kool20190630_10q.htm
 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

 

 

X  

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2019.

 

or

 

 

___

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition from _____________ to _______________.

 

Commission File Number: 000-16375

Cesca Therapeutics 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

KOOL

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 [X] No [   ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit such files).

Yes [X] 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 [X] Smaller reporting company [X]
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 [X]

 

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 August 9, 2019

Common stock, $.001 par value

 

2,416,337

 

 
 

 

Cesca Therapeutics 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

23
     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

31

     

Item 4.

Controls and Procedures

31

     

Part II Other Information

 
     

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

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

Cesca Therapeutics Inc.

Condensed Consolidated Balance Sheets

 

   

June 30

2019

   

December 31,

2018

 
   

(Unaudited)

         

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 2,424,000     $ 2,400,000  

Accounts receivable, net of allowance for doubtful accounts of $398,000 ($419,000 at December 31, 2018)

    3,091,000       1,509,000  

Inventories, net of reserves of $384,000 ($258,000 at December 31, 2018)

    3,951,000       4,493,000  

Prepaid expenses and other current assets

    389,000       224,000  

Total current assets

    9,855,000       8,626,000  
                 

Restricted cash

    1,000,000       1,000,000  

Equipment and leasehold improvements, net

    2,398,000       2,562,000  

Right-of-use operating lease assets, net

    915,000       --  

Goodwill

    781,000       781,000  

Intangible assets, net

    1,531,000       1,591,000  

Other assets

    52,000       51,000  

Total assets

  $ 16,532,000     $ 14,611,000  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Accounts payable

  $ 3,198,000     $ 2,423,000  

Accrued payroll and related expenses

    485,000       703,000  

Deferred revenue

    577,000       485,000  

Interest payable – related party

    926,000       1,513,000  

Other current liabilities

    1,295,000       1,241,000  

Total current liabilities

    6,481,000       6,365,000  
                 

Convertible promissory note – related party, less debt discount of $6,367,000 ($6,026,000 at December 31, 2018)

    2,346,000       1,174,000  
Convertible promissory note, less debt discount of $743,000 ($0 at December 31, 2018)      57,000       --  

Derivative obligations

    1,000       1,000  

Long term operating lease obligations

    825,000       --  

Other non-current liabilities

    322,000       340,000  

Total liabilities

    10,032,000       7,880,000  
                 

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; 2,368,337 issued and outstanding (2,168,337 at December 31, 2018)

    2,000       2,000  

Paid in capital in excess of par

    236,343,000       235,888,000  

Accumulated deficit

    (230,603,000 )     (227,435,000 )

Accumulated other comprehensive loss

    (20,000 )     (13,000 )

Total Cesca Therapeutics Inc. stockholders’ equity

    5,722,000       8,442,000  
                 

Noncontrolling interests

    778,000       (1,711,000 )

Total equity

    6,500,000       6,731,000  

Total liabilities and stockholders’ equity

  $ 16,532,000     $ 14,611,000  

 

 

See accompanying notes.

 

1

 

Cesca Therapeutics Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

 

   

Three Months Ended
June 30,

   

Six Months Ended

June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net revenues

  $ 4,305,000     $ 2,004,000     $ 7,268,000     $ 3,871,000  

Cost of revenues

    2,354,000       1,641,000       4,057,000       3,156,000  
                                 

Gross profit

    1,951,000       363,000       3,211,000       715,000  
                                 

Expenses:

                               

Sales and marketing

    384,000       359,000       725,000       685,000  

Research and development

    611,000       908,000       1,175,000       1,949,000  

General and administrative

    1,218,000       2,399,000       2,478,000       4,641,000  

Impairment Charges

    --       27,202,000       --       27,202,000  
                                 

Total operating expenses

    2,213,000       30,868,000       4,378,000       34,477,000  
                                 

Loss from operations

    (262,000 )     (30,505,000 )     (1,167,000 )     (33,762,000 )
                                 

Fair value change of derivative instruments

    --       308,000       --       567,000  

Interest expense

    (1,211,000 )     (733,000 )     (2,343,000 )     (1,093,000 )

Other expenses

    (2,000 )     (32,000 )     (11,000 )     (44,000 )
                                 

Total other expense

    (1,213,000 )     (457,000 )     (2,354,000 )     (570,000 )
                                 

Loss before benefit for income taxes

    (1,475,000 )     (30,962,000 )     (3,521,000 )     (34,332,000 )

Benefit for income taxes

    --       3,451,000       --       3,451,000  

Net loss

    (1,475,000 )     (27,511,000 )     (3,521,000 )     (30,881,000 )
                                 

Loss attributable to noncontrolling interests

    (178,000 )     (503,000 )     (354,000 )     (913,000 )

Net loss attributable to common stockholders

  $ (1,297,000 )   $ (27,008,000 )   $ (3,167,000 )   $ (29,968,000 )
                                 

Net loss

  $ (1,475,000 )   $ (27,511,000 )   $ (3,521,000 )   $ (30,881,000 )

Other comprehensive loss:

                               

Foreign currency translation adjustments

    (3,000 )     21,000       (8,000 )     28,000  

Comprehensive loss

    (1,478,000 )     (27,490,000 )     (3,529,000 )     (30,853,000 )

Comprehensive loss attributable to noncontrolling interests

    (178,000 )     (503,000 )     (354,000 )     (913,000 )

Comprehensive loss attributable to common stockholders

  $ (1,300,000 )   $ (26,987,000 )   $ (3,175,000 )   $ (29,940,000 )
                                 

Per share data:

                               
                                 

Basic and diluted net loss per common share

  $ (0.47 )   $ (17.49 )   $ (1.21 )   $ (22.73 )
                                 

Weighted average common shares outstanding – basic and diluted

    2,784,776       1,544,412       2,623,989       1,318,438  

 

 

See accompanying notes.

 

2

 

Cesca Therapeutics Inc.

Condensed Consolidated Statements of Stockholders Equity (Unaudited)

For the Six Months Ended June 30, 2019 and 2018

 

   

Common Stock

                                         
   

Shares

   

Amount

   

Paid in capital in excess of par

   

Accumulated deficit

   

AOCI*

   

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 expense

    --       --       81,000       --       --       --       81,000  

Exercise of pre-funded warrants

    50,000       --       5,000       --       --       --       5,000  

Discount due to beneficial conversion features

    --       --       1,513,000       --       --       --       1,513,000  

Reorganization of subsidiary and related change in non-controlling interest

    --       --       (2,843,000 )     --       --       2,843,000       --  

Foreign currency translation

    --       --       --       --       (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 expense

    --       --       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  
                                                         

Balance at January 1, 2018

    1,090,664     $ 1,000     $ 221,381,000     $ (187,640,000 )   $ (43,000 )   $ (487,000 )   $ 33,212,000  
                                                         

Stock-based compensation expense

    --       --       137,000       --       --       --       137,000  

Issuance of common stock and pre-funded warrants, net of offering costs

    60,967       --       1,213,000       --       --       --       1,213,000  

Cumulative-effect adjustment from adoption of ASC 606

    --       --       --       (79,000 )     --       --       (79,000 )

Foreign currency translation

    --       --       --       --       7,000       --       7,000  

Net loss

    --       --       --       (2,960,000 )             (410,000 )     (3,370,000 )

Balance at March 31, 2018

    1,151,631       1,000       222,731,000       (190,679,000 )     (36,000 )     (897,000 )     31,120,000  
                                                         

Stock-based compensation expense

    42       --       163,000       --       --       --       163,000  

Issuance of common stock and pre-funded warrants, net of offering costs

    647,497       1,000       4,791,000       --       --       --       4,792,000  

Exercise of pre-funded warrants

    269,167       --       27,000       --       --       --       27,000  

Foreign currency translation

    --       --       --       --       21,000       --       21,000  

Net loss

    --       --       --       (27,008,000 )             (503,000 )     (27,511,000 )

Balance at June 30, 2018

    2,068,337     $ 2,000     $ 227,712,000     $ (217,687,000 )   $ (15,000 )   $ (1,400,000 )   $ 8,612,000  

 

* Accumulated other comprehensive loss.

 

 

See accompanying notes.

