Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.
|
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
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Description of Business
ThermoGenesis Holdings, Inc. (“ThermoGenesis Holdings,” the “Company,” “we,” “our,” “us”), develops, commercializes and markets a range of automated technologies for chimeric antigen receptor therapies (“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 incorporated in the State of Delaware and headquartered in Rancho Cordova, CA.
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 for bio-manufacturing for immuno-oncology applications. The Company and its subsidiaries currently manufacture and market the following products:
Clinical Bio-Banking Applications:
|
●
|
AXP® II Automated Cell Separation System – an automated, fully closed cell separation system for isolating stem and progenitor cells from umbilical cord blood, registered as a U.S. FDA 510(k) medical device.
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|
●
|
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, registered as a U.S. FDA 510(k) medical device.
|
Point-of-Care Applications:
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●
|
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, registered as a U.S. FDA 510(k) medical device.
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|
●
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PXP-LAVARE System – an automated, fully closed system that is designed to wash, re-suspend and volume reduce cell suspensions. It allows for volume manipulation, supernatant or media exchange, and cell washing to occur without comprising cell viabilities and maximizing recoveries, registered as a U.S. FDA 510(k) medical device.
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|
●
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PXP-1000 System – an automated, fully closed system that provides fast, reproducible separation of multiple cellular components from blood with minimal red blood cell contamination, registered as a U.S. FDA 510(k) medical device.
|
Large Scale Cell Processing and Biomanufacturing:
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●
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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 buoyancy-activated cell sorting (“BACS”) technology.
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|
●
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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 CAR-T cell therapies. The CAR-TXpress Platform is owned and developed through a subsidiary CAR-TXpress Bio, Inc. (“CARTXpress Bio”) in which the Company owns 80% of the equity interest.
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Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such Securities and Exchange Commission (SEC) rules and regulations and accounting principles applicable for interim periods. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Events subsequent to the balance sheet date have been evaluated for inclusion in the accompanying condensed consolidated financial statements through the date of issuance.
Operating results for the three-month period ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in ThermoGenesis Holdings, Inc. Annual Report on Form 10-K for the year ended December 31, 2020.
Principles of Consolidation
The consolidated financial statements include the accounts of ThermoGenesis Holdings, Inc. 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.
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.
At September 30, 2021, the Company had cash and cash equivalents of $7,634,000 and working capital of $2,146,000. The Company has incurred historical losses from operations and expects to continue to incur operating losses in the near future. 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 liquidity 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. These factors and other indicators raise substantial doubt about the Company’s ability to continue as a going concern within one year from the filing date of this report.
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. 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.
3.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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There have been no material changes in the Company’s significant accounting policies to those disclosed in the Company’s Annual Report filed on its Form 10-K for the year ended December 31, 2020.
Recently Adopted Accounting Standards
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting of Income Taxes”, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020. The Company was not profitable for the nine months ended September 30, 2021 and has a full valuation allowance on all net operating loss (“NOL”) tax carryforwards. As such, the adoption of this standard did not have a material impact on the Company’s financial statements.
