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

(amended to

$1,000,000

March 2020).

The Company was in compliance with this financial covenant as of

December 31, 2019.

Potential Severance Payments

The Company’s Chief Executive Officer has rights upon termination under his employment agreement. With respect to his agreement at

December 31, 2019,

potential severance amounted to

$2.3

million.

Contingencies and Restricted Cash

In fiscal

2016,

the Company signed an engagement letter with a strategic consulting firm (“Mavericks”). Included in the engagement letter was a success fee due upon the successful conclusion of certain transactions. On

May 4, 2017,

a lawsuit was filed in California Superior Court against the Company and its Chief Executive Officer by the consulting firm, which argued that it was owed a transaction fee of

$1,000,000

under the terms of the engagement letter due to the conversion of the Boyalife debentures in

August 2016.

October 2017,

to streamline the case by providing for the dismissal of claims against the Company’s Chief Executive Officer based on alter ego theories and without acknowledging any liability, the Company deposited

$1,000,000

with the Court, which was recorded as restricted cash. The Company filed a Motion for Summary Judgment, which was denied by the Court on

June 26, 2018.

September 24, 2018,

Mavericks filed an amended complaint, adding back the Company’s Chief Executive Officer 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 dismiss the served Boyalife entities and the Company’s Chief Executive Officer 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. The trial completed in

February 2020

with an adverse jury verdict in favor of Mavericks in the total amount of

$1,000,000.

The Action is now in the post-trial phase and

judgment has been entered as the parties are disputing whether the defense of equitable estoppel should bar entry of judgment at all and the proper per-judgment interest start date. At present, the Court is already holding a

$1,000,000

cash bond deposited by the Company early in the litigation. After entry of judgment, the Court will permit release of those funds to the Mavericks. As a result, the Company recorded in other current liabilities a

$1,400,000

loss in general and administrative for the year ended

December 31, 2019.

The loss includes the

$1,000,000

transaction fee and an estimated

$400,000

in interest due. The

$1,000,000

deposited with the court will be used to settle the transaction fee.

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

December 31, 2019,

except as disclosed, management believes any liability that

may

ultimately result from the resolution of these matters will

not

have a material adverse effect on the Company’s consolidated financial position, operating results or cash flows.

Warranty

The Company offers a warranty on all its non-disposable products of

one

two

years. The Company warrants disposable products through their expiration date. The Company periodically assesses the adequacy of the warranty reserves and adjusts as necessary.

Changes in the Company’s warranty reserve, which is included in other current liabilities in the accompanying consolidated balance sheet is as follows:

	Year Ended December 31,
	2019			2018
Beginning balance	$	186,000		$	291,000
Warranties originated during the year		254,000			199,000
Claims settled made during the year		(154,000	)		(252,000	)
Changes in reserve estimate		(9,000	)		(52,000	)
Ending balance	$	277,000		$	186,000

Coronavirus (COVID-

)

December 2019,

a novel strain of coronavirus was reported in Wuhan, China. The World Health Organization has declared the outbreak to constitute a “Public Health Emergency of International Concern.” The COVID-

outbreak is disrupting supply chains and affecting production and sales across a range of industries. The extent of the impact of COVID-

on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers, employees and vendors all of which are uncertain and cannot be predicted. At this point, the extent to which COVID-

may

impact our financial condition or results of operations is uncertain.