 

3

 

Cesca Therapeutics Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

   

Six Months Ended

June 30,

 
   

2019

   

2018

 

Cash flows from operating activities:

               

Net loss

  $ (3,521,000 )   $ (30,881,000 )

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

               

Depreciation and amortization

    402,000       333,000  

Stock based compensation expense

    206,000       300,000  

Amortization of debt discount

    1,229,000       350,000  

(Recovery of) reserve for excess and slow-moving inventories

    125,000       (252,000 )

Change in fair value of derivative

    --       (567,000 )

Deferred income tax benefit

    --       (3,451,000 )

Loss on disposal of equipment

    6,000       420,000  

Impairment of intangible asset

    --       27,202,000  

Net change in operating assets and liabilities:

               

Accounts receivable

    (1,582,000 )     869,000  

Inventories

    449,000       (358,000 )

Prepaid expenses and other assets

    (165,000 )     257,000  

Accounts payable

    749,000       (242,000 )

Related party payable

    --       (606,000 )

Accrued payroll and related expenses

    (217,000 )     50,000  

Deferred revenue

    92,000       254,000  

Other current liabilities

    (623,000 )     217,000  

Other noncurrent liabilities

    (61,000 )     3,000  
                 

Net cash used in operating activities

    (2,911,000 )     (6,102,000 )
                 

Cash flows from investing activities:

               

Capital expenditures

    (142,000 )     (850,000 )
                 

Net cash used in investing activities

    (142,000 )     (850,000 )
                 

Cash flows from financing activities:

               
                 

Payments on financing lease obligations

    (15,000 )     (19,000 )

Proceeds from long-term debt

    800,000       500,000  

Proceeds from related party line of credit

    1,513,000       --  

Proceeds from exercise of pre-funded warrants

    23,000       --  

Proceeds from issuance of common stock and prefunded warrants, net

    756,000       6,032,000  
                 

Net cash provided by financing activities

    3,077,000       6,513,000  
                 

Effects of foreign currency rate changes on cash and cash equivalents

    --       (3,000 )

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

    24,000       (442,000 )
                 

Cash, cash equivalents and restricted cash at beginning of period

    3,400,000       3,513,000  

Cash, cash equivalents and restricted cash at end of period

  $ 3,424,000     $ 3,071,000  
                 

Supplemental disclosures of cash flow information:

               

Cash paid for interest

  $ 1,668,000     $ 657,000  

Supplemental non-cash financing and investing information:

               

Recording of beneficial conversion feature on debt

  $ 2,313,000       --  

Right-to-use asset acquired under operating lease

  $ 966,000       --  

Transfer of equipment to inventories

  $ 33,000     $ 172,000  

Transfer of inventories to equipment

  $ --     $ 420,000  

 

See accompanying notes.

 

4

 

Cesca Therapeutics Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

1.     Description of Business and Basis of Presentation

 

Organization and Basis of Presentation

Cesca Therapeutics Inc. (“Cesca Therapeutics,” “Cesca,” the “Company”), a Delaware corporation, develops, commercializes and markets a range of automated technologies for CAR-T and other cell-based therapies. The Company was founded in 1986 and is headquartered in Rancho Cordova, CA. ThermoGenesis Corp. (ThermoGenesis), its device subsidiary, 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.

 

On January 1, 2019, the Company entered into a reorganization of the business and equity ownership of its majority-owned ThermoGenesis subsidiary. Pursuant to the reorganization, the assets acquired by ThermoGenesis from SynGen Inc. in July 2017 were contributed to a newly formed Delaware subsidiary of ThermoGenesis named CARTXpress Bio, Inc. (CARTXpress) and the 20% interest in ThermoGenesis was exchanged for a 20% interest in CARTXpress. As a result, the Company holds an 80% equity interest in CARTXpress and the Company has become the owner of 100% of ThermoGenesis. The purpose of the reorganization is to allow CARTXpress to focus on the development and commercialization of the newly launched CARTXpress cellular manufacturing platform.

 

The Company reacquired the non-controlling interest shares in ThermoGenesis with a deficit of $1,711,000 in exchange for 20% equity interest in the newly created subsidiary, CARTXpress, which approximates $1,100,000.  The total amount of $2,843,000 related to reorganization of subsidiary and related change in non-controlling interest was recorded in the statement of stockholders’ equity. 

 

Cesca is an affiliate of the Boyalife Group, a China-based industry research alliance encompassing top research institutions for stem cell and regenerative medicine.

 

Reverse Stock Split

On June 4, 2019, the Company effected a one (1) for ten (10) reverse stock 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. Stockholders approved the reverse stock split at the Company’s annual meeting of stockholders held on May 30, 2019, and the specific ratio was determined at a meeting of the Company’s Board of Directors also held on May 30, 2019.

 

All historical share amounts disclosed herein have been retroactively recast to reflect the reverse split and subsequent share exchange. No fractional shares were issued as a result of the reverse stock split, as fractional shares of common stock were rounded up to the nearest whole share.

 

Liquidity and Going Concern

The Company has a Revolving Credit Agreement (Credit Agreement) with Boyalife Asset Holding II, Inc. (Refer to Note 3). As of June 30, 2019, the Company had drawn down $8,713,000 of the $10,000,000 available under the Credit Agreement. Future draw-downs may be limited for various reasons including default or foreign government policies that restrict or prohibit transferring funds. At the time of this filing, we are currently unable to draw down on the line of credit. This may change in the near future but there is no assurance that the line of credit will become available at such time when it is needed. 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 the Board.

 

 

On April 18, 2019, the Company entered into a Securities Purchase Agreement with an accredited investor pursuant to which the Company agreed to issue and sell to such investor (the “April Offering”) 444,445 pre-funded warrants to purchase shares of the Company’s common stock for a purchase price of $1.70 per pre-funded warrant.  The gross proceeds to the Company, excluding the proceeds, if any, from the exercise of the pre-funded warrants, was approximately $756,000.  The April Offering closed on April 26, 2019 and the pre-funded warrants were accounted for as equity by the Company.

 

Each pre-funded warrant is immediately exercisable for one share of common stock at an exercise price of $0.10 per share and will remain exercisable until exercised in full. A holder of a pre-funded warrant will not have the right to exercise any portion of its warrant if the holder, together with its affiliates, would beneficially own in excess of 4.99% or 9.99%, as applicable, of the number of shares of the Company’s common stock outstanding immediately after giving effect to such exercise (the “Beneficial Ownership Limitation”); provided, however, that the holder may increase or decrease the Beneficial Ownership Limitation, although any increase will not be effective until the 61st day after a notice of increase is delivered to the Company and the holder may not increase the Beneficial Ownership Limitation in excess of 9.99%.

 

Subject to certain exceptions, in the event the Company sells or issues any shares of common stock or common stock equivalents at a lower price during the period beginning on the closing date of the April Offering and ending on the date that is three-hundred and sixty-five (365) days following such date, the Company is required to issue the investor a number of shares of common stock (or additional pre-funded warrants to purchase shares of common stock) equal to the number of shares the investor would have received had the purchase price for such shares been at such lower purchase price.

 

At June 30, 2019, the Company had cash and cash equivalents of $2,424,000 and working capital of $3,374,000.  The Company has incurred recurring operating losses and as of June 30, 2019 had an accumulated deficit of $230,603,000.  These recurring losses raise substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date. The Company anticipates requiring additional capital to grow the device business, to fund other operating expenses and to make interest payments on the line of credit with Boyalife Asset Holding II, Inc.  The Company’s ability to fund its cash needs is subject to various risks, many of which are beyond its control. The Company plans to 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 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 condensed consolidated financial statements include the accounts of Cesca and its wholly-owned subsidiaries, ThermoGenesis and TotipotentRX Cell Therapy, Pvt. Ltd and ThermoGenesis’ majority-owned subsidiary, CARTXpress. All significant intercompany accounts and transactions have been eliminated upon consolidation.

 

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 six month periods ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.  These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in Cesca’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

 

2.     Summary of Significant Accounting Policies

 

Recently Adopted Accounting Standards

In June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting”, which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The Company adopted the standard on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s financial statements.

 

In February 2016, the FASB issued ASU 2016-02 “Leases,” which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The Company adopted the standard on January 1, 2019.

 

The new standard requires lessees to recognize both the right-of-use assets and lease liabilities in the balance sheet for most leases, whereas under previous GAAP only finance lease liabilities (previously referred to as capital leases) were recognized in the balance sheet. In addition, the definition of a lease has been revised which may result in changes to the classification of an arrangement as a lease. Under the new standard, an arrangement that conveys the right to control the use of an identified asset by obtaining substantially all of its economic benefits and directing how it is used as a lease, whereas the previous definition focuses on the ability to control the use of the asset or to obtain its output. Quantitative and qualitative disclosures related to the amount, timing and judgements of an entity’s accounting for leases and the related cash flows are expanded. Disclosure requirements apply to both lessees and lessors, whereas previous disclosures related only to lessees. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. Lessor accounting is also largely unchanged.

 

 

The new standard provides a number of transition practical expedients, which the Company has elected, including:

 

 

A “package of three” expedients that must be taken together and allow entities to (1) not reassess whether existing contracts contain leases, (2) carryforward the existing lease classification, and (3) not reassess initial direct costs associated with existing leases, and

 

An implementation expedient which allows the requirements of the standard in the period of adoption with no restatement of prior periods.

 

The impact of adoption did not have a material impact to the Company as of January 1, 2019 as the Company’s finance leases are immaterial and its operating leases had terms shorter than one year. In January 2019, the Company signed an amendment to its lease for office space at its corporate headquarters in Rancho Cordova, CA. The amendment extended the lease term by five years and was accounted for as a modification. At that time, the Company recorded lease assets and liabilities of $966,000.

