10-K 1 bioli20191231_10k.htm FORM 10-K bioli20191231_10k.htm
 

Table of Contents




UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

FORM 10-K

 


 

(Mark One)

   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the year ended December 31, 2019

 

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to

 

Commission File Number 001-36362

 


 

BioLife Solutions, Inc.

(Exact name of registrant as specified in its charter)

 


   

DELAWARE

94-3076866

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

 

3303 MONTE VILLA PARKWAY, SUITE 310, BOTHELL, WASHINGTON, 98021

(Address of registrant’s principal executive offices, Zip Code)

 

(425) 402-1400

(Telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol ($)

Name of exchange on which registered

Common Shares, par value $0.01 per share

BLFS

NASDAQ Capital Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ☐   No  ☑

 

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ☐   No  ☑

 

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  ☑   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 (S232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such said files).  Yes  ☑   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 the 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  ☐   Smaller reporting company  ☑   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 Act).  Yes  ☐   No  ☑

 

As of the registrant’s most recently completed second fiscal quarter, the aggregate market value of common equity (based on closing price on June 28, 2019 of $16.95 per share) held by non-affiliates was approximately $230 million.

 

As of May 14, 2020, 23,999,516 shares of the registrant’s common stock were outstanding.

 



 

 

 

 

Table of Contents

 

 

 

 

Page No.

PART I

 

 

 

ITEM 1.

BUSINESS

5

ITEM 1A.

RISK FACTORS

10

ITEM 1B.

UNRESOLVED STAFF COMMENTS

18

ITEM 2.

PROPERTIES

18

ITEM 3.

LEGAL PROCEEDINGS

18

ITEM 4.

MINE SAFETY DISCLOSURES

18

 

 

 

PART II

 

 

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

18

ITEM 6.

SELECTED FINANCIAL DATA

19

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

19

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

28

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

28

 

INDEX TO FINANCIAL STATEMENTS

28

 

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS

29

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

84

ITEM 9A.

CONTROLS AND PROCEDURES

84

ITEM 9B.

OTHER INFORMATION

86

 

 

 

PART III

 

 

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

87

ITEM 11.

EXECUTIVE COMPENSATION

92

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

96

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

97

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

98

 

 

 

PART IV

 

 

 

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

99

ITEM 16.

FORM 10-K SUMMARY

101

SIGNATURES

102

 

 

 

FORWARD LOOKING STATEMENTS

 

This Annual Report on Form 10-K (“Form 10-K”) contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements in this Form 10-K do not constitute guarantees of future performance and actual results could differ materially from those contained in the forward-looking statements. These statements are based on current expectations of future events. Such statements include, but are not limited to, statements about our products, including our newly acquired products, customers, regulatory approvals, the potential utility of and market for our products and services, our ability to implement our business strategy and anticipated business and operations, in particular following the 2019 acquisitions, future financial and operational performance, our anticipated future growth strategy, including the acquisition of synergistic cell and gene therapy manufacturing tools and services or technologies or other companies or technologies, capital requirements, intellectual property, suppliers, joint venture partners, future financial and operating results, the impact of the COVID-19 pandemic, plans, objectives, expectations and intentions, revenues, costs and expenses, interest rates, outcome of contingencies, business strategies, regulatory filings and requirements, the estimated potential size of markets, capital requirements, the terms of any capital financing agreements and other statements that are not historical facts. You can find many of these statements by looking for words like “believes,” “expects,” “anticipates,” “estimates,” “may,” “should,” “will,” “could,” “plan,” “intend,” or similar expressions in this Form 10-K. We intend that such forward-looking statements be subject to the safe harbors created thereby.

 

These forward-looking statements are based on the current beliefs and expectations of our management and are subject to significant risks and uncertainties. If underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results may differ materially from current expectations and projections. Factors that might cause such a difference include those discussed under “Risk Factors,” as well as those discussed elsewhere in the Form 10-K.

 

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-K or, in the case of documents referred to or incorporated by reference, the date of those documents.

 

All subsequent written or oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events, except as may be required under applicable U.S. securities law. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

 

References throughout this Form 10-K to “BioLife Solutions, Inc.”, “BioLife”, “we”, “us”, “our”, or the “Company” refer to BioLife Solutions, Inc. and its subsidiaries, taken as a whole, unless the context otherwise indicates.

 

EXPLANATORY NOTE

 

Certain Information Included in this Form 10-K

 

This Form 10-K includes restated Consolidated Financial Statements for the year ended December 31, 2018 and for the quarters ended March 31, 2018, June 30, 2018, September 30, 2018, March 31, 2019, June 30, 2019 and September 30, 2019 to reflect adjustments made to account for certain Warrants (as defined below) as a liability. The Warrants were previously recorded as equity as described below. In addition, as further described below, adjustments were made to quarterly results for 2019 related to accounting for certain market-based stock awards and the valuation of contingent consideration, in-process research and development technology, and goodwill for our Astero Bio Corporation (“Astero”) acquisition. This Annual Report on Form 10-K for the year ended December 31, 2019 provides restated quarterly data for the quarters ended March 31, 2018, June 30, 2018, September 30, 2018, March 31, 2019, June 30, 2019 and September 30, 2019.

 

We have not filed and do not intend to file amendments to our previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by the restatements of our Consolidated Financial Statements. Accordingly, as disclosed in our Current Report on Form 8-K filed April 30, 2020, the Company's previously issued financial statements for the periods from January 1, 2014 through September 30, 2019, including the Company’s previously issued audited financial statements for the year ended December 31, 2018, should no longer be relied upon, nor should any related reports of our then independent registered public accounting firm, Peterson Sullivan LLP, nor any previously furnished or filed reports, earnings releases, guidance, investor presentations, or similar communications of the Company regarding these periods be relied upon. Investors should rely only on the financial information and other disclosures, including the adjusted or restated financial information, included in this Form 10-K and subsequent filings, as applicable.

 

 

Background of Restatement

 

The Company in consultation with its Audit Committee, concluded that its previously issued Consolidated Financial Statements for the periods beginning with the first quarter of 2018 through the third quarter of 2019 (collectively, the “Affected Periods”) should be restated because of a misapplication in the guidance around accounting for Warrants and should no longer be relied upon as discussed above (the Audit Committee concluded that it was not necessary to restate the financial statements for any period prior to January 1, 2018). In connection with the restatement of the Consolidated Financial Statements for the Affected Periods, the Audit Committee further concluded to make certain other adjustments to our Consolidated Financial Statement for the periods beginning with the first quarter of 2019 through the third quarter of 2019 – see below and see Note 16: “Quarterly Financial Information (Unaudited)” to our Consolidated Financial Statements.

 

The reclassification of the Warrants did not have any impact on our liquidity, cash flows, revenues or costs of operating our business and the other non-cash adjustments to the Consolidated Financial Statements, in all of the Affected Periods, do not impact the amounts previously reported for the Company’s cash and cash equivalents, operating expenses or total cash flows from operations.

 

The warrants at issue are those certain warrants (“Warrants”) to purchase common stock of the Company that we issued to certain investors in a March 2014 public offering pursuant to the Company’s Registration Statement on Form S-1 (File No. 333-192880) and pursuant to a note conversion agreement with certain note holders. Following issuance of the Warrants, the Company accounted for the Warrants in its financial statements as equity. The Warrants have an exercise price of $4.75 per share and expire in March 2021 unless previously exercised. A total of 6,910,283 Warrants were issued in March 2014 and, as of December 31, 2019, there were 3,409,005 Warrants outstanding.

 

Historically, the Warrants were reflected as a component of equity as opposed to liabilities on the balance sheets and the statements of operations did not include the subsequent non-cash changes in estimated fair value of the Warrants in accordance with Accounting Standards Codification 480, “Distinguishing Liabilities from Equity” (“ASC 480”). The Warrants generally provide that, in the event of a fundamental transaction under rule 13(e)-3, the holder may receive cash value for the Warrants calculated using a Black Scholes model with a volatility rate equal to the greater of (i) the historical 100-day look-back period or (ii) 100% equity volatility. As a result, the Warrant cannot be classified within equity according to generally accepted accounting principles. Instead, the Warrants issued by the Company should be recorded as a liability at fair value at the date of grant, and marked to market at each reporting period. Changes in fair value are recorded in earnings.

 

Also, during the preparation and audit of the Company’s Consolidated Financial Statements for fiscal 2019, the Company identified material errors impacting the first, second and third quarters of 2019 related to the valuation of contingent consideration, in-process research and development technology and goodwill for our Astero Bio Corporation (“Astero”) acquisition and valuation of market-based restricted stock awards.

 

COVID-19

 

The Company is filing this Form 10-K on a delayed basis in accordance with the order (the “Order”) promulgated by the Securities and Exchange Commission on March 25, 2020 in Release No. 34-88465 relating to the Exchange Act. The Company was unable to file the Form 10-K in a timely manner because the Seattle area, including the location of the Company’s corporate headquarters and its media production facility and warehouse was, and is currently, at an epicenter of the coronavirus outbreak in the United States. The Company has been following the recommendations of local health authorities to minimize exposure risk for its team members for the past several months, including the temporary closures of its offices and having team members work remotely, and, as a result, the Form 10-K was not able to be completed by the filing deadline. Reference is made to our disclosures in this Form 10-K regarding the impact of COVID-19 on the Company, including those disclosures discussed under the heading “Risk Factors” herein.

 

 

 

PART I

 

ITEM 1.

BUSINESS

 

The following discussion of our business contains forward-looking statements that involve risks and uncertainties. When used in this report, the words “intend,” “anticipate,” “believe,” “estimate,” “plan” and “expect” and similar expressions as they relate to us are included to identify forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements and are a result of certain factors, including those set forth under “Risk Factors” and elsewhere in this Form 10-K (“Form 10-K”).

 

References throughout this Form 10-K to “BioLife Solutions, Inc.”, “BioLife”, “we”, “us”, “our”, or the “Company” refer to BioLife Solutions, Inc. and its subsidiaries, taken as a whole, unless the context otherwise indicates.

 

 

Overview

 

We develop, manufacture and market bioproduction tools to the cell and gene therapy (“C&GT”) industry, which are designed to improve quality and de-risk biologic manufacturing and delivery. Our products are used in basic and applied research, and commercial manufacturing of biologic-based therapies. Customers use our products to maintain the health and function of biologic material during sourcing, manufacturing, storage, and distribution of cells and tissues.

 

We currently operate as one bioproduction tools business with product lines that support several steps in the biologic material manufacturing and delivery process. We have a diversified portfolio of tools that focus on biopreservation, frozen storage, and thawing of biologic materials. We have in-house expertise in cryobiology and continue to capitalize on opportunities to maximize the value of our product platform for our extensive customer base through both organic growth innovations and acquisitions.

 

Our Products

 

Our bioproduction tools are comprised of four main product lines

 

 

Biopreservation media

 

Automated thawing devices

 

Cloud connected “smart” shipping containers

 

Freezer and storage technology and related components

 

Biopreservation media

 

Our proprietary biopreservation media products, HypoThermosol® FRS and CryoStor®, are formulated to mitigate preservation-induced, delayed-onset cell damage and death, which result when cells and tissues are subjected to reduced temperatures. Our technology can provide our C&GT customers with significant shelf life extension of biologic source material and final cell products, and can also greatly improve post-preservation cell and tissue viability and function. Our biopreservation media is serum-free, protein-free, fully defined, and manufactured under current Good Manufacturing Practices (cGMP). We strive to source wherever possible, the highest available grade, multi-compendium raw materials. We estimate our media products have been incorporated in over 400 customer clinical applications, including numerous chimeric antigen receptor (CAR) T cell and other cell types. 

 

Stability (i.e. shelf-life) and functional recovery are crucial aspects of academic research and clinical practice in the biopreservation of biologic-based source material, intermediate derivatives, and isolated/derived/expanded cellular products and therapies. Limited stability is especially critical in the C&GT field, where harvested cells and tissues will lose viability over time, if not maintained appropriately at normothermic body temperature (37ºC) or stored in a hypothermic state in an effective preservation medium. Chilling (hypothermia) is used to reduce metabolism and delay degradation of harvested cells and tissues. However, subjecting biologic material to hypothermic environments induces damaging molecular stress and structural changes. Although cooling successfully reduces metabolism (i.e., lowers demand for energy), various levels of cellular damage and death occur when using suboptimal methods. Traditional biopreservation media range from simple “balanced salt” (electrolyte) formulations to complex mixtures of electrolytes, energy substrates such as sugars, osmotic buffering agents and antibiotics. The limited stability which results from the use of these traditional biopreservation media formulations is a significant shortcoming that our optimized proprietary products address with great success.

 

Our scientific research activities over the last 20+ years enabled a detailed understanding of the molecular basis for the hypothermic and cryogenic (low-temperature induced) damage/destruction of cells through apoptosis and necrosis. This research led directly to the development of our HypoThermosol® FRS and CryoStor® technologies. Our proprietary biopreservation media products are specifically formulated to:

 

 

Minimize cell and tissue swelling

 

Reduce free radical levels upon formation

 

Maintain appropriate low temperature ionic balances

 

Provide regenerative, high energy substrates to stimulate recovery upon warming

 

Avoid the creation of an acidic state (acidosis)

 

Inhibit the onset of apoptosis and necrosis

 

 

A key feature of our biopreservation media products is their “fully-defined” profile. All of our cGMP products are serum-free, protein-free and are formulated and filled using aseptic processing. We strive to use USP/Multicompendial grade or the highest quality available synthetic components. All of these features benefit prospective customers by facilitating the qualification process required to incorporate our products into their regulatory filings.

 

The results of independent testing demonstrate that our biopreservation media products significantly extend shelf-life and improve cell and tissue post-thaw viability and function. Our products have demonstrated improved biopreservation outcomes, including greatly extended shelf-life and post-thaw viability, across a broad array of cell and tissue types.

 

Competing biopreservation media products are often formulated with simple isotonic media cocktails, animal serum, potentially a single sugar or human protein. A key differentiator of our proprietary HypoThermosol FRS formulation is the engineered optimization of the key ionic component concentrations for low temperature environments, as opposed to normothermic body temperature around 37°C, as found in culture media or saline-based isotonic formulas. Competing cryopreservation freeze media is often comprised of a single permeating cryoprotectant such as dimethyl sulfoxide (“DMSO”). Our CryoStor formulations incorporate multiple permeating and non-permeating cryoprotectant agents which allow for multiple mechanisms of protection and reduces the dependence on a single cryoprotectant. We believe that our products offer significant advantages over in-house formulations, or commercial “generic” preservation media, including, time saving, improved quality of components, more rigorous quality control release testing, more cost effective and improved preservation efficacy.

 

We estimate that annual revenue from each customer commercial application in which our products are used could range from $0.5 million to $2.0 million, if such application is approved and our customer commences large scale commercial manufacturing of the biologic based therapy.

 

Automated, Water-Free Thawing Products

 

In April 2019, we acquired Astero Bio Corporation (“Astero”), to expand our bioprocessing tools portfolio and diversify our revenue streams. The Astero ThawSTAR® line includes automated vial and cryobag thawing products that control the heat and timing of the thawing process of biologic material. Our customizable, automated, water-free thawing products uses algorithmic programmed, heating plates to consistently bring biologic material from a frozen state to a liquid state in a controlled and consistent manner. This helps reduce damage during the temperature transition. The ThawSTAR products can reduce risks of contamination versus using a traditional water bath.