In January 2020, the FASB issued ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815”. The new guidance clarifies the interaction of accounting for the transition into and out of the equity method and the accounting for measuring certain purchased options and forward contracts to acquire investments. It is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The adoption of this standard 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, 2021
|
|
|
|
Device
Revenue
|
|
|
Service
Revenue
|
|
|
Other
Revenue
|
|
|
Total
Revenue
|
|
AXP
|
|
$
|
2,217,000
|
|
|
$
|
72,000
|
|
|
$
|
21,000
|
|
|
$
|
2,310,000
|
|
BioArchive
|
|
|
221,000
|
|
|
|
297,000
|
|
|
|
--
|
|
|
|
518,000
|
|
CAR-TXpress
|
|
|
160,000
|
|
|
|
31,000
|
|
|
|
71,000
|
|
|
|
262,000
|
|
Manual Disposables
|
|
|
55,000
|
|
|
|
--
|
|
|
|
--
|
|
|
|
55,000
|
|
Other
|
|
|
9,000
|
|
|
|
--
|
|
|
|
4,000
|
|
|
|
13,000
|
|
Total
|
|
$
|
2,662,000
|
|
|
$
|
400,000
|
|
|
$
|
96,000
|
|
|
$
|
3,158,000
|
|
|
|
Nine Months Ended September 30, 2021
|
|
|
|
Device
Revenue
|
|
|
Service
Revenue
|
|
|
Other
Revenue
|
|
|
Total
Revenue
|
|
AXP
|
|
$
|
3,490,000
|
|
|
$
|
159,000
|
|
|
$
|
1,000
|
|
|
$
|
3,670,000
|
|
BioArchive
|
|
|
652,000
|
|
|
|
1,165,000
|
|
|
|
--
|
|
|
|
1,817,000
|
|
CAR-TXpress
|
|
|
702,000
|
|
|
|
89,000
|
|
|
|
214,000
|
|
|
|
1,005,000
|
|
Manual Disposables
|
|
|
300,000
|
|
|
|
--
|
|
|
|
--
|
|
|
|
300,000
|
|
Other
|
|
|
46,000
|
|
|
|
--
|
|
|
|
38,000
|
|
|
|
84,000
|
|
Total
|
|
$
|
5,190,000
|
|
|
$
|
1,413,000
|
|
|
$
|
273,000
|
|
|
$
|
6,876,000
|
|
|
|
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
|
|
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 balance sheet). Revenues recognized during the three and nine months ended September 30, 2021 that were included in the beginning balance of deferred revenue were $118,000 and $521,000, respectively. Short-term deferred revenues increased from $608,000 to $943,000 and long-term deferred revenues decreased from $1,596,000 to $1,395,000 during the nine months ended September 30, 2021, 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 Corning having two options to renew for an additional two-years (up to four years total), 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 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. In addition to any amounts payable throughout the Term for the Products, as consideration for the exclusive worldwide distribution rights for the Products, Corning paid a $2,000,000 exclusivity fee. For the three and nine months ended September 30, 2021 and 2020, the Company recorded revenue related to the exclusivity fee of $71,000 and $214,000, respectively. The remaining balance of the $2,000,000 payment of $1,405,000 is recorded as deferred revenue, with $286,000 in short-term deferred revenue and $1,119,000 recorded in long-term deferred revenue.
Distribution Agreement
The Company signed a new agreement with its AXP distributor in China through 2023. The new agreement called for the distributor to purchase a minimum of $1,400,000 of AXP disposables in 2021, then $650,000 in each of the next two years. In return for the minimum purchase commitment, the Company is providing the distributor with AXP processing devices to use during the term of the agreement. The Company maintains ownership of these devices and they must be returned to the Company at the end of the agreement in 2024. The Company analyzed the relevant accounting guidance and determined that the equipment and AXP bagsets represented distinct performance obligations. The equipment was concluded to be an embedded lease, accounted for as a sales-type operating lease. At September 30, 2021, the value of those assets was approximately $180,000 and they will be amortized over their accounting estimated useful life of five years. A portion of the revenue from each bagset shipment will be allocated and recorded as deferred revenue to be recognized as lease revenue over the term of the agreement. The expected lease revenue is $21,000 per quarter. At September 30, 2021, the Company had $82,000 in short term and $27,000 in long term deferred revenue related to future lease 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 2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
2025 and
beyond
|
|
|
Total
|
|
Service revenue
|
|
$
|
359,000
|
|
|
$
|
962,000
|
|
|
$
|
462,000
|
|
|
$
|
189,000
|
|
|
$
|
85,000
|
|
|
$
|
2,057,000
|
|
Clinical revenue
|
|
|
3,000
|
|
|
|
13,000
|
|
|
|
13,000
|
|
|
|
13,000
|
|
|
|
160,000
|
|
|
|
202,000
|
|
Device revenue(1)
|
|
|
21,000
|
|
|
|
674,000
|
|
|
|
674,000
|
|
|
|
41,000
|
|
|
|
--
|
|
|
|
1,410,000
|
|
Exclusivity fee
|
|
|
72,000
|
|
|
|
286,000
|
|
|
|
286,000
|
|
|
|
286,000
|
|
|
|
476,000
|
|
|
|
1,406,000
|
|
Total
|
|
$
|
455,000
|
|
|
$
|
1,935,000
|
|
|
$
|
1,435,000
|
|
|
$
|
529,000
|
|
|
$
|
721,000
|
|
|
$
|
5,075,000
|
|
|
(1)
|
Represents the minimum purchase requirements related to the Company AXP distributor in China
|
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.