 

Revenue Recognition

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

 

The following tables summarize the revenues of the Company’s reportable segments:

 

   

Three Months Ended June 30, 2019

 
   

Device

Revenue

   

Service

Revenue

   

Other

Revenue

   

Total

Revenue

 

Device Segment:

                               

AXP

  $ 3,028,000     $ 54,000             $ 3,082,000  

BioArchive

    433,000       351,000               784,000  

CAR-TXpress

    182,000       --               182,000  

Manual Disposables

    205,000       --               205,000  

Other

    --       --     $ 8,000       8,000  

Total Device Segment

    3,848,000       405,000       8,000       4,261,000  

Clinical Development Segment:

                               

Disposables

    37,000       --       --       37,000  

Other

    --       7,000       --       7,000  

Total Clinical Development

    37,000       7,000       --       44,000  

Total

  $ 3,885,000     $ 412,000     $ 8,000     $ 4,305,000  

 

 

   

Six Months Ended June 30, 2019

 
   

Device

Revenue

   

Service

Revenue

   

Other

Revenue

   

Total

Revenue

 

Device Segment:

                               

AXP

  $ 4,295,000     $ 109,000             $ 4,404,000  

BioArchive

    1,031,000       766,000               1,797,000  

Manual Disposables

    499,000       --               499,000  

CAR-TXpress

    490,000       --               490,000  

Other

    --       --     $ 22,000       22,000  

Total Device Segment

    6,315,000       875,000       22,000       7,212,0000  

Clinical Development Segment:

                               

Disposables

    44,000       --       --       44,000  

Other

    5,000       7,000       --       12,000  

Total Clinical Development

    49,000       7,000       --       56,000  

Total

  $ 6,364,000     $ 882,000     $ 22,000     $ 7,268,000  

 

 

   

Three Months Ended June 30, 2018

 
   

Device

Revenue

   

Service

Revenue

   

Other

Revenue

   

Total

Revenue

 

Device Segment:

                               

AXP

  $ 849,000     $ 66,000             $ 915,000  

BioArchive

    449,000       311,000               760,000  

Manual Disposables

    229,000       --               229,000  

CAR-TXpress

    30,000       --               30,000  

Other

    8,000       --     $ 16,000       24,000  

Total Device Segment

    1,565,000       377,000       16,000       1,958,000  

Clinical Development Segment:

                               

Disposables

    1,000       --       --       1,000  

Bone Marrow

    --       38,000       --       38,000  

Other

    --       7,000       --       7,000  

Total Clinical Development

    1,000       45,000       --       46,000  

Total

  $ 1,566,000     $ 422,000     $ 16,000     $ 2,004,000  

 

 

   

Six Months Ended June 30, 2018

 
   

Device

Revenue

   

Service

Revenue

   

Other

Revenue

   

Total

Revenue

 

Device Segment:

                               

AXP

  $ 1,534,000     $ 131,000             $ 1,665,000  

BioArchive

    872,000       655,000               1,527,000  

Manual Disposables

    462,000       --               462,000  

CAR-TXpress

    30,000       --               30,000  

Other

    46,000       --     $ 33,000       79,000  

Total Device Segment

    2,944,000       786,000       33,000       3,763,000  

Clinical Development Segment:

                               

Disposables

    23,000       --       --       23,000  

Bone Marrow

    --       61,000       --       61,000  

Other

    --       24,000       --       24,000  

Total Clinical Development

    23,000       85,000       --       108,000  

Total

  $ 2,967,000     $ 871,000     $ 33,000     $ 3,871,000  

 

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 six months ended June 30, 2019 that were included in the beginning balance of deferred revenue were $83,000 and $446,000, respectively.  Short term deferred revenues increased from $485,000 to $577,000 during the six months ended June 30, 2019.

 

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 2019

   

2020

   

2021

   

2022

   

2023 and

Beyond

   

Total

 

Service Revenue

  $ 701,000     $ 786,000     $ 502,000     $ 165,000     $ 120,000     $ 2,274,000  

Clinical Revenue

    7,000       14,000       14,000       14,000       202,000       251,000  

Total

  $ 708,000     $ 800,000     $ 516,000     $ 179,000     $ 322,000     $ 2,525,000  

 

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 reflecting the reporting entity’s own assumptions.

 

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 impairment of goodwill and intangible assets is a non-recurring Level 3 fair value measurement.

 

Segment Reporting

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (CODM), or decision-making group, whose function is to allocate resources to and assess the performance of the operating segments. The Company has identified its chief executive officer as the CODM. In determining its reportable segments, the Company considered the markets and the products or services provided to those markets.

 

The Company has two reportable business segments:

 

 

The Clinical Development Segment, is developing autologous (utilizing the patient’s own cells) stem cell-based therapeutics that address significant unmet medical needs for applications within the vascular, cardiology and orthopedic markets.

 

The Device Segment, engages in the development and commercialization of automated technologies for cell-based therapeutics and bio-processing. The device division is operated through the Company’s ThermoGenesis subsidiary.

 

 

Net Loss per Share

Net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding plus the pre-funded warrants. For the purpose of calculating basic net loss per share, the additional shares of common stock that are issuable upon exercise of the pre-funded warrants have been included since the shares are issuable for a negligible consideration and have no vesting or other contingencies associated with them. There were 540,945 pre-funded warrants included in the quarter ended June 30, 2019 calculation. 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 June 30:

 

   

2019

   

2018

 

Common stock equivalents of convertible promissory notes and accrued interest

    5,355,198       1,267,607  

Vested Series A warrants

    40,442       40,442  

Unvested Series A warrants(1)

    69,853       69,853  

Warrants – other

    1,300,091       1,319,728  

Stock options

    286,229       120,047  

Total

    7,051,813       2,817,677  

 

 

(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

 

Convertible Promissory Note and Revolving Credit Agreement

In March 2017, Cesca 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 the Board of Directors. The Credit Agreement and its subsequent amendments, grants to the Company the right to borrow up to $10,000,000 (the “Loan”) at any time prior to March 6, 2022 (the “Maturity Date”). The Company has drawn down a total of $8,713,000 and $7,200,000 as of June 30, 2019 and December 31, 2018, respectively.  The Company’s ability to draw-down the remaining $1,287,000 may be impacted by reasons such as default or foreign government policies that restrict or prohibit transferring funds.  At the time of this filing, we are currently unable to draw down on the line of credit.  This may change in the near future but there is no assurance that the line of credit will become available at such time when it is needed.

 

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 provides that if the Lender at any time in the future purchases the Company’s blood and bone marrow processing device business, the Lender would refund to the Company legal fees expended by the Company in connection with certain litigation expenses funded by the Company with proceeds of the Loan.

 

 

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 did contain a beneficial conversion feature and as a result of the modifications to the conversion price, the Company recorded a debt discount in the amount of $7,200,000 and added $1,513,000 to the debt discount as a result of the draw-down during the quarter ended March 31, 2019. Such discount represented the fair value of the incremental shares up to the proceeds received from the convertible notes. The Company amortized $586,000 and $1,172,000 of such debt discount to interest expense for the three and six months ended June 30, 2019, and $350,000 for the three and six months ended June 30, 2018. In addition to the amortization, the Company also recorded interest expense of $466,000 and $926,000 during the three and six months ended June 30, 2019, and $382,000 and $742,000 for the three and six months ended June 30, 2018. As of June 30, 2019, the Company had an interest payable balance of $926,000 as compared to $1,513,000 at December 31, 2018 related to the Note.

 

Distributor Agreement

On August 21, 2017, ThermoGenesis entered into an International Distributor Agreement with Boyalife W.S.N. Under the terms of the agreement, Boyalife W.S.N. was granted the exclusive right, subject to existing distributors and customers (if any), to develop, sell to, and service a customer base for ThermoGenesis’ AXP® (AutoXpress®) System and BioArchive® System in the People’s Republic of China (excluding Hong Kong and Taiwan), Singapore, Indonesia, and the Philippines (the “Territories”). Boyalife W.S.N. is an affiliate of our Chief Executive Officer and Chairman of our Board of Directors, and Boyalife (Hong Kong) Limited, our largest stockholder. Boyalife W.S.N.’s rights under the agreement include the exclusive right to distribute AXP® Disposable Blood Processing Sets and use rights to the AutoXpress® System, BioArchive System and other accessories used for the processing of stem cells from cord blood in the Territories. Boyalife W.S.N. is also appointed as the exclusive service provider to provide repairs and preventative maintenance to ThermoGenesis products in the Territories.

 

The term of the agreement is for three years with ThermoGenesis having the right to renew the agreement for successive two-year periods at its option. However, ThermoGenesis has the right to terminate the agreement early if Boyalife W.S.N. fails to meet specified minimum purchase requirements.

 

Revenues

During the three and six months ended June 30, 2019, the Company recorded $315,000 and $581,000, and $43,000 and $269,000 for the three and six months ended June 30, 2018 respectively, of revenues from Boyalife related to the aforementioned distributor agreement.

 

License Agreement

On March 12, 2018, ThermoGenesis entered into a License Agreement (the “Agreement”) with IncoCell Tianjin Ltd., a Chinese company and wholly-owned subsidiary of China-based Boyalife Group (“IncoCell”). Boyalife Group is an affiliate of the Company’s Chief Executive Officer and Chairman of the Board of Directors, and Boyalife (Hong Kong) Limited, the Company’s largest stockholder. Under the terms of the Agreement, IncoCell was granted the exclusive license to use the ThermoGenesis X-Series® products in the conduct of IncoCell’s contract manufacturing and development operations in the People’s Republic of China, Japan, South Korea, Taiwan, Hong Kong, Macau, Singapore, Malaysia, Indonesia and India (the “Territories”).