 

evo® Cloud Connected Shipping Containers

 

In August 2019, we acquired the remaining shares of SAVSU Technologies, Inc. (“SAVSU”) we did not previously own. SAVSU is a leading developer and supplier of next generation cold chain management tools for cell and gene therapies. The evo.is cloud app allows biologic products to be traced and tracked in real time. Our evo platform consists of rentable cloud-connected shippers and include technologies that enable tracking software provides real-time information on geolocation, payload temperature, ambient temperature, tilt of shipper, humidity, altitude, and real-time alerts when a shipper has been opened. Our internally developed evo.is software allows customers to customize alert notifications both in data measurements and user requirements. The evo Dry Vapor Shipper (“DVS”) is specifically marketed to cell and gene therapies. The evo DVS has improved form factor and ergonomics over the traditional dewar, including extended thermal performance, reduced liquid nitrogen recharge time, improved payload extractors and ability to maintain temperature for longer periods on its side.

 

We utilize couriers who already have established logistic channels and distribution centers. Our strategy greatly reduces the cash need to build out specialized facilities around the world. Our partnerships with several white glove couriers allow us to scale our sales and marketing effort by utilizing their salesforce. Our courier partnerships market our evo platform to their existing cell and gene therapy customers as a cost effective and innovative solution. We also market directly to our existing and prospective customers who can utilize the evo platform through our courier partnerships.     

 

Liquid Nitrogen Freezer and Storage Devices

 

In November 2019, we acquired Custom Biogenic Systems, Inc. (“CBS”) a global leader in the design and manufacture of state-of-the-art liquid nitrogen laboratory freezers, cryogenic equipment and accessories. The addition of CBS allows for product line growth, diversification of revenue and reduction of supply chain costs for our evo dry vapor shippers.

 

Included in CBS’s product line of liquid nitrogen freezers are the Isothermal LN2 freezers, constructed with a patented system which stores liquid nitrogen in a jacketed space in the walls of the freezer. This dry storage method eliminates liquid nitrogen contact with stored specimens, reduces the risk of cross-contamination and provides increased user safety in a laboratory setting. To accommodate customer requirements, we offer customizable features including wide bodied and extended height.

 

 

Our freezer offerings also include high capacity rate freezers which are fully customizable to customer needs with temperature range of -180°C to +50°C and freezing rates of 0.01 to 99.9 per minute. Password protected software aids in compliance with 21 CFR Part 11 and unlimited programming capability, these high capacity rate freezers provide a searchable database for freeze run history and allow freeze data to be saved.

 

To accompany the offerings of cryogenic freezer equipment, we supply equipment for storing critically important biological materials. This storage equipment includes upright freezer racks, chest freezer racks, liquid nitrogen freezer racks, canisters/cassettes and frames as well as laboratory boxes and dividers. Due to our onsite design and manufacturing capability, racks and canisters can be customized to address customers’ varying requirements,

 

In order to provide customers with a proactive approach to safety and monitoring of equipment containing liquefied gas, CBS offers Versalert, a patented wireless remote asset monitoring system that can monitor and record temperatures from -200°C to +50°C, and monitor and record two additional variables using 0-5v or 4-20mA inputs. With an intelligent mesh network with three times the range of competing products, the system enables customers to view current equipment conditions and receive alarm notification on smartphones, tablets or personal computers and maintain permanent electronic records for regulatory compliance and legal verification.

 

Our Market Opportunity and Competition

 

The C&GT market has been rapidly expanding, treating diseases once thought incurable. According to the Alliance for Regenerative Medicine (“ARM”) there were currently over 1,000 ongoing clinical trials utilizing regenerative medicine at the end of 2019. ARM also states there were over $9.8 billion in total global financings in the regenerative market in 2019. The FDA predicts five to ten cell and gene therapies per year will be approved. These technologies change the way physicians treat patients. The manufacturing, distribution and the delivery process is significantly different from many other types of medicines and therapies. We believe we are well positioned to address many of the manufacturing difficulties in the process of producing cell and gene therapies.

 

The Bioproduction Process

 

Our products currently fulfill several steps in the bioproduction process for cell and gene therapies. See the diagram below from an illustration of this process and our product roles. We now offer products that integrate into the critical steps of preservation, thawing, fixed storage, and transportable storage under controlled conditions.

 

 

Our Strategy

 

We intend to aggressively leverage the numerous relationships with the leading cell and gene therapy companies that use our media products to offer our expanded product portfolio of bioproduction tools. Over the last several years, we have built a strong reputation as a trusted supplier of critical tools used in cell and gene therapy manufacturing. We believe that our relationships and reputation could enable us to drive incremental revenue growth through the sale of additional products to a captive customer base.

 

 

Business Operations

 

 

Research and Development

 

Our research and activity is focused on evaluating new potential disruptive technologies which may be applicable throughout the cell and gene therapy manufacturing workflow. We routinely assess and analyze the strengths and weaknesses of competitive products and are typically engaged in business development discussions on an ongoing basis.

 

Sales and Marketing

 

We market and sell our products through direct sales and third party distribution. Our products are marketed and distributed by STEMCELL Technologies, MilliporeSigma, VWR, Thermo Fisher and several other regional distributors under non-exclusive agreements. In 2019, sales to third party distributors accounted for 46% of our revenue compared to 33% in 2018. We employ scientific team members in sales and support roles because we believe that is what makes us a trusted and critical supplier to our customers. Our technical application support team consists of individuals with extensive experience in cell processing, biopreservation, freezing and thawing.  We have also hired experienced field-based sales and customer care team members to support our growing product portfolio.

 

In the years 2019 and 2018, we derived approximately 15% of our product revenue from one customer and approximately 29% of our product revenue from two customers, respectively.

 

The following table represents the Company’s total revenue by geographic area (based on the location of the customer):

 

   

Year Ended December 31,

 

Revenue by customers’ geographic locations

 

2019

   

2018

 

North America

    69

%

    77

%

Canada

    16

%

    13

%

Europe, Middle East, Africa (EMEA)

    14

%

    8

%

Other

    1

%

    2

%

Total revenue

    100

%

    100

%

 

Manufacturing

 

Biopreservation Media - We maintain and operate two independent cGMP clean room production suites for manufacturing sterile biopreservation media products. Our quality management system (“QMS”) was certified to the ISO 13485:2016 standard in 2018. Our QMS is aligned with applicable sections of 21 CFR Part 820 - Quality System Regulation for Good Manufacturing Practice of medical devices, 21 CFR Parts 210 and 211 - cGMP for Finished Pharmaceuticals, FDA Guidance - Sterile Drug Products, Volume 4, EU Guidelines Annex 1 - Manufacture of Sterile Medicinal Products, ISO 13408 - Aseptic Processing of Healthcare Products, and ISO 14644 - Clean Rooms and Associated Controlled Environments. To date, we have not experienced significant difficulties in obtaining raw materials for the manufacture of our biopreservation media products. Pursuant to our supply agreements, we are required to notify customers of any changes to our raw materials.

 

Automated Thawing – Our ThawSTAR automated, water-free thawing products are produced by a contract manufacturing organization (“CMO”) based in the United States. We believe this CMO has the skills, experience and capacity needed to meet our quality standards and demand expectations for the product line.

 

evo Cold Chain Products – Production of our evo cold chain management hardware products is performed by external CMOs and by personnel in our Albuquerque, New Mexico facility. We are currently engaged in a project to qualify our CBS facility as a secondary supplier of liquid nitrogen dewars for our evo product line.

 

Freezer and Storage – The majority of our CBS freezers and related accessories are manufactured in our facility in Bruce Township, Michigan. We are reliant on certain critical suppliers for some components.

 

Support

 

We provide product support through a combination of channels including phone, web, and email. These support services are delivered by our customer care and scientific teams. These teams are responsible for providing timely, high-quality technical expertise on all our products.

 

Product Regulatory Status

 

Our media, thawing and evo products are not subject to any specific United States Food and Drug Administration (“FDA”) or other international marketing regulations for drugs, devices, or biologics. We are not required to sponsor formal prospective, controlled clinical-trials in order to establish safety and efficacy. However, to support our current and prospective clinical customers, we manufacture and release our products in compliance with cGMP and other relevant quality standards.

 

To assist customers with their regulatory applications, we maintain Type II Master Files at the FDA for CryoStor, HypoThermosol FRS, BloodStor 27, and our Cell Thawing Media products, which provide the FDA with information regarding our manufacturing facility and process, our quality system, stability and safety, and any additional testing that has been performed. Customers engaged in clinical and commercial applications may notify the FDA of their intention to use our products in their product development and manufacturing process by requesting a cross-reference to our master files.

 

One freezer in our Customer Biogenic Systems product line is currently regulated as a Class 2 medical device in the EU.

 

 

Intellectual Property

 

The following table lists our granted and pending patents. We have also obtained certain trademarks and tradenames for our products to distinguish our genuine products from our competitors’ products and we maintain certain details about our processes, products, and strategies as trade secrets. While we believe that the protection of patents and trademarks is important to our business, we also rely on a combination of trade secrets, nondisclosure and confidentiality agreements, scientific expertise and continuing technological innovation to maintain our competitive position. Despite these precautions, it may be possible for unauthorized third parties to copy certain aspects of our products and/or to obtain and use information that we regard as proprietary (see “Item 1A. Risk Factors” of this Annual Report for additional details). The laws of some foreign countries in which we may sell our products do not protect our proprietary rights to the same extent as do the laws of the United States. 

 

 

Issued Patents

Patents Applied For

Registered Trademarks

Biopreservation media

29 1 10

Automated thawing

6 16 7

evo cold chain

9 7 7

Freezers and accessories

6 7 6

Total

50 31 30

 

Employees

 

As of May 1, 2020, we had 151 full time employees and 7 part-time employees. Our employees are not covered by any collective bargaining agreement. We consider relations with our employees to be good.

 

Corporate History

 

We were incorporated in Delaware in 1987 under the name Trans Time Medical Products, Inc. In 2002, the Company, then known as Cryomedical Sciences, Inc. was engaged in manufacturing and marketing cryosurgical products. It completed a merger with our wholly-owned subsidiary, BioLife Solutions, Inc., which was engaged as a developer and marketer of biopreservation media products for cells and tissues. Following the merger, we changed our name to BioLife Solutions, Inc.

 

Principal Offices; Available Information

 

Our principal executive offices are located at 3303 Monte Villa Parkway, Suite 310, Bothell, Washington 98021 and the telephone number is (425) 402-1400. We maintain a website at www.biolifesolutions.com. The information contained on or accessible through our website is not part of this Annual Report on Form 10-K and is not incorporated in any manner into this Annual Report. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), are available free of charge on our website as soon as reasonably practicable after we electronically file such reports with, or furnish those reports to, the Securities and Exchange Commission (the “SEC”). The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

 

 

ITEM 1A.

RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information contained in this Annual Report, before deciding to invest in our common stock. If any of the following risks materialize, our business, financial condition, results of operation and prospects will likely be materially and adversely affected. In that event, the market price of our common stock could decline and you could lose all or part of your investment. 

 

The majority of our net product revenue come from a relatively small number of customers and products in a limited number of market sectors; if we lose any of these customers or if there are problems in those market sectors, our net product revenue and operating results could decline significantly.

 

In the years ended December 31, 2019 and 2018, we derived approximately 15% of our revenue from one distributor and approximately 29% of our revenue from two customers, respectively. No other customer accounted for more than 10% of revenue in the years ended December 31, 2019 or 2018. In the years ended December 31, 2019 and 2018, we derived approximately 73% and 88% of our revenue from CryoStor products, respectively. Due to our acquisitions in 2019, we expect both our revenue concentration related to CryoStor, and our customer concentration to be reduced for the year ended December 31, 2020. Our principal customers may vary from period to period and such customers may not continue to purchase products from us at current levels or at all (particularly as a result of the COVID-19 pandemic). Further, the inability of some of our customers to consummate anticipated purchases of our products due to changes in end-user demand, and other unpredictable factors that may affect customer ordering patterns could lead to significant reductions in net product revenue which could harm our business. Because our revenue and operating results are difficult to predict (particularly as a result of the COVID-19 pandemic), we believe that period-to-period comparisons of our results of operations are not a good indicator of our future performance. Additionally, if revenue declines in a quarter, whether due to a delay in recognizing expected revenue, adverse economic conditions, the COVID-19 pandemic or otherwise, our results of operations will be harmed because many of our expenses are relatively fixed. In particular, a large portion of our manufacturing costs, our research and development, sales and marketing and general and administrative expenses are not significantly affected by variations in revenue. Further, our cost of product revenue is dependent on product mix. If our quarterly operating results fail to meet investor expectations, the price of our common stock may decline.

 

We expect our operating results to fluctuate significantly from period to period.

 

Following our acquisitions in 2019, we have increased our fixed costs and now sell products having higher costs of product revenue than our biopreservation media products. We expect that the result of these acquisitions will make it more difficult to predict our revenue and operating results from period-to-period and that, as a result, comparisons of our results of operations are not currently and will not be for the foreseeable future a good indicator of our future performance. For example, if revenue declines in a quarter, whether due to a delay in recognizing expected revenue, adverse economic conditions, the COVID-19 pandemic or otherwise, our results of operations will be harmed because many of our expenses are now relatively fixed. In particular, a large portion of our manufacturing costs, research and development expenses, sales and marketing expenses and general and administrative expenses are not significantly affected by variations in revenue. Further, a shift in product revenue concentration away from our CryoStor products and towards our new products with higher costs of product revenue will adversely affect our operating margin. If our quarterly operating results fail to meet investor expectations, the price of our common stock may decline.

 

We may engage in future acquisitions or strategic transactions which may require us to seek additional financing or financial commitments, increase our expenses and/or present significant distractions to our management. 

 

In fiscal 2019, we acquired three companies and made investments in two other companies. We are continuing to actively evaluate opportunities to grow our portfolio of cell and gene therapy tools. In the event we engage in an acquisition or strategic transaction, including by making an investment in another company, we may need to acquire additional financing. Obtaining financing through the issuance or sale of additional equity and/or debt securities, if possible, may not be at favorable terms and may result in additional dilution to our current stockholders. Additionally, any such transaction may require us to incur non-recurring or other charges, may increase our near and long-term expenditures and may pose significant integration challenges or disrupt our management or business, which could adversely affect our operations and financial results. For example, an acquisition or strategic transaction may entail numerous operational and financial risks, including the risks outlined above and additionally:

 

 

exposure to unknown liabilities;

 

disruption of our business and diversion of our management's time and attention in order to develop acquired products or technologies;

 

higher than expected acquisition and integration costs;

 

write-downs of assets or goodwill or impairment charges;

 

increased amortization expenses;

 

difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel;

 

impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and

 

inability to retain key employees of any acquired businesses.

 

Accordingly, although there can be no assurance that we will undertake or successfully complete any transactions of the nature described above, and any transactions that we do complete could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

If intangible assets and goodwill that we recorded in connection with our acquisitions become impaired, we may have to take significant charges against earnings.

 

In connection with the accounting for our completed acquisitions in 2019, we recorded a significant amount of intangible assets, including developed technology and customer relationships relating to the acquired product lines, and goodwill. Under U.S. GAAP, we must assess, at least annually and potentially more frequently, whether the value of intangible assets and goodwill has been impaired. Intangible assets and goodwill will be assessed for impairment in the event of an impairment indicator. Any reduction or impairment of the value of intangible assets and goodwill will result in a charge against earnings, which could materially adversely affect our results of operations and shareholders’ equity in future periods.

