Table of Contents

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 September 30, 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: 333-82900

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 for 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 ☐ Non-accelerated filer ☒ Smaller reporting company ☒ 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 November 10, 2020

Common stock, $.001 par value

 

7,796,170

 

 

 

 

ThermoGenesis Holdings, Inc.

  

INDEX

 

    Page Number

Part I  Financial Information

 
     

Item 1.

Financial Statements

1

     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22
     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

30

     

Item 4.

Controls and Procedures

30

     

Part II  Other Information

 
     

Item 1.

Legal Proceedings

31

Item 1A.

Risk Factors

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 3.

Defaults upon Senior Securities

32

Item 4.

Mine Safety Disclosure

32

Item 5.

Other Information

32

Item 6.

Exhibits

33

     

Signatures

34

 

 

 

PART I - FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

 

ThermoGenesis Holdings, Inc.

Condensed Consolidated Balance Sheets

 

   

September 30,

2020

   

December 31,

2019

 
   

(Unaudited)

         

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 4,436,000     $ 3,157,000  

Restricted cash

    --       1,000,000  

Accounts receivable, net of allowance for doubtful accounts of $220,000 ($226,000 at December 31, 2019)

    1,698,000       1,278,000  

Inventories, net of reserves of $755,000 ($350,000 at December 31, 2019)

    5,876,000       3,824,000  

Prepaid expenses and other current assets

    766,000       602,000  

Total current assets

    12,776,000       9,861,000  
                 

Equipment and leasehold improvements, net

    1,537,000       2,028,000  

Right-of-use operating lease assets, net

    765,000       859,000  

Goodwill

    781,000       781,000  

Intangible assets, net

    1,382,000       1,467,000  

Other assets

    48,000       218,000  

Total assets

  $ 17,289,000     $ 15,214,000  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Accounts payable

  $ 1,661,000     $ 1,447,000  

Accrued payroll and related expenses

    513,000       288,000  

Deferred revenue – short-term

    700,000       620,000  

Interest payable – related party

    1,519,000       1,869,000  

Note payable – short-term

    235,000       --  

Other current liabilities

    1,092,000       2,461,000  

Total current liabilities

    5,720,000       6,685,000  
                 

Convertible promissory note – related party, less debt discount of $4,893,000 ($5,195,000 at December 31, 2019)

    5,107,000       3,518,000  

Convertible promissory notes, less debt discount of $588,000 (plus debt premium of $46,000 at December 31, 2019)

    412,000       413,000  

Note payable

    411,000       1,000,000  

Operating lease obligations – long-term

    648,000       761,000  

Deferred revenue – long-term

    1,669,000       1,901,000  

Other noncurrent liabilities

    20,000       20,000  

Total liabilities

    13,987,000       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; 6,832,040 issued and outstanding (2,843,601 at December 31, 2019)

    7,000       3,000  

Additional paid in capital

    253,537,000       237,313,000  

Accumulated deficit

    (250,434,000 )     (236,932,000 )

Accumulated other comprehensive loss

    22,000       2,000  

Total ThermoGenesis Holdings, Inc. stockholders’ equity

    3,132,000       386,000  
                 

Noncontrolling interests

    170,000       530,000  

Total equity

    3,302,000       916,000  

Total liabilities and equity

  $ 17,289,000     $ 15,214,000  

 

See accompanying notes.

 

 

 

ThermoGenesis Holdings, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

 

   

Three Months Ended
September 30,

   

Nine Months Ended

September 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net revenues

  $ 2,355,000     $ 4,058,000     $ 7,797,000     $ 11,325,000  

Cost of revenues

    844,000       2,163,000       7,426,000       6,220,000  
                                 

Gross profit

    1,511,000       1,895,000       371,000       5,105,000  
                                 

Expenses:

                               
                                 

Sales and marketing

    539,000       502,000       1,424,000       1,227,000  

Research and development

    750,000       584,000       1,937,000       1,758,000  

General and administrative

    1,305,000       1,139,000       4,489,000       3,617,000  
                                 

Total operating expenses

    2,594,000       2,225,000       7,850,000       6,602,000  
                                 

Loss from operations

    (1,083,000 )     (330,000 )     (7,479,000 )     (1,497,000 )
                                 

Other income (expenses):

                               

Interest expense

    (1,531,000 )     (1,188,000 )     (6,377,000 )     (3,531,000 )

Loss on equity method investments

    --       --       (13,000 )     --  

Loss on extinguishment of debt

    --       (840,000 )     --       (840,000 )

Other income (expense)

    5,000       (15,000 )     7,000       (27,000 )
                                 

Total other expense

    (1,526,000 )     (2,043,000 )     (6,383,000 )     (4,398,000 )
                                 

Net loss

    (2,609,000 )     (2,373,000 )     (13,862,000 )     (5,895,000 )
                                 

Loss attributable to noncontrolling interests

    (146,000 )     (91,000 )     (360,000 )     (445,000 )

Net loss attributable to common stockholders

  $ (2,463,000 )   $ (2,282,000 )   $ (13,502,000 )   $ (5,450,000 )
                                 

COMPREHENSIVE LOSS

                               

Net loss

    (2,609,000 )     (2,373,000 )     (13,862,000 )     (5,895,000 )