 

Pursuant to the terms of the Agreement, ThermoGenesis has granted IncoCell an exclusive license to purchase and use, at a discounted purchase price, X-Series cellular processing research devices, consumables, and kits for use in the conduct of contract manufacturing and development services in the Territories. In exchange, ThermoGenesis is entitled to a percentage of IncoCell’s gross contract development revenues, including any potential upfront payments, future milestones or royalty payments, during the term of the Agreement. The term of the Agreement is ten years, provided that either party may terminate the Agreement earlier upon ninety (90) days’ prior notice to the other party.  The Company did not record any revenues related to this license agreement during the three and six months ended June 30, 2019 and 2018.

 

 

 

4.

Convertible Promissory Note

 

On January 29, 2019, the Company agreed to issue and sell an unsecured note payable for an aggregate of $800,000 face value (the “January 2019 Note”) that, after six months, is convertible into shares of the Company's common stock at a conversion price equal to the lower of (a) $1.80 per share or (2) 90% of the closing sale price of the Company’s common stock on the date of conversion (subject to a floor conversion price of $0.50).

 

The January 2019 Note bears interest at the rate of twenty-four percent (24%) per annum and is payable quarterly in arrears.  Unless sooner converted in the manner described below, all principal under the January 2019 Note, together with all accrued and unpaid interest thereupon, will be due and payable eighteen (18) months from the date of the issuance of the January 2019 Note.  The January 2019 Note may be prepaid without penalty at any time after it becomes convertible (at which time the holder will have the right to convert it before prepayment thereof).

 

On the date that is six months after the issuance of the January 2019 Note, and for so long thereafter as any principal and accrued but unpaid interest under the January 2019 Note remains outstanding, the holder of the January 2019 Note may convert such holder’s January 2019 Note, in whole or in part, into a number of shares of Company 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 did contain a beneficial conversion feature and the Company recorded a debt discount in the amount of $800,000, upon stockholder approval of the conversion feature on May 30, 2019.  The discount represented the fair value of the incremental shares up to the proceeds received from the convertible note. The Company amortized $57,000 and of the debt discount to interest expense for the three and six months ended June 30, 2019, respectively.

 

The January 2019 Note contains customary events of default, including the suspension or failure of the Company’s common stock to be traded on a trading platform, the Company’s failure to pay interest or principal when due, or if the Company files for bankruptcy or takes some other similar action for the benefit of creditors. In the event of any default under the January 2019 Note, the holder may accelerate all outstanding interest and principal due on the January 2019 Note.

 

 

 

5.

Leases

 

The Company determines if a contract contains a lease at inception. Our material operating lease consists of office space which has a remaining term of 4.9 years. Generally, the lease term is the minimum of the noncancelable period of the lease or the lease term inclusive of reasonably certain renewal periods.

 

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:

 

   

June 30,

2019

 

Right-of-use operating lease assets, net

  $ 915,000  

Current lease liability

    102,000  

Non-current lease liability

    825,000  

 

   

June 30,

2019

 

Weighted average remaining lease term

    4.9  

Discount rate

    22 %

 

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

 

2019 (remaining)

  $ 148,000  

2020

    301,000  

2021

    310,000  

2022

    319,000  

2023

    329,000  

2024

    138,000  

Total lease payments

  $ 1,545,000  

Less: imputed interest

    (617,000 )

Present value of operating lease liabilities

  $ 928,000  

 

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 during the first quarter of 2019. Cash paid for amounts included in the measurement of operating lease liabilities were $72,000 and $143,000 during the three and six months ended June 30, 2019 and is included in cash flows from operating activities.

 

 

Operating Lease Costs

Operating lease costs were $103,000 and $206,000 during the three and six months ended June 30, 2019. 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 material as of June 30, 2019.

 

 

6.

Commitments and Contingencies

 

Financial Covenants

Effective May 15, 2017, the Company entered into a Sixth Amended and Restated Technology License and Escrow Agreement with CBR Systems, Inc. which modified the financial covenant that the Company must meet in order to avoid an event of default. The Company must maintain a cash balance and short-term investments net of debt or borrowed funds that are payable within one year of not less than $2,000,000. The Company was in compliance with this financial covenant as of June 30, 2019.

 

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 six months ended June 30, 2019 is summarized in the following table:

 

 

Balance at December 31, 2018

  $ 186,000  

Warranties issued during the period

    88,000  

Settlements made during the period

    (125,000 )

Changes in liability for pre-existing warranties during the period

    (17,000 )

Balance at June 30, 2019

  $ 132,000  

 

 

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 against the Company and its CEO by the consulting firm as the consulting firm argues that it is owed a transaction fee of $1,000,000 (and interest of approximately $300,000 as of June 30, 2019) 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 CEO based on alter ego theories and without acknowledging any liability, the Company deposited $1,000,000 with the Court and has recorded this deposit as restricted cash on its condensed consolidated balance sheet. The Company filed a Motion for Summary Judgment, which was denied by the Court on June 26, 2018. On September 24, 2018, Mavericks filed an amended complaint, adding back the Company’s CEO as a named defendant, as well as Boyalife Investment, Inc. (a dissolved company) and Boyalife (Hong Kong) Limited under new theories of liability, namely intentional interference with contract and inducement of breach of contract. On July 22, 2019, Mavericks filed a Request for Dismissal requesting the Court to the dismiss the served Boyalife entities and the Company CEO as well as the intentional interference with performance of contract and inducing breach of contract causes of action from the lawsuit.  As such, the only remaining claim at present is the original breach of contract claim against the Company. On August 6, 2019, a trial starting date was set for November 4, 2019. A mandatory settlement conference was also set for October 30, 2019 with the Court. The Company denies liability and intends to defend the lawsuit vigorously. No accrual has been recorded for this contingent liability as of June 30, 2019.

 

In the normal course of operations, the Company may have disagreements or disputes with customers, employees or vendors. Such potential disputes are seen by management as a normal part of business. As of June 30, 2019, 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.

Derivative Obligations

 

Series A Warrants

Series A warrants to purchase 40,442 common shares were issued and vested during the year ended June 30, 2016. At the time of issuance, the Company determined that as such warrants can be settled for cash at the holders’ option in a future fundamental transaction, they constituted a derivative liability. The Company has estimated the fair value of the derivative liability, using a Binomial Lattice Valuation Model with the following assumptions:

 

   

Series A

 
   

June 30,

2019

   

December 31,

2018

 

Market price of common stock

  $2.81     $2.70  

Expected volatility

  93%     94%  

Contractual term (years)

  1.7     2.2  

Discount rate

  1.81%     2.48%  

Dividend rate

  0%     0%  

Exercise price

  $80.00     $80.00  

 

Expected volatilities are based on the historical volatility of the Company’s common stock. Contractual term is based on remaining term of the respective warrants. The discount rate represents the yield on U.S. Treasury bonds with a maturity equal to the contractual term.

 

The Company recorded no gain or loss for the three and six months ended June 30, 2019, and a gain of $308,000 and $567,000 for the three and six months ended June 30, 2018, respectively, representing the net change in the fair value of the derivative liability, in the accompanying condensed consolidated statements of operations and comprehensive loss.

 

The following table represents the Company’s fair value hierarchy for its financial liabilities measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018:

 

   

Derivative Obligation

 
   

June 30,

2019

   

December 31,

2018

 

Balance

  $1,000     $1,000  

Level 1

  $--     $-  

Level 2

  $--     $-  

Level 3

  $1,000     $1,000  

 

 

The following table reflects the change in fair value of the Company’s derivative liabilities for the six months ended June 30, 2019:

 

   

Amount

 

Balance – December 31, 2018

  $ 1,000  

Change in fair value of derivative obligation

    --  

Balance – June 30, 2019

  $ 1,000  

 

 

8.     Stockholders’ Equity

 

Stock Based Compensation

The Company recorded stock-based compensation of $125,000 and $206,000 for the three and six months ended June 30, 2019, and $163,000 and $300,000 for the three and six months ended June 30, 2018, respectively, as comprised of the following:

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Cost of revenues

  $ 1,000     $ 4,000     $ 1,000     $ 7,000  

Sales and marketing

    44,000       9,000       56,000       17,000  

Research and development

    22,000       28,000       37,000       55,000  

General and administrative

    58,000       122,000       112,000       221,000  
    $ 125,000     $ 163,000     $ 206,000     $ 300,000  

 

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, 2018

    302,368     $ 13.99                  
                                 

Forfeited

    (16,139 )   $ 11.71                  
                                 

Outstanding at June 30, 2019

    286,229     $ 14.12       9       --  
                                 

Vested and expected to vest at June 30, 2019

    196,219     $ 16.92       8.6       --  
                                 

Exercisable at June 30, 2019

    84,804     $ 28.17       7.7       --  

 

 

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 six months ended June 30, 2019.