 

 

Our acquisitions expose us to risks that could adversely affect our business, and we may not achieve the anticipated benefits of acquisitions of businesses or technologies.

 

As a part of our growth strategy, we may make selected acquisitions of complementary products and/or businesses. Any acquisition involves numerous risks and operational, financial, and managerial challenges, including the following, any of which could adversely affect our business, financial condition, or results of operations:

 

 

difficulties in integrating new operations, technologies, products, and personnel;

 

 

problems maintaining uniform procedures, controls and policies with respect to our financial accounting systems;

 

 

lack of synergies or the inability to realize expected synergies and cost-savings;

 

 

difficulties in managing geographically dispersed operations, including risks associated with entering foreign markets in which we have no or limited prior experience;

 

 

underperformance of any acquired technology, product, or business relative to our expectations and the price we paid;

 

 

negative near-term impacts on financial results after an acquisition, including acquisition-related earnings charges;

 

 

the potential loss of key employees, customers, and strategic partners of acquired companies;

 

 

claims by terminated employees and shareholders of acquired companies or other third parties related to the transaction;

 

 

the assumption or incurrence of additional debt obligations or expenses, or use of substantial portions of our cash;

 

 

 

 

the issuance of equity securities to finance or as consideration for any acquisitions that dilute the ownership of our stockholders;

 

 

the issuance of equity securities to finance or as consideration for any acquisitions may not be an option if the price of our common stock is low or volatile which could preclude us from completing any such acquisitions;

 

 

diversion of management’s attention and company resources from existing operations of the business;

 

 

inconsistencies in standards, controls, procedures, and policies;

 

 

the impairment of intangible assets as a result of technological advancements, or worse-than-expected performance of acquired companies;

 

 

assumption of, or exposure to, historical liabilities of the acquired business, including unknown contingent or similar liabilities that are difficult to identify or accurately quantify; and

 

 

risks associated with acquiring intellectual property, including potential disputes regarding acquired companies’ intellectual property.

 

In addition, the successful integration of acquired businesses requires significant efforts and expense across all operational areas, including sales and marketing, research and development, manufacturing, finance, legal, and information technologies. There can be no assurance that any of the acquisitions we may make will be successful or will be, or will remain, profitable. Our failure to successfully address the foregoing risks may prevent us from achieving the anticipated benefits from any acquisition in a reasonable time frame, or at all.

 

Healthcare reform measures could adversely affect our business.

 

The efforts of governmental and third-party payors to contain or reduce the costs of healthcare may adversely affect the business and financial condition of pharmaceutical and biotechnology companies, including ours. Specifically, in both the United States and some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. Efforts by governments and other third-party payors to contain or reduce the costs of healthcare through various means may limit our commercial opportunities and adversely affect our operating results and result in a decrease in the price of our common stock or limit our ability to raise capital.

 

If our products do not perform as expected or the reliability of the technology on which our products are based is questioned, we could experience lost revenue, delayed or reduced market acceptance of our products, increased costs and damage to our reputation.

 

Our success depends on the market’s confidence that we can provide reliable, high-quality products to our customers. We believe that customers in our target markets are likely to be particularly sensitive to product defects and errors. Our reputation and the public image of our products and technologies may be impaired if our products fail to perform as expected. Although our products are tested prior to shipment, defects or errors could nonetheless occur in our products. In the future, if our products experience, or are perceived to experience, a material defect or error, this could result in loss or delay of revenues, delayed market acceptance, damaged reputation, diversion of development resources, legal claims, increased insurance costs or increased service and warranty costs, any of which could harm our business. Such defects or errors could also narrow the scope of the use of our products, which could hinder our success in the market. Even after any underlying concerns or problems are resolved, any lingering concerns in our target market regarding our technology or any manufacturing defects or performance errors in our products could continue to result in lost revenue, delayed market acceptance, damaged reputation, increased service and warranty costs and claims against us.

 

 

We face significant competition.

 

The life sciences industry is highly competitive. We anticipate that we will continue to face increased competition as existing companies may choose to develop new or improved products and as new companies could enter the market with new technologies, any of which could compete with our product or even render our products obsolete. Many of our competitors are significantly larger than us and have greater financial, technical, research, marketing, sales, distribution and other resources than us. There can be no assurance that our competitors will not succeed in developing or marketing technologies and products that are more effective or commercially attractive than any that are being developed or marketed by us, or that such competitors will not succeed in obtaining regulatory approval, or introducing or commercializing any such products, prior to us. Such developments could have a material adverse effect on our business, financial condition and results of operations. Also, even if we can compete successfully, there can be no assurance that we can continue do so in a profitable manner.

 

We are dependent on outside suppliers for all our manufacturing supplies.

 

We rely on outside suppliers for all our manufacturing supplies, parts and components. Although we believe we could develop alternative sources of supply for most of these components within a reasonable period of time, there can be no assurance that, in the future, our current or alternative sources will be able to meet all our demands on a timely basis, particularly given the uncertainty surrounding the COVID-19 pandemic. Unavailability of necessary components could require us to re-engineer our products to accommodate available substitutions, which could increase costs to us and/or have a material adverse effect on manufacturing schedules, products performance and market acceptance. In addition, an uncorrected defect or supplier’s variation in a component or raw material, either unknown to us or incompatible with our manufacturing process, could harm our ability to manufacture products. We might not be able to find a sufficient alternative supplier in a reasonable amount of time, or on commercially reasonable terms, if at all. If we fail to obtain a supplier for the components of our products, our operations could be disrupted.

 

Our success will depend on our ability to attract and retain key personnel.

 

In order to execute our business plan, we must attract, retain and motivate highly qualified managerial, scientific, manufacturing, and sales personnel. If we fail to attract and retain skilled scientific and sales personnel, our sales efforts will be hindered. Our future success depends to a significant degree upon the continued services of key scientific and technical personnel. If we do not attract and retain qualified personnel, we will not be able to achieve our growth objectives. 

 

Difficulties in manufacturing could have an adverse effect upon our expenses and our product revenues.

 

We currently manufacture all of our biopreservation media products, freezer products and related components. We currently outsource most of the manufacturing of our ThawSTAR and evo products. The manufacturing of our products is difficult and complex. To support our current and prospective clinical customers, we comply with and intend to continue to comply with cGMP in the manufacture of our products. Our ability to adequately manufacture and supply our products in a timely matter is dependent on the uninterrupted and efficient operation of our facilities and those of third-parties producing raw materials and supplies upon which we rely in our manufacturing. The manufacture of our products may be impacted by:

 

 

availability or contamination of raw materials and components used in the manufacturing process, particularly those for which we have no other source or supplier;

 

the ongoing capacity of our facilities;

 

our ability to comply with new regulatory requirements, including our ability to comply with cGMP;

 

inclement weather and natural disasters;

 

changes in forecasts of future demand for product components;

 

potential facility contamination by microorganisms or viruses;

 

updating of manufacturing specifications;

 

product quality success rates and yields; and

 

global viruses and pandemics, including the current COVID-19 pandemic.

 

 

If efficient manufacture and supply of our products is interrupted, we may experience delayed shipments or supply constraints. If we are at any time unable to provide an uninterrupted supply of our products to customers, our customers may be unable to supply their end-products incorporating our products to their patients and other customers, which could materially and adversely affect our product revenue and results of operations.

  

While we are not currently subject to FDA or other regulatory approvals on our products, if we become subject to regulatory requirements, the manufacture and sale of our products may be delayed or prevented, or we may become subject to increased expenses.

 

None of our products are subject to FDA. In particular, we are not required to sponsor formal prospective, controlled clinical-trials to establish safety and efficacy. Additionally, we comply with cGMP requirements. This is done solely to support our current and prospective clinical customers. However, there can be no assurance that we will not be required to obtain approval from the FDA, or foreign regulatory authorities, as applicable, prior to marketing any of our products in the future. Any such requirements could delay or prevent the sale of our products or may subject us to additional expenses.

 

Expiration of our patents may subject us to increased competition and reduce our opportunity to generate product revenue.

 

The patents for our products have varying expiration dates and, when these patents expire, we may be subject to increased competition and we may not be able to recover our development costs. In some of the larger economic territories, such as the United States and Europe, patent term extension/restoration may be available. We cannot, however, be certain that an extension will be granted or, if granted, what the applicable time or the scope of patent protection afforded during any extended period will be. If we are unable to obtain patent term extension/restoration or some other exclusivity, we could be subject to increased competition and our opportunity to establish or maintain product revenue could be substantially reduced or eliminated. Furthermore, we may not have sufficient time to recover our development costs prior to the expiration of our U.S. and non-U.S. patents.

 

US Patent 6,045,990, which provides patent coverage relating to HypoThermosol FRS, expired in April 2019, and its foreign patent counterparts expired in July 2019. This may reduce the barrier to entry for competition for this product, which may materially affect the pricing of HypoThermosol FRS and our ability to retain market share. We hold various trade secrets and other confidential know-how related to the manufacturing and testing of our products which limit our exposure to the expiration of US patent 6,045,990. 

 

 

Our proprietary rights may not adequately protect our technologies and products.

 

Our commercial success will depend on our ability to obtain patents and/or regulatory exclusivity and maintain adequate protection for our technologies and products in the United States and other countries. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies and products are covered by valid and enforceable patents or are effectively maintained as trade secrets.

 

We intend to apply for additional patents covering both our technologies and products, as we deem appropriate. We may, however, fail to apply for patents on important technologies or products in a timely fashion, if at all. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products and technologies. In addition, the patent positions of life science industry companies are highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. As a result, the validity and enforceability of our patents cannot be predicted with certainty. In addition, we cannot guarantee that:

 

 

we were the first to make the inventions covered by each of our issued patents and pending patent applications;

 

we were the first to file patent applications for these inventions;

 

others will not independently develop similar or alternative technologies or duplicate any of our technologies;

 

any of our pending patent applications will result in issued patents;

 

any of our patents will be valid or enforceable;

 

any patents issued to us will provide us with any competitive advantages, or will not be challenged by third parties; and

 

we will develop additional proprietary technologies that are patentable, or the patents of others will not have an adverse effect on our business.

 

The actual protection afforded by a patent varies on a product-by-product basis, from country to country and depends on many factors, including the type of patent, the scope of its coverage, the availability of regulatory related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the patents. Our ability to maintain and solidify our proprietary position for our products will depend on our success in obtaining effective claims and enforcing those claims once granted. Our issued patents and those that may be issued in the future, or those licensed to us, may be challenged, invalidated, unenforceable or circumvented, and the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages against competitors with similar products. We also rely on trade secrets to protect some of our technology, especially where it is believed that patent protection is inappropriate or unobtainable. However, trade secrets are difficult to maintain. While we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors or scientific and other advisors may unintentionally or willfully disclose our proprietary information to competitors. Enforcement of claims that a third party has illegally obtained and is using trade secrets is expensive, time consuming and uncertain. In addition, non-U.S. courts are sometimes less willing than U.S. courts to protect trade secrets. If our competitors independently develop equivalent knowledge, methods and know-how, we would not be able to assert our trade secrets against them and our business could be harmed.

 

We may not be able to protect our intellectual property rights throughout the world.

 

Filing, prosecuting and defending patents on all our products in every jurisdiction would be prohibitively expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products. These products may compete with our products and may not be covered by any patent claims or other intellectual property rights.

 

The laws of some non-U.S. countries do not protect intellectual property rights to the same extent as the laws of the United States, and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology, which could make it difficult for us to stop the infringement of our patents. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.

 

 If we fail to protect our intellectual property rights, our competitors may take advantage of our ideas and compete directly against us.

 

Our success will depend to a significant degree on our ability to secure and protect intellectual property rights and enforce patent and trademark protections relating to our technology. While we believe that the protection of patents and trademarks is important to our business, we also rely on a combination of copyright, trade secret, nondisclosure and confidentiality agreements, know-how and continuing technological innovation to maintain our competitive position. From time to time, litigation may be advisable to protect our intellectual property position. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Any litigation in this regard could be costly, and it is possible that we will not have sufficient resources to fully pursue litigation or to protect our intellectual property rights. This could result in the rejection or invalidation of our existing and future patents. Any adverse outcome in litigation relating to the validity of our patents, or any failure to pursue litigation or otherwise to protect our patent position, could materially harm our business and financial condition. In addition, confidentiality agreements with our employees, consultants, customers, and key vendors may not prevent the unauthorized disclosure or use of our technology. It is possible that these agreements will be breached or that they will not be enforceable in every instance, and that we will not have adequate remedies for any such breach. Enforcement of these agreements may be costly and time consuming. Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States.

 

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to protect our rights to, or use of, our technology.

 

If we choose to go to court to stop someone else from using the inventions claimed in our patents or our licensed patents, that individual or company has the right to ask the court to rule that these patents are invalid and/or should not be enforced against that third party. These lawsuits are expensive and would consume time and other resources even if we were successful in stopping the infringement of these patents. In addition, there is a risk that the court will decide that these patents are invalid or unenforceable and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity or enforceability of these patents is upheld, the court will refuse to stop the other party on the grounds that such other party’s activities do not infringe our rights.

 

If we wish to use the technology claimed in issued and unexpired patents owned by others, we will need to obtain a license from the owner, enter into litigation to challenge the validity or enforceability of the patents or incur the risk of litigation in the event that the owner asserts that we infringed its patents. The failure to obtain a license to technology or the failure to challenge an issued patent that we may require to discover, develop or commercialize our products may have a material adverse effect on us.

 

 

If a third party asserts that we infringed its patents or other proprietary rights, we could face a number of risks that could seriously harm our results of operations, financial condition and competitive position, including:

 

 

patent infringement and other intellectual property claims, which would be costly and time consuming to defend, whether or not the claims have merit, and which could delay a product and divert management’s attention from our business;

 

substantial damages for past infringement, which we may have to pay if a court determines that our product or technologies infringe a competitor’s patent or other proprietary rights;

 

a court prohibiting us from selling or licensing our technologies unless the third party licenses its patents or other proprietary rights to us on commercially reasonable terms, which it is not required to do; and

 

if a license is available from a third party, we may have to pay substantial royalties or lump-sum payments or grant cross licenses to our patents or other proprietary rights to obtain that license.

 

The biotechnology industry has produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our products or methods of use either do not infringe the patent claims of the relevant patent, and/or that the patent claims are invalid, and/or that the patent is unenforceable, and we may not be able to do this. Proving invalidity, in particular, is difficult since it requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents.

 

U.S. patent laws as well as the laws of some foreign jurisdictions provide for provisional rights in published patent applications beginning on the date of publication, including the right to obtain reasonable royalties, if a patent subsequently issues and certain other conditions are met.

 

Because some patent applications in the United States may be maintained in secrecy until the patents are issued, because patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing, and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our issued patents or our pending applications, or that we were the first to invent the technology.

 

Patent applications filed by third parties that cover technology similar to ours may have priority over our patent applications and could further require us to obtain rights to issued patents covering such technologies. If another party files a U.S. patent application on an invention similar to ours, we may elect to participate in or be drawn into an interference proceeding declared by the U.S. Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful, resulting in a loss of our U.S. patent position with respect to such inventions. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations. We cannot predict whether third parties will assert these claims against us, or whether those claims will harm our business. If we are forced to defend against these claims, whether they are with or without any merit and whether they are resolved in favor of or against us, we may face costly litigation and diversion of management’s attention and resources. As a result of these disputes, we may have to develop costly non-infringing technology, or enter into licensing agreements. These agreements, if necessary, may be unavailable on terms acceptable to us, if at all, which could seriously harm our business or financial condition.

