
|
|
State and local taxes
|
|
|
88,000
|
|
|
|
69,000
|
|
Other
|
|
|
120,000
|
|
|
|
233,000
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit
|
|
$
|
(673,000
|
)
|
|
$
|
--
|
|
The deferred income tax benefit of $673,000 is due to changes in the state tax rate over the last several years. Approximately $559,000 of the benefit relates to state rate changes prior to fiscal 2017, which was all recognized in the current year, of which $157,000 relates to fiscal 2016 and $402,000 relates to years prior to fiscal 2016. The Company believes these amounts are quantitatively and qualitatively immaterial to the balance sheets as of June 30, 2015 and June 30, 2016, as well as the statements of operations and comprehensive loss for the years then ended, and to fiscal 2017. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized.
At June 30, 2017, the Company had net operating loss carryforwards for federal and state income tax purposes of $118,956,000 and $42,922,000 respectively that are available to offset future income. The federal and state loss carryforwards expire in various years between 2018 and 2037.
At June 30, 2017, the Company has research and experimentation credit carryforwards of $1,458,000 for federal tax purposes that expire in various years between 2019 and 2037, and $1,456,000 for state income tax purposes that do not have an expiration date.
Significant components of the Company’s deferred tax assets and liabilities for federal and state income taxes are as follows:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
43,687,000
|
|
|
$
|
41,023,000
|
|
Income tax credit carryforwards
|
|
|
2,419,000
|
|
|
|
2,367,000
|
|
Stock compensation
|
|
|
1,047,000
|
|
|
|
874,000
|
|
Other
|
|
|
1,124,000
|
|
|
|
1,858,000
|
|
Total deferred tax assets
|
|
|
48,277,000
|
|
|
|
46,122,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Indefinite lived intangible assets
|
|
|
(6,968,000
|
)
|
|
|
(7,641,000
|
)
|
Depreciation and amortization
|
|
|
(176,000
|
)
|
|
|
(230,000
|
)
|
Total deferred tax liabilities
|
|
|
(7,144,000
|
)
|
|
|
(7,871,000
|
)
|
Valuation allowance
|
|
|
(48,101,000
|
)
|
|
|
(45,892,000
|
)
|
Net deferred taxes
|
|
$
|
(6,968,000
|
)
|
|
$
|
(7,641,000
|
)
|
The valuation allowance increased by $2,209,000 in 2017. As of June 30, 2017, the Company has a benefit of $215,000 related to stock option deductions, which will be credited to paid-in capital when realized.
Cesca Therapeutics Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12
.
Income Taxes
(Continued)
In August 2016, the conversion of the Boyalife Debentures effected an “ownership change” as defined under the provisions of the Tax Reform Act of 1986. As a result, any net operating loss and credit carryovers existing at that date will be subject to an annual limitation regarding their utilization against taxable income in future periods. Additionally, before the conversion of the debentures, it is possible that “ownership changes” occurred, which could create additional imitations on the use of our net operating losses and credit carryovers.
13
.
Employee Retirement Plan
The Company sponsors an Employee Retirement Plan, generally available to all employees, in accordance with Section 401(k) of the Internal Revenue Code. Employees may elect to contribute up to the Internal Revenue Service annual contribution limit. Under this Plan, at the discretion of the Board of Directors, the Company may match a portion of the employees’ contributions. The Company made no discretionary or matching contributions to the Plan for the years ended June 30, 2017 and 2016.
14
.
Subsequent Event
On July 7, 2017, the Company entered into a transaction in which its wholly owned subsidiary, ThermoGenesis, acquired the business and substantially all of the assets of SynGen Inc. (“SynGen”), a privately held Sacramento, California-based technology company that develops, markets, and sells advanced cell separation tools and accessories. In the transaction (the “SynGen Transaction”), ThermoGenesis acquired substantially all of SynGen’s operating assets, including its proprietary cell processing platform. In exchange, ThermoGenesis issued to SynGen shares of ThermoGenesis common stock that, after giving effect to the issuance, constitute 20% of ThermoGenesis’ outstanding common shares, and ThermoGenesis also made a one-time cash payment of $1.0 million to SynGen (together with the issuance of common stock, the “Transaction Consideration”). The preliminary purchase price is not available as the Company is in process of completing the valuation of the ThermoGenesis stock. The final determination of the fair value of certain assets acquired and the ThermoGenesis stock issued will be completed within the 12-month measurement period from the date of acquisition as required. Immediately prior to the SynGen Transaction, the Company contributed the assets, business, and current liabilities of its blood and bone-marrow processing device business to ThermoGenesis and will operate such business (together with the acquired business) through the ThermoGenesis subsidiary.
On September 13, 2017, the Company entered into Amendment No. 1 to the Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement amends the Credit Agreement originally entered into by the Company and Lender on March 6, 2017, by increasing the Company’s maximum borrowing availability thereunder from $5.0 million to $10.0 million. In connection with such amendment, the Company and Lender entered into an amended and restated convertible promissory note to reflect the new aggregate maximum principal amount of $10.0 million.
In August 2017, the Board of Directors approved changing the Company’s fiscal year from June 30 to a calendar year ending December 31. As a result, the Company will file a transition report on Form 10-K for the six month period ending December 31, 2017. Prior to filing the transition report, the Company will file a quarterly report on Form 10-Q for the quarter ending September 30, 2017.