Note 3 - Related Party Transactions

9 Months Ended

Sep. 30, 2020

Notes to Financial Statements

Related Party Transactions Disclosure [Text Block]

3.

     

Related Party Transactions

Health

B

anks Biotech (USA) Inc.

On

November 26, 2019

the Company entered into a joint venture agreement with HealthBanks Biotech (USA) Inc. (the “JV Agreement”) to form a new company called ImmuneCyte, Inc. (“ImmuneCyte”) to commercialize the Company's proprietary cell processing platform, CAR-TXpress™, for use in immune cell banking as well as for cell-based contract development and manufacturing services (CMO/CDMO). Under the terms of the JV Agreement, ImmuneCyte was initially owned

80%

by HealthBanks Biotech and

20%

by the Company. The Company currently owns

18.79%

of the equity of ImmuneCyte. ImmuneCyte will be among the

first

immune cell banks in the U.S. and offer customers the ability to preserve younger, healthier and uncontaminated immune cells for future potential use in dendritic and chimeric antigen receptor (“CAR-T”) cell therapies in a GMP compliant processing environment. The Company's principal contribution to ImmuneCyte was a supply agreement under which ImmuneCyte will have the exclusive right to purchase the Company's proprietary cell processing equipment in the immune cell banking business and a non-exclusive right to purchase it for other cell-based contract development and manufacturing (“CMO/CDMO”) services at a price equal to

115%

of the Company's cost. The Company also contributed to ImmuneCyte intellectual property and trademarks relating to the Company's clinical development assets, which were fully impaired by the Company in

2018

and had

no

book value. HealthBanks contributed to ImmuneCyte a paid-up, royalty free license to use its proprietary business management system, customer relationship management software, and laboratory information statement, and it will also make available a

$1,000,000

unsecured, non-convertible line of credit to ImmuneCyte to provide initial operating capital. Healthbanks is a subsidiary of Boyalife Group, Inc. (USA), the owner of Boyalife Asset Holding II, Inc., which is the largest stockholder of the Company, and is owned by Dr. Xiaochun (Chris) Xu, the Company's Chief Executive Officer and Chairman of our Board of Directors.

Between

November 26, 2019

and

September 30, 2020,

ImmuneCyte closed

$3,700,000

of equity investments with a private institution and qualified investors. ImmuneCyte issued

643,750

shares of Class A common stock at a price between

$5.00

to

$16.00

per share, representing a total of

6.05%

ownership in the joint venture.  As a result of these equity investments in ImmuneCyte, the Company's equity in the joint venture is

no

longer subject to anti-dilution provisions.  After these investments, ImmuneCyte is owned

75.16%

by HealthBanks,

18.79%

by the Company and

6.05%

by the private investors.

The Company initially determined that ImmuneCyte would be considered a variable interest entity, as a result of the significant influence the Company has over operations and its' lack of sufficient equity at inception. After the additional investment of

$3,700,000,

ImmuneCyte's equity at risk was considered sufficient and the Company determined it would

no

longer be classified as a variable interest entity. The Company's investment in ImmuneCyte will be accounted for under the equity method based on management's conclusion that the Company can exercise significant influence over ImmuneCyte via its equity interest and the related Supply Agreement. The Company recorded the investment initially at the value of the nonfinancial assets contributed of

$28,000,

which consisted of the book value of certain assets contributed at the time of formation.

The Company entered into a supply agreement with ImmuneCyte with an effective date of

April 22, 2020.

The supply agreement, which related to the supply of COVID-

19

antibody detection kits, has a term of

one

year from the effective date,

thirty

(

30

) day renewal terms and contains the Company's standard supply contract provisions. The Company paid ImmuneCyte approximately

$3,600,000

for kits during the

nine

months ended

September 30, 2020.

In

August 2020,

due to concerns over the consistency of performance of these kits, the Company voluntarily withdrew its application for an Emergency Use Authorization (“EUA”) with respect to the detection kits. After the EUA application was withdrawn, ImmuneCyte agreed to refund their mark-up on the purchased kits. That refund of approximately

$800,000

was received in the quarter ended

September 30, 2020.

Additionally, ImmuneCyte and the Company agreed to work together to attempt to secure a refund from the original manufacturer for the remaining amount the Company paid for kits. If a refund is obtained, it will be recognized when received. For the

nine

months ended

September 30, 2020,

the Company recorded a loss to cost of goods sold for the remaining carrying amount of the testing kits in inventory as of

September 30, 2020

of approximately

$2,800,000.

In order to continue to pursue its strategy to sell COVID-

19

antibody detection test kits, the Company entered into a supply agreement in

August 2020

with BioHit Healthcare (Hefei) Co., Ltd. for kits to be marketed under the ThermoGenesis brand.

For the

three

and

nine

months ended

September 30, 2020,

the Company recorded a loss of

$0

and

$13,000,

respectively, on its equity investment in ImmuneCyte as ImmuneCyte has recorded a cumulative loss since the Company made its investment. At

September 30, 2020,

the value of the Company's investment in ImmuneCyte will remain at

$0.

For the

three

and

nine

months ended

September 30, 2020,

ImmuneCyte had net loss of

$1,313,000

and

$1,422,000,

respectively. As of

September 30, 2020,

its current assets were

$2,120,000

and current liabilities were

$296,000.