 

Our inability to protect our systems and data from continually evolving cybersecurity risks or other technological risks, including as a result of breaches of our associated third parties, could affect our ability to conduct our business.

 

In conducting our business, we process, transmit and store sensitive business information and personal information about our customers, vendors, and other parties. This information may include account access credentials, credit and debit card numbers, bank account numbers, social security numbers, driver’s license numbers, names and addresses and other types of sensitive business or personal information. Some of this information is also processed and stored by our third-party service providers to whom we outsource certain functions and other agents, including our customers, which we refer to collectively as our associated third parties.

 

We are a regular target of malicious third-party attempts to identify and exploit system vulnerabilities, and/or penetrate or bypass our security measures, in order to gain unauthorized access to our networks and systems or those of our associated third parties. Such access could lead to the compromise of sensitive, business, personal or confidential information. As a result, we proactively employ multiple methods at different layers of our systems to defend our systems against intrusion and attack and to protect the data we collect. However, we cannot be certain that these measures will be successful and will be sufficient to counter all current and emerging technology threats that are designed to breach our systems in order to gain access to confidential information.

 

Our computer systems and our associated third parties’ computer systems could be in the future, subject to breach, and our data protection measures may not prevent unauthorized access. The techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and are often difficult to detect. Threats to our systems and our associated third parties’ systems can derive from human error, fraud or malice on the part of employees or third parties, or may result from accidental technological failure. Computer viruses and other malware can be distributed and could infiltrate our systems or those of our associated third parties. In addition, denial of service or other attacks could be launched against us for a variety of purposes, including to interfere with our services or create a diversion for other malicious activities. Our defensive measures may not prevent downtime, unauthorized access or use of sensitive data. Further, while we select our third party service providers carefully, and we seek to ensure that our customers adequately protect their systems and data, we do not control their actions and are not able to oversee their processes. Any problems experienced by our associated third parties, including those resulting from breakdowns or other disruptions in the services provided by such parties or cyber-attacks and security breaches, could adversely affect our ability to conduct our business and our financial condition.

 

We could also be subject to liability for claims relating to misuse of personal information, such as violation of data privacy laws. We cannot provide assurance that the contractual requirements related to security and privacy that we impose on our service providers who have access to customer data will be followed or will be adequate to prevent the unauthorized use or disclosure of data. Any failure to adequately enforce or provide these protective measures could result in liability, protracted and costly litigation, governmental intervention and fines.

 

The market for our common stock is limited and our stock price is volatile.

 

Our common stock, traded on the NASDAQ Capital Market, is volatile and has experienced price and volume fluctuations.

 

 

The market prices of many publicly traded companies, including emerging companies in the life sciences industry, have been, and can be expected to be, highly volatile. The future market price of our common stock could be significantly impacted by numerous factors, including, but not limited to:

 

 

Future sales of our common stock or other fundraising events;

 

Sales of our common stock by existing shareholders;

 

Changes in our capital structure, including stock splits or reverse stock splits;

 

Announcements of technological innovations for new commercial products by our present or potential competitors;

 

Developments concerning proprietary rights;

 

Adverse results in our field or with clinical tests of our products in customer applications;

 

Adverse litigation;

 

Unfavorable legislation or regulatory decisions;

 

Public concerns regarding our products;

 

Variations in quarterly operating results;

 

General trends in the health care industry;

 

Global viruses, epidemics and pandemics, including the current COVID-19 pandemic; and

 

Other factors outside of our control, including significant market fluctuations.

 

A significant percentage of our outstanding common stock is held by two stockholders, and these stockholders therefore have significant influence on us and our corporate actions.

 

As of December 31, 2019, two of our existing stockholders, Taurus4757 GmbH (“Taurus”) and WAVI Holdings AG (“WAVI”), owned, collectively, 4.7 million shares of our common stock, representing 22% of the issued and outstanding shares of common stock and warrants to purchase 3.9 million shares of our common stock and options to purchase 68,000 shares of our common stock. Taurus and WAVI were previously secured lenders to our Company, and the chairman of Taurus, Mr. Girschweiler, is a member of our board of directors. Accordingly, these stockholders have had, and will continue to have, significant influence in determining the outcome of any corporate transaction or other matter submitted to the stockholders for approval, including mergers, consolidations and the sale of all or substantially all our assets, election of directors and other significant corporate actions. In addition, without the consent of these stockholders, we could be prevented from entering into transactions that could be beneficial to us.

 

Anti-takeover provisions in our charter documents and under Delaware law could make a third-party acquisition of us difficult.

 

Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. These provisions include the ability of our board to designate the terms of and issue new series of preferred stock without stockholder approval and to amend our bylaws without stockholder approval. Further, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless certain specific requirements are met as set forth in Section 203. Collectively, these provisions could make a third-party acquisition of us difficult or could discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.

 

Any future sales of our securities in the public markets may cause the trading price of our common stock to decline and could impair our ability to raise capital through future equity offerings.

 

Sales of a substantial number of shares of our common stock or other securities in the public markets, or the perception that these sales may occur, could cause the market price of our common stock or other securities to decline and could materially impair our ability to raise capital through the sale of additional securities. In addition to the 3.9 million warrants to purchase shares of our common stock owned by Taurus and WAVI, we have an additional 88,000 warrants exercisable to purchase shares of common stock outstanding which will be freely tradable upon exercise. We have agreed to use our best efforts to keep a registration statement registering the issuance and resale of many such shares effective during the term of the warrants. In addition, we have a significant number of shares of our common stock reserved for issuance pursuant to other outstanding options and rights. If such shares are issued upon exercise of options, warrants or other rights, or if we issue additional securities in a public offering or a private placement, such sales or any resales of such securities could further adversely affect the market price of our common stock. The sale of a large number of shares of our common stock or other securities also might make it more difficult for us to sell equity or equity-related securities in the future at a time and at the prices that we deem appropriate.

 

Securities or industry analysts may not publish favorable research or reports about our business or may publish no information, which could cause our stock price or trading volume to decline.

 

The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us and our business. We do not have any control over these analysts and we cannot provide any assurance that analysts will cover us or provide favorable coverage. If any of the analysts who cover us issue an adverse opinion regarding our stock price, our business or stock price would likely decline. If one or more of these analyst cease coverage of our company or fail to regularly publish reports covering us, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.

 

We do not anticipate declaring any cash dividends on our common stock.

 

We have never declared or paid cash dividends on our common stock and do not plan to pay any cash dividends in the near future. Our current policy is to retain all funds and earnings for use in the operation and expansion of our business.

 

Changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition.

 

Generally accepted accounting principles and related accounting pronouncements, implementation guidelines, and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition, asset impairment and fair value determinations, inventories, business combinations and intangible asset valuations, leases, and litigation, are highly complex and involve many subjective assumptions, estimates, and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates, or judgments could significantly change our reported or expected financial performance or financial condition and could require us to restate our prior financial statements and issue a non-reliance statement regarding our prior financial disclosures.

 

 

Our ability to use net operating loss and tax credit carryforwards and certain built-in losses to reduce future tax payments is limited by provisions of the Internal Revenue Code, and it is possible that certain transactions or a combination of certain transactions may result in material additional limitations on our ability to use our net operating loss and tax credit carryforwards.

 

Section 382 and 383 of the Internal Revenue Code of 1986, as amended, contain rules that limit the ability of a company that undergoes an ownership change, which is generally any change in ownership of more than 50% of its stock over a three-year period, to utilize its net operating loss and tax credit carryforwards and certain built-in losses recognized in years after the ownership change. These rules generally operate by focusing on ownership changes involving stockholders owning directly or indirectly 5% or more of the stock of a company and any change in ownership arising from a new issuance of stock by the company. Generally, if an ownership change occurs, the yearly taxable income limitation on the use of net operating loss and tax credit carryforwards and certain built-in losses is equal to the product of the applicable long-term, tax-exempt rate and the value of the company’s stock immediately before the ownership change. We may be unable to offset our taxable income with losses, or our tax liability with credits, before such losses and credits expire and therefore would incur larger federal income tax liability.

 

If we fail to maintain an effective system of internal controls, we may not be able to accurately report financial results or prevent fraud. If we identify a material weakness in our internal control over financial reporting, our ability to meet our reporting obligations and the trading price of our stock could be negatively affected.

 

As described in Item 9A — Controls and Procedures and elsewhere in this Form 10-K, in connection with the restatement of our Consolidated Financial Statements, we identified a material weakness in our internal control over financial reporting with regard to having sufficient technical resources to appropriately analyze and account for complex financial instruments and complex share-based awards. With regard to our prior interpretation of ASC 480, “Distinguishing Liabilities from Equity”, as it related to the initial classification and subsequent accounting of our registered Warrants as equity instruments dating back to March 2014. Upon a reassessment, we determined that we should have accounted for these Warrants as liabilities instead of equity. This material weakness with regard to lacking sufficient technical resources also affected our ability to appropriately value and account for share based payment instruments with market-based vesting provisions under ASC 718, “Stock Compensation”We determined that we should have used a Monte Carlo simulation to value share based payment instruments with a market-based vesting condition. Given this material weakness, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2019.

 

Effective internal controls are necessary to provide reliable financial reports and to assist in the effective prevention of fraud. Any inability to provide reliable financial reports or prevent fraud could harm our business. We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies. In addition, we are required under the Sarbanes-Oxley Act of 2002 to report annually on our internal control over financial reporting. Any system of internal controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Accordingly, a material weakness increases the risk that the financial information we report contains material errors.

 

While we plan on addressing our material weakness as disclosed herein, elements of our remediation plan can only be accomplished over time and we can offer no assurance that these initiatives will ultimately have the intended effects. Any failure to maintain such internal controls could adversely impact our ability to report our financial results on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations or may lose confidence in our reported financial information. Likewise, if our financial statements are not filed on a timely basis as required by the SEC and The Nasdaq Stock Market, we could face severe consequences from those authorities. In either case, it could result in a material adverse effect on our business or have a negative effect on the trading price of our common stock. Further, if we fail to remedy this deficiency (or any other future deficiencies) or maintain the adequacy of our internal controls, we could be subject to regulatory scrutiny, civil or criminal penalties or shareholder litigation. We can give no assurance that the measures we have taken and plan to take in the future will remediate the material weakness identified or that any additional material weaknesses or restatements of our financial statements will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of those controls.

 

Further, in the future, if we cannot conclude that we have effective internal control over our financial reporting, or if our independent registered public accounting firm is unable to provide an unqualified opinion regarding the effectiveness of our internal control over financial reporting, investors could lose confidence in the reliability of our financial statements, which could lead to a decline in our stock price. Failure to comply with reporting requirements could also subject us to sanctions and/or investigations by the SEC, The Nasdaq Stock Market or other regulatory authorities.

 

Our financial condition and results of operations for fiscal 2020 may be adversely affected by the recent COVID-19 outbreak.

 

The Seattle area, including the location of our corporate headquarters and our media production facility and warehouse, was an early location of coronavirus cases in the U.S. We are currently following the recommendations of local health authorities to minimize exposure risk for our team members and visitors.  However, the scale and scope of this pandemic is unknown and the duration of the business disruption and related financial impact cannot be reasonably estimated at this time. While we have implemented specific business continuity plans to reduce the potential impact of COVID-19 and believe that we have sufficient inventory to meet previously forecasted demand for the next six to nine months, there is no guarantee that our continuity plan, once in place, will be successful or that our inventory will meet forecasted or actual demand.

 

We have already experienced certain disruptions to our business such as temporary closure of our offices and similar disruptions may occur for our customers or suppliers that may materially affect our ability to obtain supplies or other components for our products, produce our products or deliver inventory in a timely manner. This would result in lost product revenue, additional costs, or penalties, or damage our reputation. Similarly, COVID-19 could impact our customers and/or suppliers as a result of a health epidemic or other outbreak occurring in other locations which could reduce their demand for our products or their ability to deliver needed supplies for the production of our products. The extent to which COVID-19 or any other health epidemic may impact our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. Accordingly, COVID-19 could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

 

The restatement of our historical financial statements has consumed a significant amount of our time and resources and may continue to do so. 

 

As described herein, we have restated our Consolidated Financial Statements for the periods discussed herein. The restatement process was highly time and resource-intensive and involved substantial attention from management, as well as significant legal and accounting costs. Although we have now completed the restatement, we cannot guarantee that we will have no further inquiries from the SEC or The Nasdaq Stock Market regarding our restated Consolidated Financial Statements or matters relating thereto.

 

Any future inquiries from the SEC or The Nasdaq Stock Market as a result of the restatement of our historical financial statements will, regardless of the outcome, likely consume a significant amount of our resources in addition to those resources already consumed in connection with the restatement itself.

 

Further, many companies that have been required to restate their historical financial statements have experienced a decline in stock price and stockholder lawsuits related thereto.

 

Natural disasters, geopolitical unrest, war, terrorism, public health issues or other catastrophic events could disrupt the supply, delivery or demand of products, which could negatively affect our operations and performance.

 

We are subject to the risk of disruption by earthquakes, floods and other natural disasters, fire, power shortages, geopolitical unrest, war, terrorist attacks and other hostile acts, public health issues, epidemics or pandemics and other events beyond our control and the control of the third parties on which we depend. Any of these catastrophic events, whether in the United States or abroad, may have a strong negative impact on the global economy, our employees, facilities, partners, suppliers, distributors or customers, and could decrease demand for our products, create delays and inefficiencies in our supply chain and make it difficult or impossible for us to deliver products to our customers. A catastrophic event that results in the destruction or disruption of our data centers or our critical business or information technology systems would severely affect our ability to conduct normal business operations and, as a result, our operating results would be adversely affected.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 2.

PROPERTIES

 

Our material office and manufacturing leases are detailed below:

 

Location

 

Square Feet

 

Principal Use

 

Lease Expiration

Bothell, WA

 

 

32,106

 

Corporate headquarters, manufacturing, research and development, marketing and administrative offices

 

July 2021

Menlo Park, CA

 

 

1,250

 

Research and development, and administrative offices

 

July 2020

Albuquerque, NM

 

 

9,932

 

Manufacturing, research and development, and administrative offices

 

December 2021

Bruce Township, MI

 

 

106,998

 

Manufacturing, research and development, and administrative offices

 

November 2020

 

We consider the facilities to be in a condition suitable for their current uses. Because of anticipated growth in the business and due to the increasing requirements of customers or regulatory agencies, we may need to acquire additional space or upgrade and enhance existing space. We believe that adequate facilities will be available upon the conclusion of our leases.

  

ITEM 3.

LEGAL PROCEEDINGS 

 

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations. 

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is traded on the NASDAQ Capital Market exchange under the ticker symbol “BLFS.”

 

As of May 5, 2020, there were approximately 161 holders of record of our common stock. We have never paid cash dividends on our common stock and do not anticipate that any cash dividends will be paid in the foreseeable future.

 

See Item 12 for information regarding securities authorized for issuance under our equity compensation plans.

 

Issuer Repurchases of Equity Securities

 

Not applicable.

 

 

ITEM 6.

SELECTED CONSOLIDATED FINANCIAL DATA

 

Not applicable.