Other comprehensive loss:

                               

Foreign currency translation adjustments gain (loss)

    (19,000 )     16,000       20,000       9,000  

Comprehensive loss

    (2,628,000 )     (2,357,000 )     (13,842,000 )     (5,886,000 )
                                 

Comprehensive loss attributable to noncontrolling interests

    (146,000 )     (91,000 )     (360,000 )     (445,000 )

Comprehensive loss attributable to common stockholders

  $ (2,482,000 )   $ (2,266,000 )   $ (13,482,000 )   $ (5,441,000 )
                                 

Per share data:

                               
                                 

Basic and diluted net loss per common share

  $ (0.37 )   $ (0.78 )   $ (2.36 )   $ (2.00 )
                                 

Weighted average common shares outstanding basic and diluted

    6,711,664       2,913,198       5,728,105       2,720,502  

 

See accompanying notes.

 

 

 

ThermoGenesis Holdings, Inc.

Condensed Consolidated Statements of Equity (Unaudited)

For the Nine Months Ended September 30, 2020

 

   

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, net

    1,050,748       1,000       3,220,000       --       --       --       3,221,000  

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  
                                                         

Stock-based compensation expense

    --       --       314,000       --       --       --       314,000  

Exercise of pre-funded warrants

    224,445               22,000       --       --       --       22,000  

Exercise of warrants

    267,271       --       1,604,000       --       --       --       1,604,000  

Discount due to beneficial conversion features

    --       --       3,112,000       --       --       --       3,112,000  

Conversion of note payable to common stock

    104,445       1,000       188,000       --       --       --       189,000  

Issuance of Common Stock, net

    344,419       --       1,993,000       --       --       --       1,993,000  

Foreign currency translation gain

    --       --       --       --       1,000       --       1,000  

Net loss

    --       --       --       (6,437,000 )             (73,000 )     (6,510,000 )

Balance at June 30, 2020

    6,709,465       7,000       252,937,000       (247,971,000 )     41,000       316,000       5,330,000  
                                                         

Stock-based compensation expense

    --       --       234,000       --       --       --       234,000  

Issuance of Common Stock, net

    122,575       --       366,000       --       --       --       366,000  

Foreign currency translation loss

    --       --       --       --       (19,000 )     --       (19,000 )

Net loss

    --       --       --       (2,463,000 )     --       (146,000 )     (2,609,000 )

Balance at September 30, 2020

    6,832,040     $ 7,000     $ 253,537,000     $ (250,434,000 )   $ 22,000     $ 170,000     $ 3,302,000  

 

* Accumulated other comprehensive loss.

 

See accompanying notes.

 

 

ThermoGenesis Holdings, Inc.

Condensed Consolidated Statements of Equity (Unaudited)

For the Nine Months Ended September 30, 2019

 

 

   

Shares

   

Common stock

   

Paid in capital in excess of par

   

Accumulated deficit

   

AOCL*

   

Non-controlling interests

   

Total equity

 

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

    --       --       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  
                                                         

Stock-based compensation

    --       --       125,000       --       -       --       125,000  

Exercise of pre-funded warrants

    150,000       --       18,000       --       --       --       18,000  

Discount due to beneficial conversion features

    --       --       800,000       --       --       --       800,000  

Issuance of pre-funded warrants in financing, net of offering costs

    --       --       756,000       --       --       --       756,000  

Foreign currency translation

    --       --       --       --       (3,000 )     --       (3,000 )

Net loss

    --       --       --       (1,297,000 )     --       (178,000 )     (1,475,000 )

Balance at June 30, 2019

    2,368,337       2,000       236,343,000       (230,603,000 )     (20,000 )     778,000       6,500,000  
                                                         

Stock-based compensation

    --       --       253,000       --       --       --       253,000  

Exercise of pre-funded warrants

    216,500       1,000       18,000       --       --       --       19,000  

Conversion of note payable to stock

    120,000       --       216,000       --       --       --       216,000  

Foreign currency translation gain

    --       --       --       --       16,000               16,000  

Net loss

    --       --       --       (2,282,000 )     --       (91,000 )     (2,373,000 )

Balance at September 30, 2019

    2,704,837     $ 3,000     $ 236,830,000     $ (232,885,000 )   $ (4,000 )   $ 687,000     $ 4,631,000  

 

* Accumulated other comprehensive loss.

See accompanying notes.

 

 

 

ThermoGenesis Holdings, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

   

Nine Months Ended

September 30,

 
   

2020

   

2019

 

Cash flows from operating activities:

               

Net loss

  $ (13,862,000 )   $ (5,895,000 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation and amortization

    569,000       604,000  

Stock based compensation expense

    615,000       459,000  

Amortization of debt discount/premium, net

    2,165,000       1,799,000  

Amortization of accelerated debt discount due to conversion

    2,486,000       --  

Reserve for excess and slow-moving inventories

    4,036,000       141,000  

Reserve for bad debt expense

    (6,000 )     (53,000 )

Change in fair value derivative

    --       2,000  

Loss on disposal of equipment

    118,000       20,000  

Loss on extinguishment of debt

    --       840,000  

Net change in operating assets and liabilities:

