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
|
|
Adjusted EBITDA
|
|
$
|
(6,295,000
|
)
|
|
$
|
(434,000
|
)
|
The adjusted EBITDA loss was $6,295,000 for the nine months ended September 30, 2020 compared to a loss of $434,000 for the nine months ended September 30, 2019, an increase of $5,861,000. The increase was driven by an inventory reserve of approximately $2,800,000, 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 $1,350,000 due to lower sales, approximately $525,000 more in expenses related to the Company’s employee short-term incentive program, approximately $220,000 in legal and other expenses related to the Mavericks lawsuit, and approximately $150,000 in development expenses for the Company’s COVID-19 cartridge reader.
Off-Balance Sheet Arrangements
As of September 30, 2020, the Company had no off-balance sheet arrangements.