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  

This Form 10-K contains “forward-looking statements”. These forward-looking statements involve a number of risks and uncertainties. We caution readers that any forward-looking statement is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking statement. These statements are based on current expectations of future events. Such statements include, but are not limited to, statements about our products, including our newly acquired products, customers, regulatory approvals, the potential utility of and market for our products and services, our ability to implement our business strategy and anticipated business and operations, in particular following the 2019 acquisitions, future financial and operational performance, our anticipated future growth strategy, including the acquisition of synergistic cell and gene therapy manufacturing tools and services or technologies, or other companies or technologies, capital requirements, intellectual property, suppliers, joint venture partners, future financial and operating results, the impact of the COVID-19 pandemic, plans, objectives, expectations and intentions, revenues, costs and expenses, interest rates, outcome of contingencies, business strategies, regulatory filings and requirements, the estimated potential size of markets, capital requirements, the terms of any capital financing agreements and other statements that are not historical facts. You can find many of these statements by looking for words like “believes,” “expects,” “anticipates,” “estimates,” “may,” “should,” “will,” “could,” “plan,” “intend,” or similar expressions in this Form 10-K. We intend that such forward-looking statements be subject to the safe harbors created thereby. 

 

 

These forward-looking statements are based on the current beliefs and expectations of our management and are subject to significant risks and uncertainties. If underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results may differ materially from current expectations and projections. Factors that might cause such a difference include those discussed under “Risk Factors,” as well as those discussed elsewhere in the Form 10-K.

 

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-K or, in the case of documents referred to or incorporated by reference, the date of those documents.

 

All subsequent written or oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events, except as may be required under applicable U.S. securities law. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

 

Restatement

 

As discussed in the Explanatory Note and Note 2: “Restatement of Consolidated Financial Statements” to this Form 10-K, we are amending and restating our audited consolidated financial statements and related disclosures for the year ended December 31, 2018 presented in this Form 10-K along with our unaudited consolidated financial statements and related disclosures for the quarters ended March 31, 2018, June 30, 2018, September 30, 2018, March 31, 2019, June 30, 2019 and September 30, 2019 (see Note 16; “Quarterly Financial Information (Unaudited)” to our consolidated financial statements).

 

The following discussion and analysis of our financial condition and results of operations incorporates the restated amounts. For this reason, the data set forth in this section may not be comparable to discussion and data in our previously filed Annual Report on Form 10-K for the year ended December 31, 2018.

 

We are a life sciences company that develops and commercializes innovative technologies used in the manufacture, storage and transportation of biological drugs.

 

We develop, manufacture and market bioproduction tools to the cell and gene therapy industry, which are designed to improve quality and de-risk biologic manufacturing and delivery. Our products are used in basic and applied research, and commercial manufacturing of biologic based therapies by maintaining the health and function of biologic material during sourcing, manufacturing, storage, distribution, and patient delivery of cells and tissues.

 

Our current portfolio of bioprocessing tools includes our biopreservation media for the preservation of cells and tissues, automated thaw devices which provide controlled, consistent thawing of frozen biologics in vials and cryobags, a line of “smart”, cloud connected devices for transporting biologic payloads at a variety of temperature ranges and a full line of isothermal and liquid nitrogen freezers and accessories for freezing and storage of biologic samples.

 

We currently operate as one bioproduction tools business with product lines that serve the continuum in the biologic drug manufacturing and delivery process. We have a diversified portfolio of tools that focus on the freezing and thawing process of biologic drugs. We have in-house expertise in cryobiology and continue to capitalize on opportunities to maximize the value of our product platform for our extensive customer base through both organic growth innovations and acquisitions.

 

 

Astero Bio Corporation Acquisition

 

On April 1, 2019, BioLife completed the acquisition of all the outstanding shares of Astero. Astero’s ThawSTAR product line is comprised of a family of automated thawing devices for frozen cell and gene therapies packaged in cryovials and cryobags. The products improve the quality of administration of high-value, temperature-sensitive biologic therapies to patients by standardizing the thawing process and reducing the risks of contamination and overheating, which are inherent with the use of traditional water baths.

 

The Astero Acquisition was accounted for as a purchase of a business under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification No. (“ASC”) 805, “Business Combinations.” In connection with the Acquisition, the Company paid (i) a base payment in the amount of $12.5 million consisting of (x) an initial cash payment of $8.0 million at the closing of the transactions contemplated by the Purchase Agreement, subject to adjustment for working capital, net debt and transaction expenses, and (y) a deferred cash payment that was paid into escrow of $4.5 million payable upon the earlier of Astero meeting certain product development milestones or one year after the date of the Closing and (ii) earnout payments in calendar years 2019, 2020 and 2021 of up to an aggregate of $3.5 million, which shall be payable upon Astero achieving certain specified revenue targets in each year and a separate earnout payment of $5.0 million for calendar year 2021 which shall be payable upon Astero achieving a cumulative revenue target over the three-year period from 2019 to 2021.

 

SAVSU Technologies, Inc. Acquisition

 

On August 7, 2019, the Company consummated the acquisition (the “SAVSU Acquisition”) of the remaining shares of SAVSU Technologies, Inc., a Delaware corporation, pursuant to a Share Exchange Agreement (the “Exchange Agreement”) by and among the Company, SAVSU and SAVSU Origin LLC, a Delaware limited liability company (“Origin”). Pursuant to the Exchange Agreement, Origin agreed to transfer to the Company and the Company agreed to acquire from Origin 8,616 shares of common stock of SAVSU, representing the remaining 56% of the outstanding shares of SAVSU that the Company did not own, in exchange for 1,100,000 shares of common stock of the Company. On August 8, 2019, the Company completed the SAVSU Acquisition, and SAVSU became a wholly owned subsidiary of the Company.

 

SAVSU is a leading developer and supplier of next generation cold chain management tools for C&GT. The evo® cloud connect platform allows biologic products to be traced and tracked in real time. Our evo platform consists of rentable cloud connected shippers and evo technology tracking software provides real-time information on geolocation, payload temperature, ambient temperature, tilt of shipper, humidity, altitude, and real-time alerts when a shipper has been opened. Our internally developed evo software allows customers to customize alert notifications both in data measurements and user requirements. The evo Dry Vapor Shipper (“DVS”) is specifically marketed to C&GT companies. The evo DVS has improved form factor and ergonomics over the traditional dewar, including extended thermal performance, reduced liquid nitrogen recharge time, improved payload extractors and ability to maintain temperature for longer periods on its side. The evo DVS does not require to be shipped in a pallet format, enabling shipping on narrow-bodied aircraft which is not an option for competitors who use palletized shipments. Our integrated system of internal and external packing innovations reduces risk of payload breakage due to shock while in transportation.

 

The SAVSU Acquisition was accounted for as a purchase of a business under ASC 805, “Business Combinations.” The Company paid to Origin 1,100,000 shares of unregistered common stock totaling $19.9 million (based on a share price of $18.12 at the time of acquisition) for the 56% we did not previously own.

 

Custom Biogenic Systems, Inc. Acquisition

 

On November 10, 2019, we entered into an Asset Purchase Agreement, by and among the Company, Arctic Solutions, Inc., a Delaware corporation and wholly-owned subsidiary of the Company, and Custom Biogenic Systems, Inc., a Michigan corporation (“CBS Seller”), pursuant to which we agreed to purchase from the CBS Seller substantially all of CBS Seller’s assets, properties and rights (the “CBS Acquisition”). The CBS Seller, a privately held company with operations located near Detroit, Michigan, designs and manufactures liquid nitrogen laboratory freezers and cryogenic equipment and also offers a related cloud-based monitoring system that continuously assesses biologic sample storage conditions and alerts equipment owners if a fault condition occurs. The Acquisition closed on November 12, 2019.

 

In connection with the CBS Acquisition, we paid to CBS Seller (i) a base payment in the amount of $15.0 million, consisting of a cash payment of $11.0 million paid at the closing of the CBS Acquisition, less a cash holdback escrow of $550,000 to satisfy certain indemnification claims, and an aggregate number of shares of our common stock, with an aggregate fair value equal to $4.0 million, less a holdback escrow of shares of Common Stock with an aggregate value equal to $3.0 million to satisfy potential payments related to any product liability claims outstanding as of March 13, 2019 and (ii) potential earnout payments in calendar years 2020, 2021, 2022, 2023 and 2024 of up to an aggregate of, but not exceeding, $15.0 million payable to CBS Seller upon achieving certain specified revenue targets in each year for certain product lines.

 

The CBS acquisition was accounted for as a purchase of a business under FASB ASC Topic 805, “Business Combinations”. Under the acquisition method of accounting, the acquired assets and liabilities assumed from CBS were recorded as of the acquisition date, at their fair values, and consolidated with BioLife. The preliminary fair value of the net tangible assets acquired is $6.0 million, the preliminary fair value of the identifiable intangibles is $6.8 million, and the preliminary residual goodwill is $3.1 million. The fair value estimates required critical estimates, including, but not limited to, future expected cash flows, revenue and expense projections, discount rates, revenue volatility, and royalty rates. BioLife believes these estimates to be reasonable. Actual results may differ from these estimates.

 

Critical Accounting Policies and Estimates

 

We have identified the policies and estimates below as being critical to our business operations and the understanding of our results of operations. These policies require management’s most difficult, subjective or complex judgements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The impact of and any associated risks related to these policies on our business operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition,” including in the “Results of Operations” section, where such policies affect our reported and expected financial results. Although we believe that our estimates, assumptions, and judgements are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.

 

 

Revenue Recognition

 

We generate revenue from the sale of our products, primarily to customers within the C&GT market. Under ASC 606, “Revenue from Contracts with Customers,” revenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”). To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the expected value method or the most likely amount method, depending on the facts and circumstances relative to the contract. When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component or variable consideration as of and during the year ended December 31, 2019.

 

Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. The Company recognizes product revenue under the terms of each customer agreement upon transfer of control to the customer, which occurs at a point in time.

 

Inventories

 

We value inventory at the lower of cost or net realizable value, using the first-in first-out method. We review our inventory at least quarterly and record a provision for excess and obsolete inventory based on our estimates of expected product revenue volume, production capacity and expiration dates of raw materials, work-in-process and finished products. We write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value, and inventory in excess of expected requirements to cost of product revenue. Manufacturing of bioprocessing finished goods is done to order and tested for quality specifications prior to shipment.

 

A change in the estimated timing or amount of demand for our products could result in additional provisions for excess inventory quantities on hand. Any significant unanticipated changes in demand or unexpected quality failures could have a significant impact on the value of inventory and reported operating results. During all periods presented in the accompanying consolidated financial statements, there have been no material adjustments related to a revised estimate of inventory valuations.

 

Assets held for rent

 

Assets held for rent consists of all evo shippers and related components, in process of being assembled, and evo shippers and accessories complete and ready to be deployed and placed in service upon a customer order. Our customers rent the shippers per a rental agreement, which includes access to the evo.is cloud based tracking and information app. We retain ownership of the evo shippers and the evo tracking software platform. At the end of the rental agreement, the customer returns the shipper to the Company. Once an evo shipper is deployed and placed in service with a customer, we depreciate the cost of the evo shippers and related accessories over an estimated useful life of three years.

 

Business combinations

 

Amounts paid for acquisitions are allocated to the tangible and intangible assets acquired and liabilities assumed, if any, based on their fair values at the dates of acquisition. This purchase price allocation process requires management to make significant estimates and assumptions with respect to intangible assets and deferred revenue obligations. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions determined by management. Any excess of purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as any contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of comprehensive income. The fair value of contingent consideration includes estimates and judgments made by management regarding the probability that future contingent payments will be made, the extent of royalties to be earned in excess of the defined minimum royalties, etc. Management updates these estimates and the related fair value of contingent consideration at each reporting period based on the estimated probability of achieving the earnout targets and applying a discount rate that captures the risk associated with the expected contingent payments. To the extent our estimates change in the future regarding the likelihood of achieving these targets we may need to record material adjustments to our accrued contingent consideration. Changes in the fair value of contingent consideration are recorded in our consolidated statements of operations. We use the income approach to determine the fair value of certain identifiable intangible assets including customer relationships and developed technology. This approach determines fair value by estimating after-tax cash flows attributable to these assets over their respective useful lives and then discounting these after-tax cash flows back to a present value. We base our assumptions on estimates of future cash flows, expected growth rates, expected trends in technology, etc. We base the discount rates used to arrive at a present value as of the date of acquisition on the time value of money and certain industry-specific risk factors. We believe the estimated purchased customer relationships, developed technologies, trademark/tradename, patents, and in process research and development amounts so determined represent the fair value at the date of acquisition and do not exceed the amount a third party would pay for the assets.

 

 

Intangible Assets and Goodwill

 

Intangible assets

 

Intangible assets with a definite life are amortized over their estimated useful lives using the straight-line method and the amortization expense is recorded within intangible asset amortization in the consolidated statements of operations. Intangible assets and their related estimated useful lives are reviewed at least annually to determine if any adverse conditions exist that would indicate the carrying value of these assets may not be recoverable. More frequent impairment assessments are conducted if certain conditions exist, including a change in the competitive landscape, any internal decisions to pursue new or different technology strategies, a loss of a significant customer, or a significant change in the marketplace, including changes in the prices paid for the Company’s products or changes in the size of the market for the Company’s products. If impairment indicators are present, the Company determines whether the underlying intangible asset is recoverable through estimated future undiscounted cash flows. If the asset is not found to be recoverable, it is written down to the estimated fair value of the asset based on the sum of the future discounted cash flows expected to result from the use and disposition of the asset. If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life. The Company continues to believe that its definite-lived intangible assets are recoverable at December 31, 2019.

 

Goodwill

 

We test goodwill for impairment on an annual basis, and between annual tests if events and circumstances indicate it is more likely than not that the fair value of our goodwill is less than its carrying value. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and market conditions, including a decline in the Company’s market capitalization, a significant adverse change in legal factors, business climate or operational performance of the business, and an adverse action or assessment by a regulator. Goodwill is tested for impairment as of December 31st of each year, or more frequently as warranted by events or changes in circumstances mentioned above. Accounting guidance also permits an optional qualitative assessment for goodwill to determine whether it is more likely than not that the carrying value of a reporting unit exceeds its fair value. If, after this qualitative assessment, we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further quantitative testing would be necessary. A quantitative assessment is performed if the qualitative assessment results in a more likely than not determination or if a qualitative assessment is not performed. The quantitative assessment considers whether the carrying amount of a reporting unit exceeds its fair value, in which case an impairment charge is recorded to the extent the reporting unit’s carrying value exceeds its fair value. The Company operates as one reporting unit as of the goodwill impairment measurement date of December 31, 2019. As a result of our 2019 quantitative assessment, we concluded that goodwill does not need to be impaired as of December 31, 2019.

 

Contingent Consideration

 

We estimate the acquisition date fair value of the acquisition-related contingent consideration using various valuation approaches, including option pricing models and Monte Carlo simulations, as well as significant unobservable inputs, reflecting the Company’s assessment of the assumptions market participants would use to value these liabilities. The fair value of the contingent consideration is remeasured each reporting period, with any change in the value recorded in our consolidated statements of operations as change in fair value of contingent consideration.