               

Accounts receivable

    (414,000 )     (2,908,000 )

Inventories

    (6,086,000 )     980,000  

Prepaid expenses and other assets

    6,000       (227,000 )

Accounts payable

    223,000       (542,000 )

Interest payable - related party

    (350,000 )     (116,000 )

Accrued payroll and related expenses

    225,000       (298,000 )

Deferred revenue – short-term

    80,000       354,000  

Other current liabilities

    (1,326,000 )     (145,000 )

Long-term deferred revenue and other noncurrent liabilities

    (338,000 )     1,467,000  

Net cash used in operating activities

    (11,859,000 )     (3,518,000 )
                 

Cash flows from investing activities:

               

Capital expenditures

    (23,000 )     (178,000 )

Net cash used in investing activities

    (23,000 )     (178,000 )
                 

Cash flows from financing activities:

               

Proceeds from convertible promissory note-related party

    4,287,000       1,513,000  

Payments on financing lease obligations

    (32,000 )     (15,000 )

Proceeds from issuance of common stock, net of expenses

    5,580,000       756,000  

Proceeds from exercise of options, warrants and pre-funded warrants

    1,683,000       42,000  

Proceeds from long-term debt

    --       1,800,000  

Proceeds from note payable

    646,000       --  

Net cash provided by financing activities

    12,164,000       4,096,000  
                 

Effects of foreign currency rate changes on cash and cash equivalents

    (3,000 )     --  

Net increase (decrease) in cash, cash equivalents and restricted cash

    279,000       400,000  
                 

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

  $ 4,436,000     $ 3,800,000  
                 

Supplemental disclosures of cash flow information:

               

Cash paid for interest

  $ 2,094,000     $ 1,613,000  

Supplemental non-cash financing and investing information:

               

Recording of beneficial conversion feature on debt

  $ 4,981,000     $ 2,313,000  

Right-to-use asset acquired under operating lease

  $ --     $ 966,000  

Related party promissory note converted to common stock

  $ 3,000,000     $ --  

Fair value of amended convertible note issued in connection with the extinguishment of original convertible note

  $ --     $ 1,473,000  

Convertible promissory note converted to common stock

  $ 369,000     $ 216,000  

Transfer of equipment to inventories

  $ --     $ 33,000  

 

See accompanying notes.

 

 

ThermoGenesis Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

1.     DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND GOING CONCERN

 

Organization and Basis of Presentation

ThermoGenesis Holdings, Inc. (“ThermoGenesis Holdings,” the “Company,” “we,” “our,” “us”) 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 a 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 and the Company no longer reports 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 manufacture and market the following products:

 

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.

 

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.

 

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.

 

 

COVID-19 Testing Kit:

 

 

Antibody Test – The ThermoGenesis SARS-CoV-2 IgM/IgG Antibody Test Kit is a single-use rapid immunochromatographic test for the qualitative detection and differentiation of Immunoglobulin M (IgM) and Immunoglobulin G (IgG) antibodies to SARS-CoV-2 in human serum, plasma (heparin, dipotassium EDTA, and sodium citrate), and venous whole blood (heparin, dipotassium EDTA, and sodium citrate).

 

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 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 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 partially 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, 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 18.79% 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 resulting share exchange.

 

Going Concern

The Company has a Revolving Credit Agreement (“Credit Agreement”) with Boyalife Asset Holding II, Inc. (Refer to Note 3), allowing the Company to borrow up to $10,000,000 in principal amount outstanding at any time. As of September 30, 2020, the Company had drawn down the full amount available under the Credit Agreement and had an outstanding balance of $10,000,000. 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.

 

 

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 current portion of the PPP loan is $235,000 and the noncurrent portion is $411,000. 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 or after an application is filed for loan forgiveness, whichever is later. Each monthly payment shall be in the amount which would fully amortize the principal balance outstanding under the PPP 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.

 

At September 30, 2020, the Company had cash and cash equivalents of $4,436,000 and working capital of $7,056,000. The Company has incurred recurring operating losses and as of September 30, 2020 had an accumulated deficit of $250,434,000. 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 and nine month periods ended September 30, 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 Issued Accounting Standards

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06 “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,” which, among other things, provides guidance on how to account for contracts on an entity’s own equity. This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, the ASU eliminated the need for the Company to assess whether a contract on the entity’s own equity (1) permits settlement in unregistered shares, (2) whether counterparty rights rank higher than shareholder’s rights, and (3) whether collateral is required. In addition, the ASU requires incremental disclosure related to contracts on the entity’s own equity and clarifies the treatment of certain financial instruments accounted for under this ASU on earnings per share. This ASU may be applied on a full retrospective of modified retrospective basis. This ASU is effective January 1, 2022 and interim periods presented. Early adoption of the ASU is permitted by the Company effective January 1, 2021. The Company is in the process of assessing the impact of the adoption of the ASU on the Company’s financial statements.

 

In December 2019, FASB issued 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 doesn’t expect the adoption of the standard to have a material impact.

 

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 periods 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.

 

 

Recently Adopted Accounting Standards

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.