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. For the three and nine month periods ended September 30, 2021, sales and marketing and general and administrative expenses were combined into one line item identified as sales, general and administrative expenses on the Statement of Operations. Additionally, the loss on equity method investments was combined with other income on the Statement of Operations.
Net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding plus the pre-funded warrants. For the purpose of calculating basic net loss per share, the additional shares of common stock that are issuable upon exercise of the pre-funded warrants have been included since the shares are issuable for a negligible consideration and have no vesting or other contingencies associated with them. 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:
|
|
2021
|
|
|
2020
|
|
Common stock equivalents of convertible promissory notes and accrued interest
|
|
|
7,071,241
|
|
|
|
6,988,334
|
|
Vested Series A warrants
|
|
|
--
|
|
|
|
40,441
|
|
Unvested Series A warrants(1)
|
|
|
--
|
|
|
|
69,853
|
|
Warrants – other
|
|
|
653,248
|
|
|
|
1,006,190
|
|
Stock options
|
|
|
366,595
|
|
|
|
892,149
|
|
Total
|
|
|
8,091,084
|
|
|
|
8,996,967
|
|
|
(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 remained outstanding but unvested until they expired in February 2021.
|
5.
|
RELATED PARTY TRANSACTIONS
|
HealthBanks Biotech (USA) Inc.
On November 26, 2019 the Company entered into an agreement with HealthBanks Biotech (USA) Inc. (“HealthBanks”) 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 agreement, ImmuneCyte was initially owned 80% by HealthBanks and 20% by the Company. Healthbanks is a subsidiary of the Boyalife Group (USA), Inc. which is owned by Dr. Xiaochun (Chris) Xu, the Company’s Chief Executive Officer and Chairman of our Board of Directors. Due to the significant influence the Company has over ImmuneCyte’s operations, the investment was accounted for by the Company using the equity method.
Between November 26, 2019 and September 30, 2020, ImmuneCyte closed on a series of investments with a private institution and qualified investors. After the investments, ImmuneCyte was owned 75.16% by HealthBanks, 18.79% by the Company and 6.05% by the private investors.
In March 2021, ImmuneCyte completed an acquisition to acquire Boyalife’s Cellular Therapy Division, for 12,000,000 shares in ImmuneCyte and Shangai KDWinfo Technology Co. Ltd. For 500,000 shares in ImmuneCyte. Following the acquisitions, the Company’s ownership percentage in ImmuneCyte decreased from 18.79% to 8.64%. The Company performed an analysis of the transaction and noted that none of the factors supporting significant influence changed as a result of the acquisition. Therefore, it was concluded that significant influence remains and the Company will continue to account for the transaction using the equity method. The Company recognized a dilution gain of $262,000 representing its share of the net assets acquired by ImmuneCyte. However, at the time of the acquisition, the Company had accumulated losses of $428,000 in its investment in ImmuneCyte. As the accumulated losses were greater than the dilution gain, no entry was recorded by the Company for its investment in ImmuneCyte for the quarter ended March 31, 2021.
As of September 30, 2021, the value of the Company’s investment in ImmuneCyte on its Balance Sheet is $0. For the quarter ended September 30, 2021, ImmuneCyte had a consolidated net loss of $750,000; its current assets were $3,283,000 and current liabilities were $2,970,000.