 

Stock-based Compensation

 

We measure and record compensation expense using the applicable accounting guidance for share-based payments related to stock options, time-based restricted stock, and performance-based awards granted to our directors and employees. The fair value of stock options is determined by using the Black-Scholes option-pricing model. The fair value of market-based restricted stock awards is estimated, at the date of grant, using the Monte Carlo Simulation model. The Black-Scholes and Monte Carlo Simulation valuation models incorporate assumptions as to stock price volatility, the expected life of options or awards, a risk-free interest rate and dividend yield. In valuing our stock options and market-based stock awards, significant judgment is required in determining the expected volatility of our common stock and the expected life that individuals will hold their stock options prior to exercising. Expected volatility for stock options is based on the historical and implied volatility of our own common stock while the volatility for our market-based restricted stock awards is based on the historical volatility of our own stock and the stock of companies within our defined peer group. Further, our expected volatility may change in the future, which could substantially change the grant-date fair value of future awards and, ultimately, the expense we record. The fair value of restricted stock, including performance awards, without a market condition is estimated using the current market price of our common stock on the date of grant.

 

We expense stock-based compensation for stock options, restricted stock awards, and performance awards over the requisite service period. For awards with only a service condition, we expense stock-based compensation using the straight-line method over the requisite service period for the entire award. For awards with a market condition, we expense over the vesting period regardless of the value that the award recipients ultimately receive.

 

 

Provision for Income Taxes

 

We maintain a full valuation allowance on our net deferred tax assets. The assessment regarding whether a valuation allowance is required considers both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. In making this assessment, significant weight is given to evidence that can be objectively verified. In its evaluation, the Company considered its cumulative loss and its forecasted losses in the near-term as significant negative evidence. Based upon a review of the four sources of income identified within ASC 740, “Accounting for Income Taxes”, the Company determined that the negative evidence outweighed the positive evidence and a full valuation allowance on its assets will be maintained. The Company will continue to assess the realizability of its assets going forward and will adjust the valuation allowance as needed.

 

The Company determines its uncertain tax positions based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not to be sustained upon examination by the relevant income tax authorities. The Company is generally subject to examination by U.S. federal and local income tax authorities for all tax years in which loss carryforward is available.

 

The Company applies judgment in the determination of the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. As of December 31, 2019, the Company had no uncertain tax positions.

 

As of December 31, 2019, the Company had U.S. federal net operating loss (“NOL”) carryforwards of approximately $44.7 million, which is available to reduce future taxable income. Approximately $34.9 million of NOL will expire from 2020 through 2037, and approximately $9.8 million of NOL will be carried forward indefinitely. The NOL carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. Subsequent ownership changes may further affect the limitation in future years.  

 

Recent Accounting Standards Update

 

See Note 1: “Organization and Significant Accounting Policies – Recent Accounting Pronouncements,” to our consolidated financial statements included in this report for more information.

 

Results of Operations

 

The following discussion of the financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and the related footnotes thereto.

 

Revenue

 

In 2019, we acquired three companies which resulted in increased revenue diversification compared to prior years, in which nearly all revenue was derived from our biopreservation media product line. Although our revenues in 2019 were more diversified, both in terms of product and customer concentration, a trend we expect to see continue in 2020, we did realize quarterly fluctuations based on large customer ordering patterns, which is something we expect will continue in 2020.

 

Revenue for years ended December 31, 2019, and 2018 were comprised of the following:

 

   

Year Ended December 31,

(In thousands)

  2019(1)     2018    

Biopreservation media

  $ 23,358     $ 19,742    

Automated thawing

    1,184       ––    

evo shippers

    692       ––    

Freezers and accessories

    2,137       ––    

Total revenue

  $ 27,371     $ 19,742    

 

(1)

2019 revenue includes automated thawing revenue related to Astero from April 1, 2019 through December 31, 2019; evo shipper rental revenue related to SAVSU from August 8, 2019 through December 31, 2019; and freezer and accessory revenue related to CBS from November 12, 2019 through December 31, 2019.

 

For 2019, revenue increased by $7.6 million, or 39%, compared with 2018. The increase is due to the acquisitions throughout 2019, and an increase in product revenue of our biopreservation media products. Product revenue of our biopreservation media products in 2019 increased $3.6 million, or 18% compared with 2018. Our biopreservation media products continued to be adopted by customers in the C&GT market and we realized a higher selling price per liter in 2019 compared to 2018. Revenue is impacted by the relatively high degree of customer concentration, the timing of orders, the development efforts of our customers or end-users and regulatory approvals for biologics that incorporate our products, which may result in significant quarterly fluctuations. Such quarterly fluctuations are expected, but they may not be predictive of future revenue or otherwise indicative of a trend.

 

 

Costs and Operating Expenses

 

Total costs and operating expenses for years ended December 31, 2019 and 2018 were comprised of the following:

 

   

Year Ended December 31,

                 

(In thousands, except percentages)

 

2019

   

2018

   

$ Change

   

% Change

 

Cost of revenue

  $ 8,760     $ 6,217     $ 2,543       41

%

Research and development

    3,168       1,298       1,870       144

%

Sales and marketing

    4,701       2,615       2,086       80

%

General and administrative

    8,893       5,950       2,943       49

%

Intangible asset amortization

    1,079    

––

      1,079       ––

%

Acquisition costs

    940    

––

      940       ––

%

Change in fair value of contingent consideration

    50    

––

      50       ––

%

Total costs and operating expenses

  $ 27,591     $ 16,080     $ 11,511       72

%

 

Cost of Revenue

 

In 2019 cost of revenue increased $2.5 million, or 41% when compared to 2018, due primarily to the increase in revenue mentioned above. We expect that cost of product revenue may fluctuate in future quarters based on production volumes and product mix. The product lines acquired in 2019 have a higher cost of product revenue than our biopreservation media products.

 

Cost of product revenue as a percentage of revenue was 32%, and 31% for 2019 and 2018, respectively. Cost of product revenue in 2019 includes $289,000 in inventory step-up related amortization recorded in the purchase accounting of our Astero and CBS acquisitions. The increase in cost of product revenue as a percentage of revenue is a result of the inventory step-up, and higher costs of product revenue as a percentage of revenue for the product lines acquired in 2019 through the Astero, Savsu and CBS acquisitions.

 

Research and Development Expenses

 

During 2019 and 2018 research and development (“R&D”) expense consisted primarily of salaries and other personnel-related costs, consulting and external product development services.

 

R&D expense increased $1.9 million in 2019, or 144%, compared with 2018. The increase is primarily due to our three acquisitions in 2019 and stock compensation expense.

 

We expect our R&D expense to increase as we continue to expand, develop and refine the product lines we acquired in 2019.

 

Sales and Marketing Expenses

 

Sales and marketing expense (“S&M”) consists primarily of salaries, and other personnel-related costs, stock compensation expense, trade shows, sales commissions and advertising.

 

In 2019, S&M expense increased $2.1 million, or 80%, compared with 2018. The increase reflects the S&M costs we absorbed related to our acquisitions, stock compensation expense and an increase in our direct selling costs.

 

We expect S&M expense to increase, as we expand our direct selling efforts to support the broader product line offerings resulting from our 2019 acquisitions.  

    

General and Administrative Expenses

 

General and administrative (“G&A”) expense consists primarily of personnel-related expenses, non-cash stock-based compensation for administrative personnel and members of the board of directors, professional fees, such as accounting and legal, and corporate insurance.

 

In 2019, G&A expenses increased by $2.9 million, or 49%, compared with 2018. The increase reflects the assumption of G&A expenses related to our 2019 acquisitions, and the continued buildout of our administrative infrastructure, primarily through increased headcount and information technology expenditures, to support expected future growth and stock compensation expense.

 

We expect G&A expense to increase reflecting the infrastructure and costs related to supporting the larger expected enterprise created as a result of our 2019 acquisitions.

 

Intangible asset amortization expense

 

Amortization expense consists of charges related to the amortization of intangible assets associated with acquisitions, Astero, SAVSU and CBS in which we acquired definite-lived intangible assets.

 

Acquisition costs

 

Acquisition costs consist of legal, accounting, third-party valuations, and other due diligence costs related to our Astero, SAVSU and CBS acquisitions.

 

Change in fair value of contingent consideration

 

Change in fair value of contingent consideration consists of changes in estimated fair value of our potential earnouts related to our Astero acquisition.

 

 

Other Income and Expenses

 

Total other expenses for years ended December 31, 2019 and 2018 were comprised of the following:

 

   

Year Ended December 31,

                 

(In thousands, except percentages)

 

2019

   

2018

(restated)

   

$ Change

   

% Change

 

Change in fair value of warrant liability

  $ (12,835

)

  $ (28,271

)

  $ 15,436       55

%

Interest income (expense), net

    501       276       225       81

%

Other     (13 )     ––       (13 )     ––  
                                 

Loss on equity method investment – SAVSU

    (739

)

    (672

)

    (67

)

    (10

%)

Gain on acquisition - SAVSU     10,108       ––       10,108       ––  

Total other income (expenses)

  $ (2,978

)

  $ (28,667

)

  $ 25,689       90

%

 

Change in fair value of warrant liability. Reflects the changes in fair value associated with the periodic “mark to market” valuation of certain warrants that were issued in 2014. See Note 1: “Organization and Significant Accounting Policies” of our accompanying consolidated financial statements “Certain Warrants which have Features that may Result in Cash Settlement” for more information.

 

Interest Income. We earn interest on cash held in our money market account. We had a higher weighted average cash balance in our money market account for the year ended December 31, 2019 compared to 2018.

 

Interest Expense. Interest expense is related to equipment financing.

 

Loss on equity method investment. The non-cash loss associated with our proportionate share of the net loss in our investment in SAVSU prior to our acquisition of the remaining shares of SAVSU and subsequent consolidation of SAVSU in our financial statements.

 

Gain on acquisition of SAVSU. The non-cash gain associated with our equity investment in SAVSU due to the acquisition of the remaining shares of SAVSU and subsequent consolidation of SAVSU in our financial statements.

 

Liquidity and Capital Resources

 

On December 31, 2019, we had $6.4 million in cash and cash equivalents, compared to $30.7 million at December 31, 2018. The reduction in cash is primarily due to the cash payments associated with the 2019 acquisitions of Astero and CBS.  We acquired Astero on April 1, 2019 for $12.5 million in cash and contingent consideration of up to $8.5 million (which payment requirement has not been triggered or otherwise paid to date). We anticipate paying $484,000 for the earnout related to 2019 revenues of Astero in early 2020. On August 8, 2019, we acquired SAVSU for 1,100,000 shares of common stock. On November 12, 2019, we acquired CBS for $11.0 million in cash, $4.0 million in shares of our common stock, and up to $15.0 million in contingent consideration payable in cash or stock (which payment requirement has not been triggered or otherwise paid to date).

 

Based on our current expectations with respect to our future revenue and expenses, we believe that our current level of cash and cash equivalents will be sufficient to meet our liquidity needs for at least the next 12 months. However, if our revenues do not grow as expected, including as a result of the COVID-19 pandemic, and if we are not able to manage expenses sufficiently, we may be required to obtain additional equity or debt financing if our cash resources are depleted. Further, the Company may choose to raise additional capital through a debt or equity financing in an attempt to mitigate the heightened level of business uncertainty caused by the COVID-19 pandemic, or in order to pursue additional acquisition or strategic investment opportunities. Additional capital, if required, may not be available on reasonable terms, if at all. 

 

 

Cash Flows

 

   

Year Ended December 31,

         

(In thousands)

 

2019

    2018 (restated)    

$ Change

 

Operating activities

  $ 1,213     $ 2,348     $ (1,135

)

Investing activities

    (27,018

)

    (6,500

)

    (20,518

)

Financing activities

    1,596       28,146       (26,550

)

Net increase (decrease) in cash and cash equivalents

  $ (24,209

)

  $ 23,994     $ (48,203

)

 

Operating Activities

 

In 2019, our operating activities provided cash of $1.2 million reflecting a net loss of $1.7 million and non-cash charges totaling $6.6 million primarily related to depreciation, amortization, gain on acquisition of SAVSU, changes in fair value contingent consideration, income tax benefit related to the acquisition of SAVSU, fair value change in warrant liability and stock-based compensation charges. An increase in accounts receivable used $290,000 of cash and was primarily driven by the 39% year-to-date increase in revenues and an increase in inventory used $3.7 million to support future revenue. These cash items used for operating activities were offset by cash items provided by operating activities that included an increase in accounts payable and accrued liabilities of $1.4 million. The remaining cash used in operating activities resulted from unfavorable changes in various other working capital accounts.

 

For 2018, our operating activities provided cash of $2.3 million reflecting net loss of $25.0 million and non-cash charges totaling $30.7 million primarily related to fair value change in warrant liability, depreciation, amortization of deferred rent related to lease incentives, loss in our equity investment in SAVSU and stock-based compensation charges. An increase in receivables consumed $2.0 million of cash and was primarily driven by the 79% year-to-date increase in revenues. An increase in inventory levels to accommodate future revenue growth used $1.7 million of cash. The remaining cash flow provided by operations resulted from net favorable changes in various other working capital accounts.

 

Investing Activities

 

Our investing activities used $27.0 million of cash during 2019. We used $12.4 million, gained $1.3 million, and used $11.0 million in cash for the Astero, SAVSU, and CBS acquisitions, respectively. We also invested $1.0 million and $1.5 million in our strategic investments in iVexSol and Sexton Bio, respectively. Capital expenditures used $2.3 million as we continue to invest in our manufacturing facilities and increase in SAVSU’s assets held for rent.

 

For 2018, our investing activities used $6.5 million of cash, including $6.0 million for the purchase of additional shares of SAVSU. The remaining $500,000 was used for purchases of equipment.

 

Financing Activities

 

In 2019, cash provided by financing activities of $1.6 million included $1.8 million from the proceeds of warrant and stock option exercises.

 

In 2018, our financing activities provided $28.1 million of cash. We received proceeds of $20.0 million from the sale of stock to an institutional investor, $12.9 million from the proceeds of outstanding warrant and stock option exercises. We used $4.3 million in cash to redeem Series A preferred shares and $436,000 related to dividend payments on Series A preferred shares.

 

Period subsequent to year-end

 

The Seattle area, including the location of our corporate headquarters and our media production facility and warehouse, was at the epicenter of the coronavirus outbreak in the U.S. We are currently following the recommendations of local health authorities to minimize exposure risk for our team members and visitors. However, the scale and scope of this pandemic is unknown and the duration of the business disruption and related financial impact cannot be reasonably estimated at this time. While we are currently implementing specific business continuity plans to reduce the potential impact of COVID-19 and believe that we have sufficient inventory to meet previously forecasted demand for the next six to nine months, there is no guarantee that our continuity plan, once in place, will be successful or that our inventory will meet forecasted demand.

 

We have already experienced certain disruptions to our business such as temporary closure of our offices and similar disruptions may occur for our customers or suppliers that may materially affect our ability to obtain supplies or other components for our products, produce our products or deliver inventory in a timely manner. This would result in lost product revenue, additional costs, or penalties, or damage our reputation. Similarly, COVID-19 could impact our customers and/or suppliers as a result of a health epidemic or other outbreak occurring in other locations which could reduce their demand for our products or their ability to deliver needed supplies for the production of our products. The extent to which COVID-19 or any other health epidemic may impact our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. Accordingly, COVID-19 could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

We experienced an increase in demand for our biopreservation media products in the latter half of March 2020, which we attribute to our customers’ desire to secure inventory in the face of wide-spread uncertainty. However, the ultimate future impact of COVID-19 on our business is subject to significant uncertainty.

 

 

Off-Balance Sheet Arrangements

 

We do not have any special purpose entities or off-balance sheet financing arrangements.