 

Revenue Recognition

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

 

The following tables summarize the revenues by product line:

 

   

Three Months Ended September 30, 2020

 
   

Device Revenue

   

Service Revenue

   

Other Revenue

   

Total Revenue

 

AXP

  $ 1,137,000     $ 32,000     $ --     $ 1,169,000  

BioArchive

    337,000       282,000       --       619,000  

CAR-TXpress

    332,000       22,000       71,000       425,000  

Manual Disposables

    100,000       --       --       100,000  

Other

    26,000       --       16,000       42,000  

Total

  $ 1,932,000     $ 336,000     $ 87,000     $ 2,355,000  

 

   

Nine Months Ended September 30, 2020

 
   

Device Revenue

   

Service Revenue

   

Other Revenue

   

Total Revenue

 

AXP

  $ 4,009,000     $ 103,000     $ --     $ 4,112,000  

BioArchive

    675,000       900,000       --       1,575,000  

CAR-TXpress

    1,035,000       47,000       214,000       1,296,000  

Manual Disposables

    499,000       --       --       499,000  

Other

    276,000       --       39,000       315,000  

Total

  $ 6,494,000     $ 1,050,000     $ 253,000     $ 7,797,000  

 

   

Three Months Ended September 30, 2019

 
   

Device Revenue

   

Service Revenue

   

Other Revenue

   

Total Revenue

 

AXP

  $ 2,255,000     $ 51,000     $ --     $ 2,306,000  

BioArchive

    243,000       351,000       --       594,000  

Manual Disposables

    221,000       --       --       221,000  

CAR-TXpress

    875,000       10,000       33,000       918,000  

Other

    --       --       19,000       19,000  

Total

  $ 3,594,000     $ 412,000     $ 52,000     $ 4,058,000  

 

   

Nine Months Ended September 30, 2019

 
   

Device Revenue

   

Service Revenue

   

Other Revenue

   

Total Revenue

 

AXP

  $ 6,550,000     $ 160,000     $ --     $ 6,710,000  

BioArchive

    1,274,000       1,117,000       --       2,391,000  

Manual Disposables

    764,000       --       --       764,000  

CAR-TXpress

    1,365,000       6,000       33,000       1,404,000  

Other

    5,000       11,000       40,000       56,000  

Total

  $ 9,958,000     $ 1,294,000     $ 73,000     $ 11,325,000  

 

 

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 and nine months ended September 30, 2020 that were included in the beginning balance of deferred revenue were $115,000 and $547,000, respectively. Short-term deferred revenues increased from $620,000 to $700,000 and long-term deferred revenues decreased from $1,901,000 to $1,669,000 during the nine months ended September 30, 2020, 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 and nine months ended September 30, 2020, the Company recorded revenue of $71,000 and $214,000, respectively, related to the exclusivity fee. The remaining balance of the $2,000,000 payment of $1,690,000 was recorded to deferred revenue, with $286,000 in short-term deferred revenue and $1,404,000 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

  $ 310,000     $ 958,000     $ 561,000     $ 298,000     $ 38,000     $ 2,165,000  

Clinical revenue

    3,000       13,000       13,000       13,000       175,000       217,000  

Exclusivity fee

    71,000       286,000       286,000       286,000       761,000       1,690,000  

Total

  $ 384,000     $ 1,257,000     $ 860,000     $ 597,000     $ 974,000     $ 4,072,000  

 

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 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. As of September 30, 2020, all pre-funded warrants previously issued have been exercised and none are currently 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 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 September 30:

 

   

2020

   

2019

 

Common stock equivalents of convertible promissory note and accrued interest

    6,988,334       6,013,667  

Vested Series A warrants

    40,441       40,441  

Unvested Series A warrants(1)

    69,853       69,853  

Warrants – other

    1,006,190       1,300,091  

Stock options

    892,149       296,029  

Total

    8,996,967       7,720,081  

___________

 

(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, 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 18.79% 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.

 

Between November 26, 2019 and September 30, 2020, ImmuneCyte closed $3,700,000 of equity investments with a private institution and qualified investors. ImmuneCyte issued 643,750 shares of Class A common stock at a price between $5.00 to $16.00 per share, representing a total of 6.05% ownership in the joint venture.  As a result of these equity investments in ImmuneCyte, the Company’s equity in the joint venture is no longer subject to anti-dilution provisions.  After these investments, ImmuneCyte is owned 75.16% by HealthBanks, 18.79% by the Company and 6.05% by the private investors.

 

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 $3,700,000, 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. The supply agreement, which related to the supply of COVID-19 antibody detection kits, has a term of one year from the effective date, thirty (30) day renewal terms and contains the Company’s standard supply contract provisions. The Company paid ImmuneCyte approximately $3,600,000 for kits during the nine months ended September 30, 2020. In August 2020, due to concerns over the consistency of performance of these kits, the Company voluntarily withdrew its application for an Emergency Use Authorization (“EUA”) with respect to the detection kits. After the EUA application was withdrawn, ImmuneCyte agreed to refund their mark-up on the purchased kits. That refund of approximately $800,000 was received in the quarter ended September 30, 2020. Additionally, ImmuneCyte and the Company agreed to work together to attempt to secure a refund from the original manufacturer for the remaining amount the Company paid for kits. If a refund is obtained, it will be recognized when received. For the nine months ended September 30, 2020, the Company recorded a loss to cost of goods sold for the remaining carrying amount of the testing kits in inventory as of September 30, 2020 of approximately $2,800,000. In order to continue to pursue its strategy to sell COVID-19 antibody detection test kits, the Company entered into a supply agreement in August 2020 with BioHit Healthcare (Hefei) Co., Ltd. for kits to be marketed under the ThermoGenesis brand.