 

Warrants

A summary of warrant activity for the six months ended June 30, 2019 follows:

 

   

Number of

Shares

   

Weighted-Average

Exercise Price Per

Share

 

Balance at December 31, 2018

    1,726,523     $ 29.88  

Warrants granted(1)

    444,445     $ 0.10  

Warrants expired

    (19,637 )   $ 417.00  

Warrants exercised

    (200,000 )   $ 0.10  
                 

Outstanding at June 30, 2019

    1,951,331     $ 22.26  
                 

Exercisable at June 30, 2019

    1,881,478     $ 20.11  

                                              

 

(1) 

See Footnote 1 of the Notes to the Condensed Consolidated Financial Statements. 

 

 

9.       Segment Reporting

 

The Company has two reportable segments, which are the same as its operating segments:

 

The Clinical Development Segment is developing autologous (utilizing the patient’s own cells) stem cell-based therapeutics that address significant unmet medical needs for applications within the vascular, cardiology and orthopedic markets.

 

The Device Segment is a pioneer and market leader in the development and commercialization of automated technologies for cell-based therapeutics and bio-processing.

 

 

The following table summarizes the operating results of the Company’s reportable segments:

 

   

Three Months Ended June 30, 2019

 
   

Clinical

Development

   

Device

   

Total

 

Net revenues

  $ 44,000     $ 4,261,000     $ 4,305,000  

Cost of revenues

    57,000       2,297,000       2,354,000  

Gross profit

    (13,000 )     1,964,000       1,951,000  
                         

Operating expenses

    483,000       1,730,000       2,213,000  

Operating loss

  $ (496,000 )   $ 234,000     $ (262,000 )
                         

Depreciation and amortization

  $ 75,000     $ 115,000     $ 190,000  

Stock-based compensation expense

  $ 59,000     $ 66,000     $ 125,000  

Goodwill

    --     $ 781,000     $ 781,000  

Total assets

  $ 4,412,000     $ 12,120,000     $ 16,532,000  

 

 

 

   

Three Months Ended June 30, 2018

 
   

Clinical

Development

   

Device

   

Total

 

Net revenues

  $ 46,000     $ 1,958,000     $ 2,004,000  

Cost of revenues

    49,000       1,592,000       1,641,000  

Gross profit

    (3,000 )     366,000       363,000  
                         

Operating expenses

    28,408,000       2,460,000       30,868,000  

Operating loss

  $ (28,411,000 )   $ (2,094,000 )   $ (30,505,000 )
                         

Depreciation and amortization

  $ 69,000     $ 105,000     $ 174,000  

Impairment charges

  $ 27,202,000     $ --     $ 27,202,000  

Stock-based compensation expense

  $ 122,000     $ 41,000     $ 163,000  

Goodwill

  $ 500,000     $ 781,000     $ 1,281,000  

Total assets

  $ 12,808,000     $ 10,435,000     $ 23,243,000  

 

   

Six Months Ended June 30, 2019

 
   

Clinical

Development

   

Device

   

Total

 

Net revenues

  $ 55,000     $ 7,213,000     $ 7,268,000  

Cost of revenues

    100,000       3,957,000       4,057,000  

Gross profit

    (45,000 )     3,256,000       3,211,000  
                         

Operating expenses

    955,000       3,423,000       4,378,000  

Operating loss

  $ (1,000,000 )   $ (167,000 )   $ (1,167,000 )
                         

Depreciation and amortization

  $ 169,000     $ 233,000     $ 402,000  

Stock-based compensation expense

  $ 113,000     $ 93,000     $ 206,000  

Goodwill

  $ --     $ 781,000     $ 781,000  

Total assets

  $ 4,412,000     $ 12,120,000     $ 16,532,000  

 

   

Six Months Ended June 30, 2018

 
   

Clinical

Development

   

Device

   

Total

 

Net revenues

  $ 108,000     $ 3,763,000     $ 3,871,000  

Cost of revenues

    120,000       3,036,000       3,156,000  

Gross profit

    (12,000 )     727,000       715,000  
                         

Operating expenses

    29,588,000       4,889,000       34,477,000  

Operating loss

  $ (29,600,000 )   $ (4,162,000 )   $ (33,762,000 )
                         

Depreciation and amortization

  $ 137,000     $ 196,000     $ 333,000  

Impairment charges

  $ 27,202,000     $ --     $ 27,202,000  

Stock-based compensation expense

  $ 220,000     $ 80,000     $ 300,000  

Goodwill

  $ 500,000     $ 781,000     $ 1,281,000  

Total assets

  $ 12,808,000     $ 10,435,000     $ 23,243,000  

 

 

 

10.    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 June 30, 2019 and 2018, one customer accounted for 40% and 24% of revenue, while a second customer accounted for 18% and 0% of revenue, respectively.  For the six months ended June 30, 2019 and 2018, one customer accounted for 29% and 21% of revenue, while another customer accounted for 13% and 0% of revenue, respectively.

 

At June 30, 2019, three customers accounted for 79% of accounts receivable.  At December 31, 2018 four customers accounted for 77% of accounts receivable.

 

 

11.     Subsequent Events

 

On July 23, 2019, the Company entered into and closed a private placement with an accredited investor, pursuant to which the Company issued and sold to such investor an unsecured convertible promissory note in the original principal amount of $1,000,000 (the “July 2019 Note”).   After six months and subject to the receipt of stockholder approval of the conversion feature of the July 2019 Note, such note is convertible into shares of the Company's common stock at a conversion price equal to the lower of (a) $1.80 per share or (b) 90% of the closing sale price of the Company’s common stock on the date of conversion (subject to a floor conversion price of $0.10). On August 12, 2019, the July 2019 Note was amended to raise the floor conversion price from $0.10 to $0.50.  All other terms of the July 2019 Note remained unchanged. 

 

The July 2019 Note bears interest at the rate of twenty-four percent (24%) per annum and is payable quarterly in arrears.  Unless sooner converted in the manner described below, all principal under the July 2019 Note, together with all accrued and unpaid interest thereupon, will be due and payable three years from the date of the issuance on July 31, 2022.  However, if stockholder approval of the conversion feature of the July 2019 Note is not obtained at the Company’s next annual meeting of stockholders, the maturity date will accelerate to the date that is fourteen days after the next annual meeting.  The July 2019 Note may be prepaid without penalty at any time after the it becomes convertible (at which time the holder will have the right to convert the it before prepayment thereof).

 

On the date that is six months after the issuance of the July 2019 Note, but subject to stockholder approval of the conversion feature described above, and for so long thereafter as any principal and accrued but unpaid interest under the July 2019 Note remains outstanding, the holder may convert the July 2019 Note, in whole or in part, into a number of shares of Company 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 July 2019 Note has customary conversion blockers at 4.99% and 9.99% unless otherwise agreed to by the Company and the holder.

 

In addition, on July 23, 2019, the Company entered into Amendment No. 1 to the Convertible Note Agreement, dated January 29, 2019, by the Company and Orbrex USA Co. Limited. Under the terms of this Amendment, the maturity date of the January 2019 Note was extended from July 29, 2020 to July 31, 2022. All other terms of the Convertible Note Agreement remain the same.

 

 

 

 

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

 

Forward-Looking Statements

This report contains forward-looking statements. The forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements contained herein. When used in this report, the words "anticipate," "believe," "estimate," "expect" and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. Actual results, performance or achievements could differ materially from the results expressed in, or implied by these forward-looking statements. Readers should be aware of important factors that, in some cases, have affected, and, in the future, could affect actual results, and may cause actual results for the three and six months ended June 30, 2019 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. These factors include without limitation, the ability to obtain capital and other financing in the amounts and at the times needed to complete clinical trials and launch new products, market acceptance of new products, the nature and timing of regulatory approvals for both new products and existing products for which the Company proposes new claims, realization of forecasted revenues, expenses and income, initiatives by competitors, price pressures, failure to meet FDA regulated requirements governing the Company’s products and operations (including the potential for product recalls associated with such regulations), risks associated with initiating manufacturing for new products, failure to meet Foreign Corrupt Practice Act regulations, legal proceedings, 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 Cesca’s Form 10-K for the year ended December 31, 2018.

 

Business Overview

Cesca develops and commercializes a range of automated technologies for cell-banking, cell-processing, and cell-based therapeutics. Since the 1990’s Cesca has been a pioneer in, and a leading provider of automated systems that isolate, purify and cryogenically store units of hematopoietic stem and progenitor cells for the cord blood banking industry. In July 2017, Cesca’s subsidiary, ThermoGenesis Corp. (“ThermoGenesis”), completed a strategic acquisition of the business and substantially all of the assets of SynGen Inc. (“SynGen”), a research and development company for automated cellular processing. Following this acquisition, ThermoGenesis operates Cesca’s device business and SynGen’s automated cellular processing business.

 

Following the acquisition of SynGen, we utilized the SynGen assets, together with our own proprietary technology, to develop a novel proprietary CAR-TXpress™ platform that addresses the critical unmet need for better efficiency and cost-effectiveness for the emerging immune-oncology field, in particular, the chimeric antigen receptor T cell (“CAR-T”) market. Since the first quarter of 2018, the Company developed and launched three X-Series products, which provide superior performance in the processing of immunotherapy drugs: X-Lab®, X-Wash®, and X-BACS™.