 

Capital Requirements

 

Our future capital requirements will depend on many factors, including the following:

 

 

the expansion of our cell and gene therapy tools business;

 

the ability to sustain product revenue and profits of our cell and gene therapy products;
 

The degree to which we implement additional automated production equipment throughout our facilities;

 

our ability to acquire additional cell and gene therapy products;

 

the scope of and progress made in our research and development activities

 

the extent of any share repurchase activity; and

 

the success of any proposed financing efforts.

 

Absent acquisitions of additional products, product candidates or intellectual property, we believe our current cash balances are adequate to meet our cash needs for at least the next 12 months. We expect operating expenses in the year ending December 31, 2020 to increase as we continue to expand our C&GT tools business. We expect to incur continued spending related to the development and expansion of our product lines and expansion of our commercial capabilities for the foreseeable future. Our future capital requirements may include, but are not limited to, purchases of property, plant and equipment, the acquisition of additional cell and gene therapy products and technologies to complement our existing manufacturing capabilities, and continued investment in our intellectual property portfolio.

 

We actively evaluate various strategic transactions on an ongoing basis, including acquiring complementary products, technologies or businesses that would complement our existing portfolio. We continue to seek to acquire such potential assets that may offer us the best opportunity to create value for our shareholders. In order to acquire such assets, we may need to seek additional financing to fund these investments. If our available cash balances and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements, including because of any such acquisition-related financing needs or lower demand for our products, we may seek to sell common or preferred equity or convertible debt securities, enter into a credit facility or another form of third-party funding, or seek other debt funding. The sale of equity and convertible debt securities may result in dilution to our stockholders, and those securities may have rights senior to those of our common shares. If we raise additional funds through the issuance of preferred stock, convertible debt securities or other debt financing, these securities or other debt could contain covenants that would restrict our operations. Any other third-party funding arrangement could require us to relinquish valuable rights. We may require additional capital beyond our currently anticipated amounts. Further, the Company may choose to raise additional capital through a debt or equity financing in an attempt to mitigate the heightened level of business uncertainty caused by the COVID-19 pandemic. Additional capital may not be available on reasonable terms, if at all.

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Not applicable.

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Page No.

 

 

 

Reports of Independent Registered Public Accounting Firms

 

29

Consolidated Balance Sheets

 

31

Consolidated statements of Operations

 

32

Consolidated statements of Shareholders’ Equity

 

33

Consolidated statements of Cash Flows

 

34

Notes to Consolidated Financial Statements

 

35

 

 

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS

 

Shareholders and Board of Directors

BioLife Solutions, Inc.

Bothell, Washington

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheet of BioLife Solutions, Inc. (the “Company”) as of December 31, 2019, the related consolidated statements of operations, shareholders’ equity, and cash flows for the year ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated May 15, 2020 expressed an adverse opinion thereon.

 

Change in Accounting Principle

 

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of the Accounting Standards Codification Topic 842, “Leases.”

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

 

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

 

/S/ BDO USA, LLP

 

We have served as the Company's auditor since 2019.

 

Seattle, Washington

 

May 15, 2020

 

 

To the Board of Directors and Shareholders

BioLife Solutions, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of BioLife Solutions, Inc. ("the Company") as of December 31, 2018, the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended, and the related notes (collectively referred to as the "financial statements").  In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States.

 

Restatement of Previously Issued Financial Statements

 

As discussed in Note 2 to the financial statements, the Company has restated its 2018 financial statements to correct an error.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on the Company's financial statements based on our audits.  We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.  Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.  Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.  Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.  We believe that our audit provides a reasonable basis for our opinion.

 

/S/ PETERSON SULLIVAN LLP

 

We served as the Company's auditor since 2007 until 2019.

 

Seattle, Washington

March 15, 2019, except for the effects of the restatement discussed in Note 2 to the financial statements, as to which the date is May 15, 2020

 

 

 

BioLife Solutions, Inc.

Consolidated Balance Sheets

 

   

December 31,

   

December 31,

 

(In thousands, except per share and share data)

 

2019

   

2018

(restated)

 

Assets

               

Current assets

               

Cash and cash equivalents

  $ 6,448     $ 30,657  

Accounts receivable, trade, net of allowance for doubtful accounts of $68 and $0 at December 31, 2019 and 2018, respectively

    5,345       3,045  

Inventories

    10,972       3,509  

Prepaid expenses and other current assets

    1,348       353  

Total current assets

    24,113       37,564  
                 

Assets held for rent, net

    3,922    

––

 

Property and equipment, net

    5,572       1,319  

Operating lease right-of-use assets, net

    1,040    

––

 

Long-term deposits and other assets

    50       36  

Investments

    2,500    

––

 

Equity method investment in SAVSU

 

––

      6,548  

Intangible assets, net

    21,982    

––

 

Goodwill

    33,637    

––

 

Total assets

  $ 92,816     $ 45,467  
                 

Liabilities and Shareholders’ Equity

               

Current liabilities

               

Accounts payable

  $ 3,119     $ 720  

Accrued expenses and other current liabilities

    3,369       1,219  

Lease liabilities, operating, current portion

    804    

––

 

Contingent consideration, current portion

    377    

––

 

Total current liabilities

    7,669       1,939  
                 

Warrant liability

    39,602       28,516  

Contingent consideration, long term

    1,537    

––

 

Lease liabilities, operating, long-term

    550    

––

 

Other long-term liabilities

    4       380  

Total liabilities

    49,362       30,835  
                 

Commitments and Contingencies (Note 12)

               
                 

Shareholders’ equity

               
Preferred stock, $0.001 par value; 1,000,000 shares authorized, Series A, 4,250 shares designated, and 0 shares issued and outstanding at December 31, 2019 and 2018     ––       ––  

Common stock, $0.001 par value; 150,000,000 shares authorized, 20,825,452 and 18,547,406 shares issued and outstanding at December 31, 2019 and 2018, respectively

    21       19  

Additional paid-in capital

    143,485       113,008  

Accumulated deficit

    (100,052

)

    (98,395

)

Total shareholders’ equity

    43,454       14,632  

Total liabilities and shareholders’ equity

  $ 92,816     $ 45,467  

 

The accompanying Notes to consolidated Financial Statements are an integral part of these consolidated financial statements

 

 

 

BioLife Solutions, Inc.

Consolidated Statements of Operations

 

   

Years Ended December 31,

 
   

2019

   

2018

(restated)

 

(In thousands, except per share and share data)

               

Product revenue

  $ 26,844     $ 19,742  

Rental revenue

    527    

––

 

Total product and rental revenue

    27,371       19,742  

Costs and operating expenses:

               

Cost of product and rental revenue (exclusive of intangible assets amortization)

    8,760       6,217  

Research and development

    3,168       1,298  

Sales and marketing

    4,701       2,615  

General and administrative

    8,893       5,950  

Intangible assets amortization

    1,079    

––

 

Acquisition costs

    940    

––

 

Change in fair value of contingent consideration

    50    

––

 

Total operating expenses

    27,591       16,080  

Operating income (loss)

    (220

)

    3,662  
                 

Other income (expenses)

               

Change in fair value of warrant liability

    (12,835

)

    (28,271

)

Interest income

    506       281  

Interest expense

    (5

)

    (5

)

Other expenses

    (13

)

 

––

 

Loss from equity-method investment in SAVSU

    (739

)

    (672

)

Gain on acquisition of SAVSU

    10,108    

––

 

Total other expenses

    (2,978

)

    (28,667

)

                 

Net loss before provision for income taxes

    (3,198

)

    (25,005

)

Income tax (benefit)

    (1,541

)

 

––

 

Net loss

    (1,657

)

    (25,005

)

Less: Preferred stock dividends and accumulated deficit impact of preferred stock redemption           (339 )
Net income (loss) attributable to common stockholders     (1,657 )     (25,344 )
                 

Earnings per share attributable to common stockholders:

               

Basic and Diluted

  $ (0.09

)

  $ (1.56

)

Weighted average shares used to compute earnings per share attributable to common stockholders:

               

Basic and Diluted

    19,460,299       16,256,465  

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements

 

 

 

BioLife Solutions, Inc.

Consolidated Statements of Shareholders’ Equity

 

(In thousands, except share data)

 

Preferred
Stock
Shares –
Series A

   

Preferred
Stock
Amount –
Series A

   

Common
Stock
Shares

   

Common
Stock
Amount

   

Additional
Paid-in
Capital

   

Accumulated
Deficit

   

Total
Shareholders’
Equity

(Deficit)

 

Balance, December 31, 2017 (restated)

    4,250     $       14,021,422     $ 14     $ 63,505     $ (73,051

)

  $ (9,532

)

Series A preferred stock redemption

    (4,250

)

                      (4,241

)

    (9

)

    (4,250

)

Stock based compensation

                            1,519             1,519  

Stock issued for private equity transaction – Casdin Capital, net of legal fees of $85,000

                1,428,571       2       19,913             19,915  

Stock option exercises

                365,983             508             508  

Warrant exercises (restated)

                2,608,844       3       31,768             31,771  

Stock issued – on vested RSUs

                116,647                          

Stock issued for services

                5,939             36             36  

Preferred stock dividends

                                  (330

)

    (330

)

Net loss (restated)

                                  (25,005

)

    (25,005

)

Balance, December 31, 2018 (restated)

        $       18,547,406     $ 19     $ 113,008     $ (98,395

)

  $ 14,632  

Stock based compensation

                            3,043             3,043  

Shares issued in acquisitions

                1,334,219       1       23,931             23,932  

Stock option exercises

                697,010       1       1,180             1,181  

Warrant exercises

                121,000             2,323             2,323  

Stock issued – on vested RSUs

                125,817                          

Net loss

                                  (1,657

)

    (1,657

)

Balance, December 31, 2019

        $       20,825,452     $ 21     $ 143,485     $ (100,052

)

  $ 43,454  

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements

 

 

 

BioLife Solutions, Inc.

Consolidated Statements of Cash Flows

 

   

Years Ended December 31,

 

(In thousands)

 

2019

   

2018

(restated)

 

Cash flows from operating activities

               

Net loss

  $ (1,657

)

  $ (25,005

)

Adjustments to reconcile net income to net cash provided by operating activities

               

Depreciation

    718       338  

Amortization of intangible assets

    1,079        

Stock-based compensation

    3,043       1,519  
Non cash lease expense     512

 

     

Loss from equity method investment in SAVSU

    739       672  

Gain on acquisition of SAVSU

    (10,108

)

     

Change in fair value of contingent consideration

    50        

Deferred income tax benefit

    (1,541

)

     

Change in fair value of warrant liability

    12,835       28,271  

Other

    15       (127

)

                 

Change in operating assets and liabilities

               

Accounts receivable, trade, net

    (290

)

    (2,024

)

Inventories

    (3,777

)

    (1,662

)

Prepaid expenses and other current assets

    (704

)

    (104

)

Accounts payable

    768       (11

)

Accrued expenses and other current liabilities

    (246 )     497  

Other liabilities

    (81

)

     

Other 

    (142

)

    (16

)

Net cash provided by operating activities

    1,213       2,348  
                 

Cash flows from investing activities

               

Cash acquired in acquisition of SAVSU

    1,251        

Acquisition of Astero Bio, net of cash acquired

    (12,439

)

     

Payments related to the acquisition of CBS

    (11,000

)

     

Investment in Sexton

    (1,500

)

     

Investment in iVexSol convertible debt

    (1,000

)

     

Purchase of property and equipment

    (675

)

    (500

)

Purchase of assets held for lease

    (1,655

)

     

Investment in SAVSU

          (6,000

)

Net cash used in investing activities

    (27,018

)

    (6,500

)

                 

Cash flows from financing activities

               

Stock issue from private equity transaction

          20,000  

Proceeds from exercise of common stock options

    1,181       508  

Proceeds from exercise of warrants

    574       12,392  

Payments for redemption of preferred stock

          (4,250

)

Payments of preferred stock dividends

          (436

)

Other

    (159

)

    (68

)

Net cash provided by financing activities

    1,596       28,146  
                 

Net increase (decrease) in cash and cash equivalents

    (24,209

)

    23,994  

Cash and cash equivalents – beginning of year

    30,657       6,663  

Cash and cash equivalents – end of year

  $ 6,448     $ 30,657  

Non-cash investing and financing activities

               

Purchase of property and equipment not yet paid

  $ 29     $ 54  

Stock issued as consideration to acquire SAVSU

    19,932        

Stock issued as consideration to acquire assets of CBS

    4,000        

Stock issued for services in prior period included in liabilities at prior year-end

          36  

Reclassification of warrant liabilities to equity upon exercise

    1,749       19,378  

Receivables converted to equity investment in SAVSU

          150  

Purchase of equipment with debt

          18  

Legal fees for private equity transaction not yet paid

          44  

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

1.

Organization and Significant Accounting Policies

 

Business

 

BioLife Solutions, Inc. (“BioLife,” “us,” “we,” “our,” or the “Company”) is a leading developer, manufacturer and supplier of a portfolio of bioproduction tools including; proprietary biopreservation media, automated thawing devices, cloud-connected shipping containers, and freezer technology for cell and gene therapies. Our CryoStor® freeze media and HypoThermosol® hypothermic storage are optimized to preserve cells in the regenerative medicine market. These novel biopreservation media products are serum-free and protein-free, fully defined, and are formulated to reduce preservation-induced cell damage and death; offering commercial companies and clinical researchers significant improvement in shelf life and post-preservation viability and function. Our ThawSTAR® product line is comprised of a family of automated thawing devices for frozen cell and gene therapies packaged in cryovials and cryobags. These products improve the quality of administration of high-value, temperature-sensitive biologic therapies to patients by standardizing the thawing process and reducing the risks of contamination and overheating, which are inherent with the use of traditional water baths. Our evo shipping containers are innovative high-performance cloud-connected passive storage and transport containers for temperature-sensitive biologics and pharmaceuticals. Our cryogenic freezer technology, provides for controlled rate freezing and storage of biologic materials.

 

 

Use of estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Significant estimates and assumptions by management affect the Company’s allowance for doubtful accounts, the net realizable value of inventory, fair value of warrant liability, valuation of market based awards, valuations and purchase price allocations related to investments and business combinations, expected future cash flows including growth rates, discount rates, terminal values and other assumptions and estimates used to evaluate the recoverability of long-lived assets, estimated fair values of intangible assets and goodwill, amortization methods and periods, certain accrued expenses, share-based compensation, contingent consideration from business combinations, tax reserves and recoverability of the Company’s net deferred tax assets, and related valuation allowance.

 

The Company regularly assesses these estimates, however, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances.

 

Basis of Presentation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Astero Bio Corporation (“Astero” or “ThawStar” acquired on April 1, 2019), SAVSU Technologies, Inc. (“SAVSU” acquired on August 8, 2019), and Arctic Solutions, Inc. dba Custom Biogenic Systems (“CBS” acquired on November 12, 2019). All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The Company operates and manages its business as one reportable and operating segment, which is the business of bioproduction tools. The Company’s Chief Executive Officer and Chief Financial and Operating Officer, who are the chief operating decision makers, review financial information on an aggregate basis for purposes of allocating and evaluating financial performance. All long-lived assets are maintained in the United States of America.