Convertible Promissory Note and Revolving Credit Agreement
In March 2017, ThermoGenesis Holdings entered into a Credit Agreement with Boyalife Asset Holding II, Inc. (the “Lender”). The Lender is a wholly owned subsidiary of the Boyalife Group (USA), 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”). As of September 30, 2021 and December 31, 2020, the Company had an outstanding principal balance on the Loan of $10,000,000.
The Credit Agreement and the Convertible Promissory Note issued thereunder (as amended, 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. In January 2021, the Company paid the Lender, the interest due as of December 31, 2020 in the amount of $2,082,000. The Note can be prepaid in whole or in part by the Company at any time without penalty.
The Credit Agreement and Note were amended in April 2018, granting the Lender the right to convert, at any time, outstanding principal and accrued but unpaid interest into shares of the Company’s common stock at a conversion price of $16.10 per share. The amendment included a down-round provision that lowered the conversion price if the Company issues shares of common stock at a lower price per share, the conversion price of the Note is lowered to that amount. The Company completed a transaction in 2018, which lowered the conversion price to $1.80.
The following summarizes the Note:
|
Maturity
Date
|
|
Stated
Interest
Rate
|
|
|
Conversion
Price
|
|
|
Face Value
|
|
|
Remaining
Debt
Discount
|
|
|
Carrying
Value
|
|
At September 30, 2021
|
3/6/2022
|
|
|
22%
|
|
|
|
$1.80
|
|
|
|
$10,000,000
|
|
|
|
$(1,583,000)
|
|
|
|
$8,417,000
|
|
At December 31, 2020
|
3/6/2022
|
|
|
22%
|
|
|
|
$1.80
|
|
|
|
$10,000,000
|
|
|
|
$(4,065,000)
|
|
|
|
$5,935,000
|
|
The Company amortized $827,000 and $2,482,000 of debt discount to interest expense for the three and nine months ended September 30, 2021 and $827,000 and $2,103,000 for the three and nine months ended September 30 2020, respectively. In addition to the amortization, the Company also recorded interest expense of $562,000 and $1,668,000 for the three and nine months ended September 30, 2021 and $562,000 and $1,519,000 for the three and nine months ended September 30 2020, respectively. The interest payable balance as of September 30, 2021 and December 31, 2020 was $1,668,000 and $2,082,000, respectively.
6.
|
CONVERTIBLE PROMISSORY NOTE
|
July 2019 Note
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”). The July 2019 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 following summarizes the July 2019 Note:
|
Maturity
Date
|
|
Stated
Interest
Rate
|
|
|
Conversion
Price
|
|
|
Face Value
|
|
|
Remaining
Debt
Discount
|
|
|
Carrying
Value
|
|
At September 30, 2021
|
7/31/2022
|
|
|
24%
|
|
|
|
$1.80
|
|
|
|
$1,000,000
|
|
|
|
$(267,000)
|
|
|
|
$733,000
|
|
At December 31, 2020
|
7/31/2022
|
|
|
24%
|
|
|
|
$1.80
|
|
|
|
$1,000,000
|
|
|
|
$(507,000)
|
|
|
|
$493,000
|
|
The Company recorded amortization expense for the debt discount on the July 2019 Note for the three and nine months ended September 30, 2021 of $80,000 and $241,000, respectively; and $27,000 and $107,000 for the three and nine months ended September 30, 2020. Interest expense related to the July 2019 Note was $60,000 and $180,000 for the three and nine months ended September 30, 2021 and 2020.
The Company leases an approximately 28,000 square foot facility located in Rancho Cordova, California for its corporate offices and in-house manufacturing. The lease was renewed in the first quarter of 2019 and is accounted for as an operating lease. The lease expires in May 2024.