 

Cesca now has two separately reported business segments: A “Device Segment” and a “Clinical Development Segment.” The Device Segment develops and commercializes automated systems that provide GMP, clinical grade cell-banking, cell-processing, and cell-based therapeutics commercialized by Cesca’s subsidiary, ThermoGenesis. The Clinical Development Segment is developing autologous (utilizing the patient’s own cells) cell-based therapeutics that address significant unmet medical needs for the vascular, cardiology and orthopedic markets.

 

23

 

Cesca’s Device Segment

Cesca’s Device Segment offers automated devices and technologies for cell-banking, point-of-care applications, and cell-processing. The automated solution offerings include:

 

AutoXpress Platform for Clinical Bio-Banking Applications, which provides automated isolation, harvest, controlled-rate freezing and cryogenic storage of cord blood stem and progenitor cells for treatment of patients in need, and includes the following products:

 

 

AXP® System – The innovative AXP System defines a new processing standard for isolating and retrieving over 97% of the stem and progenitor cells from collections of umbilical cord blood in an automated, fully closed, sterile system in 30 minutes. AXP is self-powered, microprocessor-controlled, and contains flow control optical sensors to achieve precise separation.

 

 

BioArchive® Cryopreservation System The BioArchive Cryopreservation System is the industry’s leading, fully automated, robotic, liquid nitrogen controlled-rate-freezing (CRF) and cryogenic storage system for stem cell samples and clinical products. Using proven, computer-controlled technology, it provides the ultimate performance and protection for today’s invaluable cord blood samples and future cell therapeutic products. BioArchive is the preferred system for the highest quality cord blood banks worldwide. A complete technical Master-File has been provided to the FDA to support those highest quality cord blood banks which have been able to qualify for, and obtain, a Biological License from the FDA to allow their cord blood units to be used to treat patients with blood cancers.

 

POCXpress Platform for Point-of-Care Applications 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 and includes the following products:

 

 

MXP® System – Built based on similar technology as our proprietary AXP System, MXP is an automated, fully closed, sterile system that volume-reduces bone marrow to a user-defined volume in less than 1 hour, while retaining over 90% of the MNCs. The MXP is self-powered, microprocessor-controlled, and contains flow control optical sensors to achieve precise separation.

 

 

PXP® System The PXP System is our newly launched point-of-care device. PXP is an automated, closed system that harvests a precise volume of cell concentrate from bone marrow aspirates. PXP can generate a concentration of bone marrow in less than 20 minutes, with consistently high MNC and CD34+ stem cell progenitor recovery rates and greater than 98% depletion of contaminating red blood cells (RBCs). Processing data is captured using our proprietary DataTrak™ software to assist with Good Manufacturing Practice (GMP) process monitoring and reporting information.

 

CAR-TXpress Platform for Immuno-Oncology Applications addresses the critical unmet need for chemistry, manufacturing and controls (CMC) improvement of the emerging CAR-T therapies for cancer patients. CAR-TXpress eliminates the need of using the labor intensive and “open system” ficoll MNC purification process and traditional magnetic bead T-Cell selection process, thereby dramatically reducing processing time and increasing efficiency of the manufacturing process, which should reduce the overall manufacturing cost. The CAR-TXpress platform includes the following X-Series products:

 

 

X-Lab® System for Cell Isolationa semi-automated, functionally-closed, ficoll-free, system for the rapid isolation of mononuclear cells (“MNCs”) with, or without, platelets from collected units of peripheral blood, cord blood, bone marrow aspirate or leukapheresis. On November 13, 2018, the Company announced that ThermoGenesis had filed a Device Master File (“MAF”) with the FDA for the X-LAB. The MAF contains all the relevant information that the FDA will need to allow principal investigators to include Cesca’s systems in their investigational new drug applications.

 

24

 

 

X-BACS™ System for Cell Purification a semi-automated, functionally-closed system employs a microbubble/antibody reagent to isolate target cells by buoyancy-activated cell sorting (BACS). These microbubble/antibody reagents bind to user-selected target cells to increase their buoyancy and provide a complete separation from non-target cells during centrifugation and allowing the harvest of a highly purified population of target cells, with high recovery efficiency and cell viability.

 

 

X-Wash® System for Washing and Reformulation – a semi-automated, functionally-closed system that separates, washes, and volume-reduces units of fresh or thawed units of blood, bone marrow, leukapheresis or cell cultures and presents these washed cells in a predetermined small volume.

 

Cesca’s Clinical Development Segment

Using our proprietary automated point-of-care cellular processing technologies, Cesca’s Clinical Development Segment is developing autologous (utilizing the patient’s own cells) stem cell-based therapeutics that will address significant unmet medical needs for the vascular, cardiology and orthopedic markets that include:

 

 

VXP® for Critical Limb Ischemia (CLI) – Cesca has a proprietary point-of-care, autologous stem cell-based therapy under development which is intended for the treatment of patients with CLI. The FDA has cleared the Company to proceed with a 362 subject, multi-center pivotal Phase III CLIRST study, which is designed to evaluate the safety and efficacy of Cesca’s autologous stem cell-based therapy in patients with no-option or poor option late stage CLI. Previous clinical studies using Cesca’s proprietary, point-of-care-technologies have demonstrated the regeneration of blood vessels and improved blood circulation in the limbs, using a patient’s own bone marrow derived stem cells.

 

 

VXP® for Acute Myocardial Infarction – Cesca has a proprietary, point-of-care autologous stem cell-based therapy under development which is intended as an adjunct treatment for patients who have suffered an acute STEMI, the most serious type of heart attack.  Such treatments are aimed at minimizing the adverse remodeling of the heart post-STEMI.

 

 

PXP® for Orthopedics – Osteoarthritis (OA) - Cesca is in early stage development of an autologous stem cell-based therapy intended to treat patients with cartilage tissue degeneration that may lead to progressive cartilage loss and painful joint diseases. Localized articular cartilage defects can potentially be repaired by transplantation of autologous cell therapy. Therapies in development using Cesca’s proprietary PXP system are expected to delay further deterioration and repair the damaged joint cartilage. Treatment is typically via a single procedure in the hospital or clinic.

 

Critical Accounting Policies

Management’s discussion and analysis of its financial condition and results of operations is based upon the condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a full discussion of our accounting estimates and assumptions that have been identified as critical in the preparation of the Company’s condensed consolidated financial statements, please refer to Cesca’s 2018 Form 10-K for the year ended December 31, 2018.

 

25

 

Results of Operations for the Three Months Ended June 30, 2019 as Compared to the Three Months Ended June 30, 2018

 

Net Revenues

Consolidated net revenues for the three months ended June 30, 2019 were $4,305,000 compared to $2,004,000 for the three months ended June 30, 2018, an increase of $2,301,000 or 115%. The increase was driven by AXP and CAR-TXpress sales in the Device Segment. The AXP revenues increase was driven by approximately 550 cases sold to a distributor in China as compared to no cases sold to that distributor in the quarter ended June 30, 2018 and approximately 450 more cases were sold to domestic end users in the current quarter (resulting in approximately $1,900,000 more in AXP disposables revenue). Additionally, AXP device sales increased approximately $200,000 in the second quarter of 2019 as compared to the same period last year. This increase was driven by customers upgrading to AXP II devices in the current year. CAR-TXpress sales increased by $152,000 due to relaunching the product line in the second half of 2018. Sales in the Clinical Development Segment were flat compared to prior year.

 

   

June 30,

2019

   

June 30,

2018

 

Device Segment:

               

AXP

  $ 3,082,000     $ 915,000  

BioArchive

    784,000       760,000  

Manual Disposables

    205,000       229,000  

CAR-TXpress

    182,000       30,000  

Other

    8,000       24,000  
      4,261,000       1,958,000  

Clinical Development Segment:

               

Disposables

    37,000       1,000  

Other

    7,000       45,000  
      44,000       46,000  
    $ 4,305,000     $ 2,004,000  

 

Gross Profit

The Company’s gross profit was $1,951,000 or 45% of net revenues for the three months ended June 30, 2019, compared to $363,000 or 18% for three months ended June 30, 2018, an increase of $1,588,000. Device Segment gross profit margin increased to $1,964,000 or 46% for the three months ended June 30, 2019, compared to $366,000 or 19% for the three months ended June 30, 2018, an increase of $1,598,000. The increase was primarily due to the $2,167,000 increase in AXP sales, generating approximately $650,000 more from disposables and approximately $100,000 from sales of AXP II devices. Additionally, lower AXP disposable costs through price efficiencies from contract manufacturers decreased cost of goods expense related to AXP disposables by approximately $550,000 and reduced overhead expenses of approximately $200,000 as a result of the June 2018 reorganization. The remainder of the increase is due primarily to additional sales of CAR-TXpress which resulted in approximately $75,000 more gross profit.

 

26

 

Sales and Marketing Expenses

Consolidated sales and marketing expenses were $384,000 for the three months ended June 30, 2019, as compared to $359,000 for the three months ended June 30, 2018, an increase of $25,000 or 7%. The variance was driven by increased stock compensation expense for new options granted to ThermoGenesis employees during the current quarter.