Convertible Promissory Note and Revolving Credit Agreement

In

March 2017,

ThermoGenesis Holdings entered into a Credit Agreement with Boyalife Investment Fund II, Inc., which later merged into Boyalife Asset Holding II, Inc. (the “Lender”). The Lender is a wholly owned subsidiary of Boyalife Group Inc., which is owned and controlled by the Company's Chief Executive Officer and Chairman of our Board of Directors. The Credit Agreement, as amended, grants to the Company the right to borrow up to

$10,000,000

(the “Loan”) at any time prior to

March 6, 2022 (

the “Maturity Date”). In

February 2020,

the Company and the Lender completed a series of transactions in which the Company completed a draw down for

$1,869,000

and the Lender converted a total of

$3,000,000

of the outstanding balance of the convertible note into an aggregate of

1,666,670

shares of our common stock in

two

conversions. As a result of the conversions, the Company recorded a

$2,486,000

charge to interest expense for the unamortized portion of the beneficial conversion feature related to the unamortized portion of the beneficial conversion feature of outstanding principal balance that was converted. On

April 28, 2020,

the Company borrowed an additional

$2,418,000

under the Loan. Immediately after that draw down, the outstanding principal balance under the Loan was

$10,000,000

and accrued but unpaid interest was

$580,000.

The principal purpose of the draw down was to provide working capital to fund the Company's purchase of SARS-CoV-

2

(COVID-

19

) IgM/IgG Antibody Fast Detection Kits from ImmuneCyte. As of

September 30, 2020,

the outstanding principal balance of the Loan was

$10,000,000.

The Credit Agreement and the Convertible Promissory Note issued thereunder (the “Note”) provide that the principal and all accrued and unpaid interest under the Loan will be due and payable on the Maturity Date, with payments of interest-only due on the last day of each calendar year. The Loan bears interest at

22%

per annum, simple interest. The Company has

five

business days after the Lender demands payment to pay the interest due before the Loan is considered in default. The Note can be prepaid in whole or in part by the Company at any time without penalty.

The Maturity Date of the Note is subject to acceleration at the option of the Lender upon customary events of default, which include; a breach of the Loan documents, termination of operations, or bankruptcy. The Lender's obligation to make advances under the Loan is subject to the Company's representations and warranties in the Credit Agreement continuing to be true at all times and there being

no

continuing event of default under the Note.

The Credit Agreement and Note were amended in

April 2018.

The amendment granted the Lender the right to convert, at any time, outstanding principal and accrued but unpaid interest into shares of Common Stock at a conversion price of

$16.10

per share and if the Company issues shares of Common Stock at a lower price per share, the conversion price of the Note is lowered to the reduced amount. The Company completed

two

transactions in

2018,

lowering the conversion price to

$1.80.

It was concluded that the conversion option of the draw down in

February 2020

of

$1,869,000

contained a beneficial conversion feature and the Company recorded a debt discount for the full amount in the quarter ended

March 31, 2020.

It was also concluded that the conversion option of the draw down in

April 2020

of

$2,418,000

contained a beneficial conversion feature and the Company recorded a debt discount for the full amount in the quarter ended

June 30, 2020.

Such discount represented the fair value of the incremental shares up to the proceeds received from the convertible notes. The Company amortized

$828,000

and

$2,103,000

of debt discount to interest expense for the

three

and

nine

months ended

September 30, 2020,

respectively, and

$471,000

and

$1,398,000

for the

three

and

nine

months ended

September 30, 2019,

respectively. As of

September 30, 2020,

the Company had an interest payable balance of

$1,519,000

as compared to

$1,869,000

at

December 31, 2019

related to the Note.

Distributor Agreement

On

August 21, 2017,

ThermoGenesis Corp. entered into an International Distributor Agreement with Boyalife W.S.N. Under the terms of the agreement, Boyalife W.S.N. was granted the exclusive right, subject to existing distributors and customers (if any), to develop, sell to, and service a customer base for ThermoGenesis Corp's AXP

®

AutoXpress System and BioArchive

®

System in the People's Republic of China (excluding Hong Kong and Taiwan), Singapore, Indonesia, and the Philippines (the “Territories”). Boyalife W.S.N. is related to our Chief Executive Officer and Chairman of our Board of Directors, and an affiliate of Boyalife (Hong Kong) Limited. Boyalife W.S.N,'s rights under the agreement include the exclusive right to distribute AXP

®

Disposable Blood Processing Sets and use rights to the AXP

®

AutoXpress System, BioArchive

®

System and other accessories used for the processing of stem cells from cord blood in the Territories. Boyalife W.S.N. is also appointed as the exclusive service provider to provide repairs and preventative maintenance to ThermoGenesis Corp. products in the Territories.

The term of the agreement is for

three

years with ThermoGenesis Corp. having the right to renew the agreement for successive

two

-year periods at its option. However, ThermoGenesis Corp. has the right to terminate the agreement early if Boyalife W.S.N. fails to meet specified minimum purchase requirements.

During the

three

and

nine

months ended

September 30, 2020,

the Company recorded

no

revenue and for the

three

and

nine

months ended

September 30, 2019,

the Company recorded

$214,000

and

$794,000,

respectively, of revenues from Boyalife related to the aforementioned distributor agreement.