 

 

For the three and nine months ended September 30, 2020, the Company recorded a loss of $0 and $13,000, respectively, on its equity investment in ImmuneCyte as ImmuneCyte has recorded a cumulative loss since the Company made its investment. At September 30, 2020, the value of the Company’s investment in ImmuneCyte will remain at $0. For the three and nine months ended September 30, 2020, ImmuneCyte had net loss of $1,313,000 and $1,422,000, respectively. As of September 30, 2020, its current assets were $2,120,000 and current liabilities were $296,000.

 

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, as amended, 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 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. On April 28, 2020, the Company borrowed an additional $2,418,000 under the Loan. Immediately after that draw down, the outstanding principal balance under the Loan was $10,000,000 and accrued but unpaid interest was $580,000. The principal purpose of the draw down 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. As of September 30, 2020, the outstanding principal balance of the Loan was $10,000,000.

 

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 for the full amount in the quarter ended March 31, 2020. It was also concluded that the conversion option of the draw down in April 2020 of $2,418,000 contained a beneficial conversion feature and the Company recorded a debt discount for the full amount in the quarter ended June 30, 2020. Such discount represented the fair value of the incremental shares up to the proceeds received from the convertible notes. The Company amortized $828,000 and $2,103,000 of debt discount to interest expense for the three and nine months ended September 30, 2020, respectively, and $471,000 and $1,398,000 for the three and nine months ended September 30, 2019, respectively. As of September 30, 2020, the Company had an interest payable balance of $1,519,000 as compared to $1,869,000 at December 31, 2019 related to the Note.

 

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.

 

During the three and nine months ended September 30, 2020, the Company recorded no revenue and for the three and nine months ended September 30, 2019, the Company recorded $214,000 and $794,000, 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 (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 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.

 

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.

 

During the nine months ended September 30, 2020, the holder converted the remainder of the face value of the note into shares of common stock. For the nine months ended September 30, 2020, $369,000 was converted into 204,445 shares of common stock. Additionally, the unamortized premium for the portion of the note that was converted of $46,000 was recorded to interest income during the nine months ended September 30, 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”). 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.

 

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, 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 had accounted for the July 2019 Note as a debt instrument until the conversion feature was approved by the Company’s stockholders. Accordingly, the Company recorded a beneficial conversion feature in the amount of $694,000, upon stockholder approval of the conversion feature, which occurred on June 4, 2020. The discount represented the fair value of the incremental shares up to the proceeds received from the convertible note. The debt discount will be amortized to interest expense over the term of the July 2019 Note. For the three and nine months ended September 30, 2020, $27,000 and $107,000, respectively, were amortized to interest expense.

 

 

 

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 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:

 

   

September 30,

2020

 

Right-of-use operating lease assets, net

  $ 765,000  

Current lease liability

    147,000  

Non-current lease liability

    648,000  
         

Weighted average remaining lease term

    3.7  

Discount rate

    22 %

 

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

 

2020 (remaining)

  $ 76,000  

2021

    310,000  

2022

    319,000  

2023

    328,000  

2024

    139,000  

Thereafter

    --  

Total lease payments

  $ 1,172,000  

Less: imputed interest

    (377,000 )

Present value of operating lease liabilities

  $ 795,000  

 

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 $225,000 for the nine months ended September 30, 2020 and is included in cash flows from operating activities.

 

Operating Lease Costs

Operating lease costs were $135,000 and $343,000 for the three and nine months ended September 30, 2020, 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 not and were not material for the three and nine months ended of September 30, 2020.

 

 

6.     COMMITMENTS AND CONTINGENCIES

 

Financial Covenants 

Effective March 16, 2020, the Company and CBR Systems, Inc. (“CBR”) entered into a Manufacturing and Supply Amending Agreement #1 (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 due in one year or less, that the Company must have on hand at the end of any month to avoid being in default under the Original Agreement.

 

On July 13, 2020, the Company, entered into a Manufacturing and Supply Amending Agreement #2 with CBR with an effective date of July 13, 2020 (the “Amendment”). The Amendment, among other things, revised the amount of certain products to be purchased, pricing of those products and removal of the safety stock requirement. In addition, the Amendment updated the financial requirement to exclude convertible debt from the definition of short-term debt under events or conditions that constitute a default. The Amendment states that the Company’s cash balance and short-term investments net of non-convertible debt and borrowed funds that are payable within one year must be greater than $1,000,000 at any month end.