 

Research and Development Expenses

Consolidated research and development expenses were $611,000 for the three months ended June 30, 2019, compared to $908,000 for the three months ended June 30, 2018, a decrease of $297,000 or 33%. Research and development expenses in the Device Segment decreased by $242,000 and in the Clinical Development Segment decreased by $53,000. The decrease in both segments is primarily due to a decline in personnel costs related to the June 2018 reorganization.

 

General and Administrative Expenses

Consolidated general and administrative expenses for the three months ended June 30, 2019 were $1,218,000, compared to $2,399,000 for the three months ended June 30, 2018, a decrease of $1,181,000 or 50%. The decrease is driven by the decline in personnel costs associated with the June 2018 reorganization and other headcount reductions in 2018 of approximately $250,000, severance expenses of $225,000, a one-time legal settlement of $150,000 and a loss on the disposal of fixed assets of $420,000 in the quarter ended June 30, 2018. The Company also eliminated its management bonus program in 2019, reducing expenses by $115,000.

 

Impairment Charges

The Company incurred impairment charges of $0 during the three months ended June 30, 2019 as compared to $27,202,000 during the three months ended June 30, 2018. During the quarter ended June 30, 2018, the Company experienced a significant and sustained decline in its stock price resulting in its market capitalization falling significantly below the recorded value of its consolidated assets. The Company performed a quantitative assessment which determined that the carrying amount for the Company’s goodwill and indefinite lived intangible assets relating to the clinical protocols exceeded its estimated fair value. As a result, impairment charges of $12,695,000 to goodwill and $14,507,000 to the intangible assets were recorded during the period to the Clinical Development Segment.

 

Interest Expense

Interest expense increased to $1,211,000 for the three months ended June 30, 2019 as compared to $733,000 for the three months ended June 30, 2018, an increase of $478,000.  The increase is driven by interest recorded and the amortization of the debt discount on the beneficial conversion feature related to the January 2019 Note of approximately $105,000, as well as approximately $325,000 more in interest expense and amortization of the debt discount on the beneficial conversion feature related to the Revolving Credit Agreement with Boyalife, for which amortization started in May 2018.

 

Benefit for Income Taxes

The income tax benefit to the Company was $0 in the three months ended June 30, 2019 as compared to $3,451,000 in the three months ended June 30, 2018. The income tax benefit for the three months ended June 30, 2018 was due to the impairment of the indefinite lived intangible assets for the clinical protocols and goodwill during the quarter ended June 30, 2018. The Company’s deferred tax liability was tied to the intangible assets and goodwill in the Clinical Development Segment. The impairment caused the deferred tax liability to decrease resulting in a $3,451,000 benefit for income taxes recorded in the period ended June 30, 2018. The current quarter had $0 income tax expense.

 

27

 

Results of Operations for the Six Months Ended June 30, 2019 as Compared to the Six Months Ended June 30, 2018

 

Net Revenues

Consolidated net revenues for the six months ended June 30, 2019 were $7,268,000, compared to $3,871,000, for the six months ended June 30, 2018, an increase of $3,397,000 or 88%. Device Segment revenues increased across all product lines. The AXP revenues increase was driven by the sale of 640 cases sold to a distributor in China as compared to no cases sold to that distributor in the quarter ended June 30, 2018 and 400 more cases were sold to domestic end users in the current quarter (resulting in approximately $1,900,000 more in AXP disposables revenue). Additionally, AXP device sales increased approximately $360,000 in the first six months of 2019 as compared to the same period last year. This increase was driven by customers upgrading to AXP II devices in the current year. BioArchive sales increased by $270,000 driven by the sale of one additional BioArchive device to our distributor in China. CAR-TXpress sales increased by $459,000 due to relaunching the product line in the second half of 2018. Sales in the Clinical Development Segment were $53,000 less than prior year due to reduced clinical services in India.

 

   

June 30,

2019

   

June 30,

2018

 

Device Segment:

               

AXP

  $ 4,405,000     $ 1,665,000  

BioArchive

    1,797,000       1,527,000  

Manual Disposables

    499,000       462,000  

CAR-TXpress

    489,000       30,000  

Other

    22,000       79,000  
      7,212,000       3,763,000  

Clinical Development Segment:

               

Disposables

    44,000       23,000  

Other

    12,000       85,000  
      56,000       108,000  
    $ 7,268,000     $ 3,871,000  

 

Gross Profit

The Company’s gross profit was $3,211,000 or 44% of net revenues for the six months ended June 30, 2019, compared to $715,000 or 18% for the six months ended June 30, 2018, an increase of $2,496,000.  Device Segment gross profit margin increased to $3,265,000 or 45% of net revenues for the six months ended June 30, 2019, compared to $727,000 or 19% of net revenues for the six months ended June 30, 2018, an increase of $2,538,000.  The increase was primarily due to increased AXP sales, generating approximately $800,000 more in gross profit from disposables and approximately $150,000 from sales of AXP II devices.  Additionally, lower AXP disposable costs through price efficiencies from contract manufacturers decreased cost of goods expense for AXP disposables by approximately $750,000 and reduced overhead expenses of approximately $450,000 driven by the June 2018 reorganization.  The remainder of the increase is due primarily to additional sales of CAR-TXpress which resulted in approximately $250,000 more gross profit. 

 

Sales and Marketing Expenses

Consolidated sales and marketing expenses were $725,000 for the six months ended June 30, 2019, as compared to $685,000 for the six months ended June 30, 2018, an increase of $40,000 or 6%. The variance was driven by increased stock compensation expense for new options granted to ThermoGenesis employees during the current quarter.

 

28

 

Research and Development Expenses

Consolidated research and development expenses were $1,175,000 for the six months ended June 30, 2019, compared to $1,949,000 for the six months ended June 30, 2018, a decrease of $774,000 or 40%. Research and development in the Device Segment decreased by $568,000 and the Clinical Development Segment decreased by $206,000. The decrease in both segments is primarily due to a decline in personnel costs related to the June 2018 reorganization.

 

General and Administrative Expenses

Consolidated general and administrative expenses for the six months ended June 30, 2019 were $2,478,000, compared to $4,641,000 for the six months ended June 30, 2018, a decrease of $2,163,000 or 47%. The decrease was driven by the decline in personnel costs associated with the June 2018 reorganization and other headcount reductions of approximately $500,000, severance expenses of $225,000, a one-time legal settlement of $150,000 and a loss on the disposal of fixed assets of $420,000 in the six months ended June 30, 2018. The remainder of the decrease was due to a reduction of approximately $250,000 as the result of the Company eliminating the management bonus plan in 2019 and reduced legal expense of approximately $150,000 in the current year.

 

Impairment Charges

The Company incurred impairment charges of $0 during the six months ended June 30, 2019, as compared to impairment charges of $27,202,000 during the six months ended June 30, 2018. During the six months ended June 30, 2018, the Company experienced a significant and sustained decline in its stock price resulting in its market capitalization falling significantly below the recorded value of its consolidated assets. The Company performed a quantitative assessment which determined that the carrying amount for the Company’s goodwill and indefinite lived intangible assets relating to the clinical protocols exceeded its estimated fair value. As a result, impairment charges of $12,695,000 to goodwill and $14,507,000 to the intangible assets were recorded during the period to the Clinical Development Segment.

 

Interest Expense

Interest expense increased to $2,343,000 for the six months ended June 30, 2019 as compared to $1,093,000 for the six months ended June 30, 2018, an increase of $1,250,000.  The increase is driven by interest recorded and the amortization of the debt discount on the beneficial conversion feature related to the January 2019 Note of approximately $105,000, as well as approximately $1,000,000 more in interest and amortization of the debt discount on the beneficial conversion feature related to the Revolving Credit Agreement with Boyalife, for which amortization started in May 2018.

 

Benefit for Income Taxes

The income tax benefit decreased to $0 in the six months ended June 30, 2019, as compared to $3,451,000 in the six months ended June 30, 2018. The income tax benefit for the six months ended June 30, 2018 was due to the impairment of the indefinite lived intangible assets for the clinical protocols and goodwill during the six months ended June 30, 2018. The Company’s deferred tax liability was tied to the intangible assets and goodwill in the Clinical Development Segment. The impairment caused the deferred tax liability to decrease resulting in a $3,451,000 benefit for income taxes recorded in the period ended June 30, 2018. The current year has no income tax expense.

 

29

 

Liquidity and Capital Resources

At June 30, 2019, the Company had cash and cash equivalents of $2,424,000 and working capital of $3,374,000. This compares to cash and cash equivalents of $2,400,000 and working capital of $2,261,000 at December 31, 2018. 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 June 30, 2019, the Company had drawn down $8,713,000 of the $10,000,000 available under the Credit Agreement. Future draw-downs may be limited for various reasons including default or foreign government policies that restrict or prohibit transferring funds. At the time of this filing, we are currently unable to draw down on the line of credit. This may change in the near future but there is no assurance that the line of credit will become available at such time when it is needed. 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 the Board.