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,
2021
|
|
|
December 31,
2020
|
|
Right-of-use operating lease assets, net
|
|
$
|
614,000
|
|
|
$
|
730,000
|
|
Current lease liability (included in other current liabilities)
|
|
|
193,000
|
|
|
|
157,000
|
|
Non-current lease liability
|
|
|
455,000
|
|
|
|
604,000
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term
|
|
|
2.7
|
|
|
|
3.4
|
|
Discount rate
|
|
|
22
|
%
|
|
|
22
|
%
|
Maturities of lease liabilities by year for our operating leases are as follows:
2021 (Remaining)
|
|
$
|
78,000
|
|
2022
|
|
|
319,000
|
|
2023
|
|
|
328,000
|
|
2024
|
|
|
139,000
|
|
Total lease payments
|
|
$
|
864,000
|
|
Less: imputed interest
|
|
|
(217,000
|
)
|
Present value of operating lease liabilities
|
|
$
|
647,000
|
|
Statement of Cash Flows
In January 2019, the Company signed an amendment to its Rancho Cordova, California lease. 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 included in cash flow from operating activities was $78,000 and $231,000 for the three and nine months ended September 30, 2021 and $76,000 and $225,000 for the three and nine months ended September 30, 2020, respectively.
Operating Lease Costs
Operating lease costs were $107,000 and $316,000 for the three and nine months ended September 30, 2021 and $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 amounts for variable lease costs, as well as immaterial and short-term leases.
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 were not material for the three and nine months ended September 30, 2021 and 2020.
8.
|
COMMITMENTS AND CONTINGENCIES
|
Contingencies
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, 2021, 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 condensed consolidated financial position, operating results or cash flows.
Financial Covenants
On July 13, 2020, the Company, entered into a Manufacturing and Supply Amending Agreement #2 with CBR Systems, Inc. (“CBR”) with an effective date of July 13, 2020 (the “Amendment”). The Amendment amends the Manufacturing and Supply Agreement entered into on May 15, 2017 and Amendment #1 dated March 16, 2020 by the Company and CBR. 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 agreement as of September 30, 2021.
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, 2021 is summarized in the following table:
Balance at December 31, 2020
|
|
$
|
154,000
|
|
Warranties issued during the period
|
|
|
53,000
|
|
Settlements made during the period
|
|
|
(140,000
|
)
|
Changes in liability for pre-existing warranties during the period
|
|
|
--
|
|
Balance at September 30, 2021
|
|
$
|
67,000
|
|
9.
|
PAYCHECK PROTECTION PROGRAM
|
On April 21, 2020, the Company entered into a promissory note and received a Paycheck Protection Program loan “PPP Loan” from the Small Business Association “SBA”, which was established under the CARES Act. The Company received net proceeds of $646,000 from the PPP Loan. The term of the PPP Loan is two years with an interest rate of 1.00% per annum, which was 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. In late December 2020, the Company applied with the SBA for forgiveness of the PPP Loan and was notified on March 30, 2021 that the SBA had approved our application to forgive the entire amount of the loan and accrued interest. For the nine months ended September 30, 2021, the Company recorded a gain on extinguishment of debt of $652,000 representing the principal and accrued interest for the PPP Loan at the time of forgiveness.
10.
|
EMPLOYEE RETENTION TAX CREDIT
|
Employee Retention Tax Credits (“ERTC”), created in the March 2020 CARES Act and then subsequently amended by the Consolidated Appropriation Act (“CAA”) of 2021 and the American Rescue Plan Act (“ARPA”) of 2021, is a refundable payroll credit for qualifying businesses keeping employees on their payroll during the COVID-19 pandemic. Under CAA and ARPA amendments, employers can claim a refundable tax credit against the employer share of social security tax equal to 70% of the qualified wages (including certain health care expenses) paid to employees from January 1, 2021 to December 31, 2021. Qualified wages are limited to $10,000 per employee per quarter in 2021 so the maximum ERTC available is $7,000 per employee per quarter.
The Company is eligible to receive the ERTC credits under the gross receipts decline test when comparing the first, second and third quarters of 2021 to the same quarters in 2019, which qualified the Company to claim ERTC the first three quarters of 2021 under the amended ERTC program. The Company qualified for a refundable payroll tax credit totaling $842,000 for the first three quarters of 2021, which is recorded in other income on the Company’s consolidated statement of operations for the three and nine months ended September 30, 2021, and prepaid and other current assets on the Company’s consolidated balance sheet as of September 30, 2021.