 

The Company was in compliance with this financial covenant as of September 30, 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 nine months ended September 30, 2020 is summarized in the following table:

 

Balance at December 31, 2019

  $ 277,000  

Warranties issued during the period

    62,000  

Settlements made during the period

    (171,000 )

Changes in liability for pre-existing warranties during the period

    (20,000 )

Balance at September 30, 2020

  $ 148,000  

 

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 September 30, 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 were 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 and on May 19, 2020 the ATM Agreement was amended to increase the aggregate value of up to $15,280,313 (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 of 1933, 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 September 30, 2020, the Company sold a total of 517,740 shares of Common Stock for aggregate gross proceeds of $2,785,000 at an average selling price of $5.38 per share, resulting in net proceeds of approximately $2,473,000 after deducting legal expenses, audit fees, commissions and other transaction costs of approximately $312,000.

 

Subsequent to September 30, 2020, the Company sold a total of 964,130 shares of Common Stock for aggregate gross proceeds of $2,771,000 at an average selling price of $2.87 per share, resulting in net proceeds of approximately $2,683,000 after deducting commissions and other transaction costs of approximately $88,000.

 

Stock Based Compensation

The Company recorded stock-based compensation of $234,000 and $615,000 for the three and nine months ended September 30, 2020, and $253,000 and $459,000 for the three and nine months ended September 30, 2019, respectively, as comprised of the following:

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Cost of revenues

  $ 3,000     $ 1,000     $ 5,000     $ 2,000  

Sales and marketing

    65,000       110,000       106,000       166,000  

Research and development

    36,000       38,000       72,000       75,000  

General and administrative

    130,000       104,000       432,000       216,000  
Total   $ 234,000     $ 253,000     $ 615,000     $ 459,000  

 

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                  
                                 

Granted

    615,500     $ 5.92                  

Forfeited

    (15,158 )   $ 5.13                  

Outstanding at September 30, 2020

    892,149     $ 8.57       8.997     $ --  
                                 

Vested and expected to vest at September 30, 2020

    565,836     $ 9.91       8.736     $ --  
                                 

Exercisable at September 30, 2020

    184,137     $ 17.05       7.665     $ --  

 

 

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 nine months ended September 30, 2020.

 

Warrants

A summary of warrant activity for the nine months ended September 30, 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

    (599,582 )   $ 2.81  
                 

Outstanding at September 30, 2020

    1,116,484     $ 37.27  
                 

Exercisable at September 30, 2020

    1,046,631     $ 34.42  

 

 

8.     MAJOR CUSTOMERS AND ACCOUNTS RECEIVABLE

 

The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually represented 10% or more of the Company’s total accounts receivable as follows:

 

For the three months ended September 30, 2020 and 2019, one customer accounted for 22% and 27% of revenue, a second customer accounted for 20% and 13% of revenue, while a third customer accounted for 10% and 2% of revenue, respectively. For the nine months ended September 30, 2020 and 2019, one customer accounted for 28% and 29% of revenue, a second customer accounted for 12% and 13% of revenue, while a third customer accounted for 12% and 0% of revenue, respectively.

 

At September 30, 2020, two customers accounted for 59% of accounts receivable. At December 31, 2019, three customers accounted for 53% of accounts receivable.

 

 

9.     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 except as disclosed above.

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Note Regarding Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. 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 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 U.S. Food and Drug Administration (“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”), 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 a 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 and the Company no longer reports 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 manufacture and market the following products:

 

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.

 

 

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.

 

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.

 

COVID-19 Testing Kit:

 

 

Antibody Test – The ThermoGenesis SARS-CoV-2 IgM/IgG Antibody Test Kit is a single-use rapid immunochromatographic test for the qualitative detection and differentiation of Immunoglobulin M (IgM) and Immunoglobulin G (IgG) antibodies to SARS-CoV-2 in human serum, plasma (heparin, dipotassium EDTA, and sodium citrate), and venous whole blood (heparin, dipotassium EDTA, and sodium citrate).

 

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 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 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 partially 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, 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 18.79% 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 to bring to market a point-of-care COVID-19 antibody test in the United States. Antibody tests can allow for rapid pre-screening of patients, leading to the identification of individuals who have encountered the virus and have developed antibody immunity. In order to pursue its strategy to sell COVID-19 antibody detection test kits, the Company entered into a supply agreement with BioHit Healthcare (Hefei) Co., Ltd. (“BioHit”) for kits to be marketed under the ThermoGenesis brand. BioHit has obtained an Emergency Use Authorization (“EUA”) from the FDA for its SARS-CoV-2 IgM/IgG Antibody Test Kit.

 

In addition, the Company began working with ImmuneCyte to develop a convalescent plasma strategy. 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 aid in identifying individuals with an adaptive immune response to SARS-CoV-2. 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.

 

In March 2020, the Company signed a supply agreement with ImmuneCyte to purchase antibody testing kits and announced that it filed notification with the FDA of its intent to register a test under the name ThermoGenesis SARS-CoV-2 (COVID-19) IgM/IgG Antibody Fast Detection Kit (Colloidal Gold). In April 2020, the Company received an acknowledgement letter from the U.S. Food and Drug Administration which provided confirmation that the Company’s SARS-CoV-2 (COVID-19) IgM/IgG Antibody Fast Detection Kit had been validated in accordance with Section IV.D. of the “Policy for Diagnostic Tests for Coronavirus Disease – 2019 during the Public Health Emergency,” (“Policy D”) issued by FDA on March 16, 2020. On April 30, 2020, the Company submitted a request to the FDA for review of validation data in order to obtain an EUA for the testing kits. In August 2020, due to concerns over the consistency of performance of these kits, the Company voluntarily withdrew its application for an EUA. Accordingly, the Company determined that it was unlikely that it would be able to sell its on-hand inventory of testing kits. After the Company’s withdrawal of its EUA application, ImmuneCyte agreed to refund their mark-up on the testing kits sold to the Company. That payment of approximately $800,000 was received in the quarter ended September 30, 2020. The Company recorded a loss in cost of goods sold for the remaining carrying value of the testing kits after receipt of the refund of $2,800,000 in the nine-months ended September 30, 2020.