 

The Company has incurred recurring operating losses and as of June 30, 2019 had an accumulated deficit of $230,603,000. These conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date. The Company anticipates requiring additional capital to grow the device business, to fund other operating expenses and to make interest payments on the line of credit with Boyalife. The Company’s ability to fund its cash needs is subject to various risks, many of which are beyond its control. The Company plans to seek additional funding through bank borrowings or public or private sales of debt or equity securities or strategic partnerships. The Company cannot guarantee that such funding will be available on a timely basis, in needed quantities or on terms favorable to us, if at all.

 

Non-GAAP Measures

In addition to the results reported in accordance with US GAAP, we also use a non-GAAP measure, adjusted EBITDA, to evaluate operating performance and to facilitate the comparison of our historical results and trends.  The Company calculates adjusted EBITDA as income from operations less depreciation, amortization, stock compensation and impairment of intangible assets.  This financial measure is not a measure of financial performance under US GAAP and should not be considered in isolation or as a substitute for loss as a measure of performance.  The calculation of this non-GAAP measure may not be comparable to similarly titled measures used by other companies.  Reconciliations to the most directly comparable GAAP measure are provided below.

 

Three months ended June 30, 2019 and 2018, respectively:

 

   

Three Months Ended June 30,

 
   

2019

   

2018

 

Net loss

  $ (1,475,000 )   $ (27,511,000 )
                 

Deduct:

               

Interest expense

    (1,211,000 )     (733,000 )

Fair value change of derivative instruments and other

    (2,000 )     276,000  

Benefit for income taxes

    --       3,451,000  

Loss from operations

  $ (262,000 )   $ (30,505,000 )
                 

Add:

               

Depreciation and amortization

    190,000       174,000  

Stock-based compensation expense

    125,000       163,000  

Impairment of intangible asset

    --       27,202,000  

Adjusted EBITDA

  $ 53,000     $ (2,966,000 )

 

The adjusted EBITDA was $53,000 for the three months ended June 30, 2019 compared to a loss of $2,966,000 for the three months ended June 30, 2018.  The adjusted EBITDA increase as compared to the second quarter in the prior year was due to $1,588,000 in additional gross profit as the result of $2,301,000 higher sales, while decreasing overhead expenses and lower disposable costs through price efficiencies from contract manufacturers.  Additionally, the Company decreased salaried related expenses by approximately $600,000 in the current quarter as a result of the June 2018 reorganization and the elimination of other positions during 2018.  Prior year quarter ended June 30, 2018 also included severance expenses of $225,000, a one-time legal settlement of $150,000 and a loss on the disposal of fixed assets of $420,000.

 

30

 

Six months ended June 30, 2019 and 2018, respectively:

 

   

Six Months Ended June 30,

 
   

2019

   

2018

 

Net Loss

  $ (3,521,000 )   $ (30,881,000 )
                 

Deduct:

               

Interest expense

    (2,343,000 )     (1,093,000 )
Fair value change of derivative instruments and other     (11,000 )     523,000  

Benefit for income taxes

    --       3,451,000  

Loss from operations

  $ (1,167,000 )   $ (33,762,000 )
                 

Add:

               

Depreciation and amortization

    402,000       333,000  

Stock-based compensation expense

    206,000       300,000  

Impairment of intangible asset

    --       27,202,000  

Adjusted EBITDA

  $ (559,000 )   $ (5,927,000 )

 

The adjusted EBITDA loss was $559,000 for the six months ended June 30, 2019 compared to a loss of $5,967,000 for the three months ended June 30, 2018.  The adjusted EBITDA increase for the first half of 2019 as compared to the prior year was due to $2,495,000 in additional gross profit as the result of $3,397,000 higher sales, while decreasing overhead expenses and lower disposable costs through price efficiencies from contract manufacturers.  Additionally, the Company decreased salaried related expenses by approximately $1,200,000 in the current quarter as a result of the June 2018 reorganization and the elimination of other positions during 2018.  Prior year six months ended June 30, 2018 also included severance expenses of $225,000, a one-time legal settlement of $150,000 and a loss on the disposal of fixed assets of $420,000.  Finally, the Company eliminated in the management bonus program for 2019, resulting in savings of approximately $350,000 for the first six months of 2019.

 

Off-Balance Sheet Arrangements

As of June 30, 2019, the Company had no off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Cesca is a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and is not required to provide information under this item.

 

Item 4. Controls and Procedures

 

Cesca carried out an evaluation, under the supervision, and with the participation of management, including both the Company’s Chief Executive Officer (principal executive officer) and Principal Accounting Officer (principal financial officer), of the effectiveness of the design and operation of Cesca’s disclosure controls and procedures (as defined by Exchange Act Rule 13a-15(e) or 15d-15(e)) as of June 30, 2019. Disclosure controls and procedures cover controls and other procedures that are designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to management, including the Chief Executive Officer and the Principal Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, Cesca’s Chief Executive Officer and Principal Accounting Officer have both concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2019.

 

There were no changes in Cesca’s internal controls over financial reporting that occurred during the three months ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. Management believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within any company, have been detected.

 

31

 

PART II - OTHER INFORMATION

 

Item 1.

Legal Proceedings.

In the normal course of operations, the Company may have disagreements or disputes with distributors, vendors or employees. Such potential disputes are seen by management as a normal part of business. There have been no material changes since the disclosures set forth in the Company’s Form 10-K for the year ended December 31, 2018.

 

Item 1A.

Risk Factors.

There have been no material changes to the risk factors relating to the Company set forth in Part I, “Item IA. Risk Factors” of its Annual Report on Form 10-K for the year ended December 31, 2018.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

 

Item 3.

Defaults upon Senior Securities.

None.

 

Item 4.

Mine Safety Disclosure.

Not applicable.

 

Item 5.

Other Information.

On August 12, 2019, the Company and Orbrex (USA) Co. Limited (“Orbrex”) entered into an amendment to the Convertible Promissory Note in the original principal amount of $1,000,000 issued by the Company to Orbrex on July 23, 2019 (the “July 2019 Note”).  The amendment, which was deemed to be effective as of July 23, 2019, changed the floor conversion price in the July 2019 Note from $0.10 to $0.50.

 

Item 6.

Exhibits.

An index of exhibits is found on page 33 of this report.

 

32

 

Item 6.

Exhibits.

 

Exhibit No.

Document Description

Incorporated by Reference

3.1

Certificate of Amendment to the Sixth Amended and Restated Certificate of Incorporation of Cesca Therapeutics Inc.

Incorporated by reference to Exhibit 3.1 to Form 8-K filed with the SEC on June 4, 2019.

4.1

Form of Pre-Funded Common Stock Purchase Warrant.

Incorporated by reference to Exhibit 4.1 to Form 8-K filed with the SEC on April 25, 2019.

4.2

Form of Convertible Promissory Note.

Incorporated by reference to Exhibit 4.1 to Form 8-K filed with the SEC on July 29, 2019.

4.3

Amendment No. 1 to the Convertible Note, dated July 23, 2019, between Cesca Therapeutics Inc. and Orbrex USA Co.

Incorporated by reference to Exhibit 10.1 to Form 8-K filed with the SEC on July 29, 2019

10.1

Securities Purchase Agreement, dated April 18, 2019, between Cesca Therapeutics Inc. and the Purchaser identified on the signature pages thereto.

Incorporated by reference to Exhibit 10.1 to Form 8-K filed with the SEC on April 25, 2019.

10.2

Third Amendment to Cesca Therapeutics Inc. Amended 2016 Equity Incentive Plan Dated December 14, 2018.

Incorporated by reference to Exhibit 10.1 to Form 8-K filed with the SEC on June 4, 2019

10.3

Securities Purchase Agreement, dated July 23, 2019, between Cesca Therapeutics Inc. and the Purchaser identified on the signature page thereto.

Incorporated by reference to Exhibit 10.1 to Form 8-K filed with the SEC on July 29, 2019

10.4 Amendment No. 1 to the Convertible Promissory Note, Dated July 23, 2019 between Cesca therapeutics Inc. and Orbrex USA Co. Filed herewith
10.5 Cesca Therapeutics Inc. Amended 2016 Equity Incentive Plan Filed herewith

31.1

Certification by the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Filed herewith

31.2

Certification by the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Filed herewith

32

Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

Filed herewith

101.INS

XBRL Instance Document‡

101.SCH

XBRL Taxonomy Extension Schema Document‡

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document‡

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document‡

101.LAB

XBRL Taxonomy Extension Label Linkbase Document‡

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document‡

 

Footnotes to Exhibit Index

 

XBRL information is furnished and not filed for purpose of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.

 

33

 

Cesca Therapeutics Inc.

 

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Cesca Therapeutics Inc.

(Registrant)

   

Dated: August 13, 2019

/s/ Xiaochun (Chris) Xu, Ph.D.

 

Xiaochun (Chris) Xu, Ph.D.

Chief Executive Officer

(Principal Executive Officer)

 

Dated: August 13, 2019

/s/ Jeff Cauble

 

Jeff Cauble

Principal Financial and Accounting Officer

(Principal Financial Officer and Principal Accounting Officer)

 

34

 

ex_154680.htm

Exhibit 10.4

 

AMENDMENT NO. 1 TO CONVERTIBLE PROMISSORY NOTE