Common Stock
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 the Company’s common stock, having an aggregate offering price of up to $4,400,000 and on May 19, 2020 the ATM Agreement was amended to increase the aggregate value of up to $15,280,313 (the “HCW Shares”). As of September 30, 2021, the Company sold a total of 5,597,484 shares of the Company’s common stock for aggregate gross proceeds of $15,280,000 at an average selling price of $2.73 per share, resulting in net proceeds of approximately $14,568,000 after deducting legal expenses, audit fees, commissions and other transaction costs of approximately $712,000. For the nine months ended September 30, 2021, the Company sold 2,976,832 shares of common stock for net proceeds of $6,832,000 after deducting $224,000 in commissions and other transaction costs.
Stock Based Compensation
In May 2021, five Company executives voluntarily surrendered the options they were awarded in June 2020. At the time they were surrendered, the exercise price of the options was underwater. No payment or other consideration was paid to the Company executives for surrendering the options. In total 490,000 options were cancelled. As a result of the cancellation, the remaining unamortized expense of $2,008,000 was accelerated and recorded in the three months ended June 30, 2021.
The Company recorded stock-based compensation of $92,000 and $2,449,000 for the three and nine months ended September 30, 2021, and $234,000 and $615,000 for the three and nine months ended September 30, 2020, respectively, as comprised of the following:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Cost of revenues
|
|
$
|
4,000
|
|
|
$
|
3,000
|
|
|
$
|
14,000
|
|
|
$
|
5,000
|
|
Selling, general and administrative
|
|
|
64,000
|
|
|
|
195,000
|
|
|
|
2,194,000
|
|
|
|
538,000
|
|
Research and development
|
|
|
24,000
|
|
|
|
36,000
|
|
|
|
241,000
|
|
|
|
72,000
|
|
|
|
$
|
92,000
|
|
|
$
|
234,000
|
|
|
$
|
2,449,000
|
|
|
$
|
615,000
|
|
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, 2020
|
|
|
889,636
|
|
|
$
|
8.57
|
|
|
|
8.7
|
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled / Forfeited
|
|
|
523,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2021
|
|
|
366,595
|
|
|
$
|
11.86
|
|
|
|
7.1
|
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at September 30, 2021
|
|
|
331,128
|
|
|
$
|
12.36
|
|
|
|
6.9
|
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2021
|
|
|
244,245
|
|
|
$
|
13.97
|
|
|
|
7.0
|
|
|
$
|
--
|
|
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, 2021.
Warrants
A summary of warrant activity for the nine months ended September 30, 2021 is as follows:
|
|
Number of
Shares
|
|
|
Weighted-Average
Exercise Price Per
Share
|
|
|
Weighted-
Average
Remaining
Contract Term
|
|
Balance at December 31, 2020
|
|
|
1,116,484
|
|
|
$
|
37.27
|
|
|
|
0.49
|
|
Warrants expired
|
|
|
463,236
|
|
|
|
|
|
|
|
|
|
Warrants exercised
|
|
|
--
|
|
|
$
|
--
|
|
|
|
|
|
Outstanding at September 30, 2021
|
|
|
653,248
|
|
|
$
|
6.97
|
|
|
|
1.70
|
|
Exercisable at September 30, 2021
|
|
|
653,248
|
|
|
$
|
6.97
|
|
|
|
1.70
|
|
12.
|
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 net revenues, one customer accounted for 42% and 20%, a second customer accounted for 24% and 22% and a third customer accounted for 0% and 10% for the three months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021 and 2020, one customer accounted for 19% and 12%, a second customer accounted for 17% and 27%, while a third customer accounted for 10% and 12% of net revenues, respectively.
At September 30, 2021, two customers accounted for 67% of accounts receivable. At December 31, 2020, three customers accounted for 72% of accounts receivable.