 

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 resulting 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 accounting principles generally accepted in the United States of America (“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 September 30, 2020 as Compared to the Three Months Ended September 30, 2019

 

Net Revenues

Consolidated net revenues for the three months ended September 30, 2020 were $2,355,000, compared to $4,058,000 for the three months ended September 30, 2019, a decrease of $1,703,000 or 42%. The decrease was driven by AXP® disposable sales, which declined from approximately 1,000 cases sold in the quarter ended September 30, 2019 to approximately 600 cases sold in the quarter ended September 30, 2020. The decrease resulted in approximately $1,000,000 less in AXP® disposable revenue for the current quarter. The COVID-19 pandemic appears to be the main driver of the decline in cases sold, as fewer cord blood units are being stored globally during the pandemic. We expect AXP® disposable sales to increase back to their prior levels after the pandemic is over. Also contributing to the decrease were CAR-TXpress sales which decreased by $489,000. This decrease also appears to be related to the COVID-19 pandemic as the decline was driven by fewer disposable sales.

 

   

September 30, 2020

   

September 30, 2019

 

AXP

  $ 1,169,000     $ 2,306,000  

BioArchive

    619,000       594,000  

Manual Disposables

    100,000       221,000  

CAR-TXpress

    425,000       914,000  

Other

    42,000       23,000  

Total

  $ 2,355,000     $ 4,058,000  

 

Gross Profit 

The Company’s gross profit was $1,511,000 or 64% of net revenues for the three months ended September 30, 2020, compared to $1,895,000 or 47% of net revenues for three months ended September 30, 2019, a decrease of $384,000. The decrease was driven by a decline in AXP® disposables sold resulting in approximately $500,000 less gross profit, a decline in AXP® devices sold resulting in approximately $60,000 less gross profit, a decline in CAR-TXpress sales which generated approximately $250,000 less gross profit, and approximately $250,000 in inventory reserves for X-Series® disposables. These decreases were partially offset by an increase of approximately $800,000 due to a refund from ImmuneCyte for the mark-up on sales of the COVID-19 testing kits which were previously reserved by the Company in quarter ended June 30, 2020.

 

Sales and Marketing Expenses

Consolidated sales and marketing expenses were $539,000 for the three months ended September 30, 2020, as compared to $502,000 for the three months ended September 30, 2019, an increase of $37,000 or 7%. The increase was driven by accrued expenses of approximately $45,000 related to the Company’s employee short-term incentive program and approximately $35,000 for consulting expenses. These increases were partially offset by lower stock compensation expense in the quarter ended September 30, 2020.

 

Research and Development Expenses

Consolidated research and development expenses were $750,000 for the three months ended September 30, 2020 as compared to $584,000 for the three months ended September 30, 2019, an increase of $166,000 or 28%. The increase was driven by development expenses for the Company’s COVID-19 cartridge reader of approximately $150,000.

 

General and Administrative Expenses

Consolidated general and administrative expenses for the three months ended September 30, 2020 were $1,305,000, compared to $1,139,000 for the three months ended September 30, 2019, an increase of $166,000 or 15%. The primary driver of the increase is approximately $100,000 in accrued expenses related to the Company’s employee short-term incentive program and approximately $70,000 in severance expense.

 

Interest Expense

Interest expense for the three months ended September 30, 2020 was $1,531,000, compared to $1,188,000 for the three months ended September 30, 2019, an increase of $343,000. The increase was driven by additional interest expense and amortization of the debt discount related to the Revolving Credit Agreement with Boyalife Asset Holding II, Inc.

 

 

Results of Operations for the Nine Months Ended September 30, 2020 as Compared to the Nine Months Ended September 30, 2019

 

Net Revenues

Consolidated net revenues for the nine months ended September 30, 2020 were $7,797,000, compared to $11,325,000, for the nine months ended September 30, 2019, a decrease of $3,528,000 or 31%. The decrease was driven by AXP® disposable sales which declined by approximately $2,000,000 with approximately 1,000 fewer cases sold in the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. The COVID-19 pandemic has had a significant impact on the cord blood industry, with fewer cord blood units being stored globally after the start of the pandemic. Additionally, AXP® device sales were approximately $500,000 higher in the year ended September 30, 2019 as compared to September 30, 2020 due to customers converting to new AXP® II devices. Also contributing to the decrease was BioArchive® sales which decreased by $816,000, primarily due to two less devices being sold and lower service revenue in the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. Partially offsetting these decreases, other revenue increased by $259,000, driven by revenues of approximately $240,000 for COVID-19 testing kits.

 

   

September 30, 2020

   

September 30, 2019

 

AXP

  $ 4,112,000     $ 6,710,000  

BioArchive

    1,575,000       2,391,000  

Manual Disposables

    499,000       764,000  

CAR-TXpress

    1,296,000       1,404,000  

Other

    315,000       56,000  
Total   $ 7,797,000     $ 11,325,000  

 

Gross Profit

The Company’s gross profit was $371,000 or 5% of net revenues for the nine months ended September 30, 2020, compared to $5,105,000 or 45% for the nine months ended September 30, 2019, a decrease of $4,734,000. The gross profit decrease in the current year was driven by an inventory reserve of approximately $2,800,000 in the second quarter, after deducting the $800,000 mark-up refund, for the remaining inventory of COVID-19 testing kits purchased from ImmuneCyte, and approximately $250,000 in inventory reserves for X-Series® disposables. The nine months ended September 30, 2020 also had reduced gross profit of approximately $1,000,000 less from AXP® disposable sales and approximately $350,000 less from BioArchive® sales.

 

Sales and Marketing Expenses

Consolidated sales and marketing expenses were $1,424,000 for the nine months ended September 30, 2020, as compared to $1,227,000 for the nine months ended September 30, 2019, an increase of $197,000 or 16%. The increase was driven by accrued expenses of approximately $135,000 related to the Company’s employee short-term incentive program and approximately $60,000 for consulting expenses.

 

Research and Development Expenses

Consolidated research and development expenses were $1,937,000 for the nine months ended September 30, 2020, compared to $1,758,000 for the nine months ended September 30, 2019, an increase of $179,000 or 10%. The increase was driven by development expenses for the Company’s COVID-19 cartridge reader of approximately $150,000.

 

General and Administrative Expenses

Consolidated general and administrative expenses for the nine months ended September 30, 2020 were $4,489,000, compared to $3,617,000 for the nine months ended September 30, 2019, an increase of $872,000 or 24%. The increase was driven by legal and other expenses related to the Mavericks lawsuit of approximately $220,000, expenses related to the Company’s employee short-term incentive program of approximately $300,000 and approximately $235,000 more for stock compensation expense in the nine months ended September 30, 2020, related to stock options granted to the board of directors and Company executives during the current year.

 

 

Interest Expense

Interest expense increased to $6,377,000 for the nine months ended September 30, 2020 as compared to $3,531,000 for the nine months ended September 30, 2019, an increase of $2,846,000. The increase was driven by 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 were converted during the first quarter of 2020. The remainder of the increase was driven by additional interest expense and amortization of the debt discount of approximately $450,000 related to the Revolving Credit Agreement with Boyalife Asset Holding II, Inc.

 

Liquidity and Capital Resources

At September 30, 2020, the Company had cash and cash equivalents of $4,436,000 and working capital of $7,056,000. 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. As of September 30, 2020, the outstanding principal balance of the Loan was $10,000,000 of the $10,000,000.

 

The Company has incurred recurring operating losses and as of September 30, 2020 had an accumulated deficit of $250,434,000. 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, including, but not limited to, risks attributable to the COVID-19 pandemic. 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 U.S. 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 U.S. 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 September 30, 2020 and 2019, respectively:

 

   

Three Months Ended September 30,

 
   

2020

   

2019

 

Net loss

  $ (2,609,000 )   $ (2,373,000 )
                 

Deduct:

               

Interest expense

    (1,531,000 )     (1,188,000 )

Loss on extinguishment of debt

    --       (840,000 )

Fair value change of derivative instruments and other

    5,000       (15,000 )

Loss from operations

  $ (1,083,000 )   $ (330,000 )
                 

Add:

               

Depreciation and amortization

    177,000       202,000  

Stock-based compensation expense

    234,000       253,000  

Adjusted EBITDA

  $ (672,000 )   $ 125,000  

 

Adjusted EBITDA for the three months ended September 30, 2020 was a loss of $672,000, compared to income of $125,000 for the three months ended September 30, 2019, a decrease of $797,000. The adjusted EBITDA decrease was driven by approximately $900,000 less in gross profit as the result of lower sales, approximately $250,000 in inventory reserves for X-Series® disposables, approximately $175,000 more in expenses related to the Company’s employee short-term incentive program, approximately $150,000 in development expenses for the Company’s COVID-19 cartridge reader and approximately $70,000 in severance expense. These decreases were partially offset by an $800,000 refund the Company received for the mark-up portion of COVID-19 testing kits the Company purchased from ImmuneCyte.

 

Nine months ended September 30, 2020 and 2019, respectively:

 

   

Nine Months Ended September 30,

 
   

2020

   

2019

 

Net Loss

  $ (13,862,000 )   $ (5,895,000 )
                 

Deduct:

               

Interest expense

    (6,377,000 )     (3,531,000 )

Fair value change of derivative instruments and other

    7,000       (27,000 )

Loss on equity method investments

    (13,000 )     --  

Loss on extinguishment of debt

    --       (840,000 )

Loss from operations

  $ (7,479,000 )   $ (1,497,000 )
                 

Add:

               

Depreciation and amortization

    569,000       604,000  

Stock-based compensation expense

    615,000       459,000