 

Liquidity and capital resources

 

As of December 31, 2019, we had $6.4 million in cash and cash equivalents, compared to $30.7 million at December 31, 2018. The reduction in cash is primarily due to the cash payments associated with the 2019 acquisitions of Astero and CBS. We acquired Astero on April 1, 2019 for $12.5 million in cash and contingent consideration of up to $8.5 million (which payment requirement has not been triggered or otherwise paid to date). We anticipate paying $484,000 for the earnout related to 2019 revenues of Astero in early 2020. On August 8, 2019, we acquired SAVSU for 1,100,000 shares of common stock. On November 12, 2019, we acquired CBS for $11.0 million in cash, $4.0 million in shares of our common stock, and up to $15.0 million in contingent consideration payable in cash or stock (which payment requirement has not been triggered or otherwise paid to date).

 

Based on our current expectations with respect to our future revenue and expenses, we believe that our current level of cash and cash equivalents will be sufficient to meet our liquidity needs for at least the next 12 months. However, if our revenues do not grow as expected, including as a result of the COVID-19 pandemic, and if we are not able to manage expenses sufficiently, we may be required to obtain additional equity or debt financing if our cash resources are depleted. Further, the Company may choose to raise additional capital through a debt or equity financing in an attempt to mitigate the heightened level of business uncertainty caused by the COVID-19 pandemic, or in order to pursue additional acquisition or strategic investment opportunities. Additional capital, if required, may not be available on reasonable terms, if at all. 

 

Revenue recognition

 

To determine revenue recognition for contractual arrangements that we determine are within the scope of Financial Accounting Standards Board (“FASB”) Topic 606, “Revenue from Contracts with Customers”, we perform the following five steps: (i) identify each contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to our performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy the relevant performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. Our revenues are primarily generated from the sale of our biopreservation media, ThawStar, and freezer products. We generally recognize product revenue, including shipping and handling charges billed to customers, when we transfer control of our products to our customers (transfer of control generally occurs upon shipment of our product). Shipping and handling costs are classified as part of cost of product revenue in the statement of operations. We are not required to disclose the value of unsatisfied performance obligations as our contracts have a duration of one year or less.

 

The Company also generates revenue from the leasing of our evo cold chain systems, which are typically cloud-connected shippers with enabling cold chain cloud applications, to customers pursuant to rental arrangements entered into with the customer.  Revenue from the rental of cold chain systems is not within the scope of FASB ASC Topic 606 as it is within the scope of FASB ASC Topic 842, “Leases”. All customers leasing shippers currently do so under month-to-month rental arrangements. We account for these rental transactions as operating leases and record rental revenue on a straight-line basis over the rental term. These rental arrangements may contain both lease and non-lease components. We have elected to utilize the practical expedient to account for lease and non-lease components together as a single combined lease component as the timing and pattern of transfer are the same for the non-lease components and associated lease component and, the lease component, if accounted for separately, would be classified as an operating lease.

 

 

The following table presents revenues by product line:

 

   

Year Ended December 31,

 

(In thousands)

 

2019

   

2018

 

Biopreservation media

  $ 23,358     $ 19,742  

Automated thaw

    1,184        

evo shippers

    692        

Freezers and accessories

    2,137        

Total revenue

  $ 27,371     $ 19,742  

 

Risks and Uncertainties

 

The Company evaluates its operations periodically to determine if any risks and uncertainties exist that could impact its operations in the near term. The Company does not believe that there are any significant risks which have not already been disclosed in the consolidated financial statements. A loss of certain suppliers could temporarily disrupt operations, although alternate sources of supply exist for these items. The Company has mitigated these risks by building finished good and raw material inventory from certain key suppliers. See Note 17: “Subsequent Events” for more information regarding the impact of COVID-19.

 

Earnings per share

 

The Company considers its unexercised warrants and unvested restricted shares, which contain non-forfeitable rights to dividends, participating securities, and includes such participating securities in its computation of earnings per share pursuant to the two-class method. Basic earnings per share for the two classes of stock (common stock and warrants) is calculated by dividing net income by the weighted average number of shares of common stock and warrants outstanding during the reporting period. Diluted earnings per share is calculated using the weighted average number of shares of common stock plus the potentially dilutive effect of common equivalent shares outstanding determined under both the two class method and the treasury stock method, whichever is more dilutive.

 

The following table presents computations of basic and diluted earnings per share under the two class method:

 

   

Year Ended

 
   

December 31,

 

(In thousands, except share and earnings per share data)

 

2019

   

2018

(restated)

 

Numerator:

               

Net loss attributable to BioLife Solutions

  $ (1,657

)

  $ (25,005

)

Less: Preferred stock dividends and accumulated deficit impact of preferred stock redemption

          (339

)

Basic net loss attributable to common stockholders

    (1,657

)

    (25,344

)

                 

Denominator:

               

Basic and diluted weighted average shares outstanding

    19,460,299       16,256,465  
                 

Basic and diluted earnings per share attributable to common stockholders

  $ (0.09

)

  $ (1.56

)

 

The following table sets forth the number of shares excluded from the computation of diluted loss per share, as their inclusion would have been anti-dilutive:

 

   

Year Ended

 
   

December 31,

 
   

2019

   

2018

(restated)

 

Stock options and restricted stock awards

    2,564,456       2,819,306  

Warrants

    2,903,813       2,551,507  

Total

    5,520,495       5,370,813  

 

 

Cash and cash equivalents

 

Cash equivalents consist primarily of interest-bearing money market accounts. We consider all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents. We maintain cash balances that may exceed federally insured limits. We do not believe that this results in any significant credit risk. 

 

 

Inventories

 

Inventories relate to the Company’s cell and gene therapy products. The Company values inventory at cost or, if lower, net realizable value, using the first-in, first-out method. The Company reviews its inventories at least quarterly and records a provision for excess and obsolete inventory based on its estimates of expected product revenue volume, production capacity and expiration dates of raw materials, work-in-process and finished products. The Company writes down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value, and inventory in excess of expected requirements to cost of product revenue. A change in the estimated timing or amount of demand for the Company’s products could result in additional provisions for excess inventory quantities on hand. Any significant unanticipated changes in demand or unexpected quality failures could have a significant impact on the value of inventory and reported operating results. During all periods presented in the accompanying consolidated financial statements, there have been no material adjustments related to a revised estimate of inventory valuations. Work-in-process and finished products inventories consist of material, labor, outside testing costs and manufacturing overhead.

 

Accounts receivable

 

Accounts receivable consist of short-term amounts due from our customers (generally 30 to 90 days) and are stated at the amount we expect to collect. We establish an allowance for doubtful accounts based on our assessment of the collectability of specific customer accounts. Changes in accounts receivable are primarily due to the timing and magnitude of orders of our products, the timing of when control of our products is transferred to our customers and the timing of cash collections.

 

Accounts receivable are stated at principal amount, do not bear interest, and are generally unsecured. We provide an allowance for doubtful accounts based on an evaluation of customer account balances past due ninety days from the date of invoicing. Accounts considered uncollectible are charged against the established allowance.

 

Investments

 

We periodically invest in securities of private companies to promote business and strategic objectives. These investments are measured and recorded as follows:

 

Non-marketable equity securities are equity securities without a readily determinable fair value. At December 31, 2019 this investment is comprised of $1.5 million in Series A Preferred Stock in Sexton BioTechnologies, Inc. (“Sexton”) This investment is measured and recorded using a measurement alternative that measures the securities at cost minus impairment, if any. The preferred stock is also convertible at our option into common stock at a price of $0.33 per share.

 

As of December 31, 2019, management believes there are no indications of impairment for Sexton.

 

In September of 2019 the company invested $1.0 million in a convertible note receivable of iVexSol, Inc. (“iVexSol”).  The Company has made an irrevocable election to record this convertible note in its entirety at fair value utilizing the fair value option available under U.S. GAAP. The company believes that carrying this investment at fair value better portrays the economic substance of the investment.  Under the fair value option, gains and losses on the convertible note are included in unrealized gains/(losses) on investments within net earnings each reporting period. Gains/(losses) related to this convertible note were not material for the year ended December 31, 2019. The fair value of the Note on the date of investment was determined to be equal to its principal amount. Interest income related to this Note is recorded separately from other changes in its fair value within interest income each period.

 

The following table represents the difference between the fair value and the unpaid principal balance of the convertible note as of December 31, 2019:

 

Fair value as of

December 31, 2019

   

Unpaid principal balance as of December 31, 2019

   

Fair value carry amount (over)/under

 
  $1,000,000       $1,000,000       $—  

 

 

Equity Method Investments

 

Equity method investments at December 31, 2018, consist entirely of our investment in SAVSU. We accounted for our ownership in SAVSU using the equity method of accounting prior to our acquisition of the remaining ownership interest in SAVSU on August 8, 2019. This method states that if the investment provides us the ability to exercise significant influence, but not control, over the investee, we account for the investment under the equity method. Significant influence is generally deemed to exist if the Company’s ownership interest in the voting stock of the investee ranges between 20% and 50%, although other factors, such as representation on the investee’s board of directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment is recorded at its initial carrying value in the consolidated balance sheet and is periodically adjusted for capital contributions, dividends received and our share of the investee’s earnings or losses together with other-than-temporary impairments which are recorded as a component of other income (expense), net in the consolidated statements of operations. For the period prior to acquisition, January 1, 2019 through August 7, 2019, SAVSU’s net loss totaled $1.7 million. For the year ended December 31, 2018, SAVSU’s net loss totaled $1.9 million.

 

Property and equipment

 

Property and equipment are stated at cost and are depreciated using the straight-line method over estimated useful lives of three to ten years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the remaining lease term of the respective assets. Gains or losses on disposals of property and equipment are recorded within income from operations. Costs of repairs and maintenance are included as part of operating expenses unless they are incurred in relation to major improvements to existing property and equipment, at which time they are capitalized.

 

Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. If the sum of the expected future cash flows (undiscounted and before interest) from the use of the assets is less than the net book value of the asset an impairment could exist and the amount of the impairment loss, if any, will generally be measured as the difference between the net book value of the assets and their estimated fair values. There were no impairment losses recognized during the years ended December 31, 2019 and 2018.

 

Assets held for rent

 

Assets held for rent are carried at cost less accumulated depreciation. These assets consist of evo shippers and related components in production shippers complete and ready to be deployed and placed in service upon a customer order, shippers in the process of being assembled, and components available to build shippers. When the shipper is sent to our customers, we depreciate the cost of the shippers over its estimated useful life of three years.

 

 

Our customers rent the shippers per a rental agreement. Each agreement provides for fixed monthly rent. Rental revenue and fees are recognized over the rental term on a straight-line basis. We retain the ownership of the shippers and the evo tracking software platform. At the end of the rental agreement, the customer returns the shipper to the company.

 

Assets held for rent are reviewed for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. If the sum of the expected future cash flows (undiscounted and before interest) from the use of the assets is less than the net book value of the asset an impairment could exist and the amount of the impairment loss, if any, will generally be measured as the difference between the net book value of the assets and their estimated fair values. There were no impairment losses recognized during the years ended December 31, 2019 and 2018.

 

Lease Accounting

 

In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases: ASC Topic 842, “Leases” (“ASU 2016-02”) that replaces existing lease guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. Under the new guidance, leases will continue to be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated Statements of Operations. Lessor accounting is largely unchanged under ASU 2016-02.

 

We adopted ASU 2016-02 and related ASUs (collectively Accounting Standards Codification (“ASC”) 842) effective January 1, 2019 using the modified retrospective method and did not restate comparative periods. Consequently, periods before January 1, 2019 will continue to be reported in accordance with the prior accounting guidance, ASC 840, “Leases”. We elected the package of practical expedients, which permits us to retain prior conclusions about lease identification, lease classification and initial direct costs for leases that commenced before January 1, 2019. The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. We also elected the practical expedient to combine lease and non-lease components for all of our leases other than net lease real estate leases.

 

The adoption of this standard resulted in the recording of operating lease right-of-use assets of $1.3 million and short-term and long-term lease liabilities of $1.8 million as of January 1, 2019. The difference between right-of-use assets and lease liabilities relates to liabilities of $0.5 million for deferred rent and lease incentives liabilities that were included on our Balance Sheet prior to adoption of ASC Topic 842, “Leases”. These amounts were eliminated at the time of adoption and are included in the lease liabilities. Adoption of ASC Topic 842, “Leases” did not have a material impact on the Company’s net earnings and had no impact on cash flows.

 

Income taxes

 

We account for income taxes using an asset and liability method which generally requires recognition of deferred tax assets and liabilities for the expected future tax effects of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are recognized for the future tax effects of differences between tax bases of assets and liabilities, and financial reporting amounts, based upon enacted tax laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income. We evaluate the likelihood of realization of deferred tax assets and provide an allowance where, in management’s opinion, it is more likely than not that the asset will not be realized.

 

We determine any uncertain tax positions based on a determination of whether and how much of a tax benefit taken in the Company’s tax filings or positions is more likely than not to be sustained upon examination by the relevant income tax authorities.

 

Judgment is applied in the determination of the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We have not recorded any liabilities for uncertain tax positions or any related interest and penalties. Our tax returns are open to audit for years ending December 31, 2016 to 2019.

 

Advertising

 

Advertising costs are expensed as incurred and totaled $43,000 and $30,000 for the years ended December 31, 2019 and 2018, respectively.

 

 

Concentrations of credit risk and business risk

 

In the years 2019 and 2018, we derived approximately 15% of our revenue from one customer and 29% of our revenue from two customers, respectively. All revenue from foreign customers are denominated in United States dollars.

 

The following table represents the Company’s total revenue by geographic area (based on the location of the customer):

 

   

Year Ended December 31,

 

Revenue by customers’ geographic locations

 

2019

   

2018

 

United States

    69

%

    77

%

Canada

    16

%

    13

%

Europe, Middle East, Africa (EMEA)

    14

%

    8

%

Other

    1

%

    2

%

Total revenue

    100

%

    100

%

 

At December 31, 2019, two customers accounted for 25% of gross accounts receivable. At December 31, 2018, three customers accounted for 71% of gross accounts receivable. No other customers accounted for more than 10% of our gross accounts receivable. In the years 2019 and 2018, we derived approximately 74% and 88%, respectively, of our revenue from CryoStor products.

 

Research and development

 

Research and development costs are expensed as incurred.

 

Stock-based Compensation

 

We measure and record compensation expense using the applicable accounting guidance for share-based payments related to stock options, time-based restricted stock, and performance-based awards granted to our directors and employees. The fair value of stock options, including performance awards, without a market condition is determined by using the Black-Scholes option-pricing model. The fair value of restricted stock awards with a market condition is estimated, at the date of grant, using the Monte Carlo Simulation model. The Black-Scholes and Monte Carlo Simulation valuation models incorporate assumptions as to stock price volatility, the expected life of options or awards, a risk-free interest rate and dividend yield. In valuing our stock options, significant judgment is required in determining the expected volatility of our common stock and the expected life that individuals will hold their stock options prior to exercising. Expected volatility for stock options is based on the historical and implied volatility of our own common stock while the volatility for our restricted stock awards with a market condition is based on the historical volatility of our own stock and the stock of companies within our defined peer group. Further, our expected volatility may change in the future, which could substantially change the grant-date fair value of future awards and, ultimately, the expense we record. The fair value of restricted stock, including performance awards, without a market condition is estimated using the current market price of our common stock on the date of grant.

 

We expense stock-based compensation for stock options, restricted stock awards, and performance awards over the requisite service period. For awards with only a service condition, we expense stock-based compensation using the straight-line method over the requisite service period for the entire award. For awards with a market condition, we expense over the vesting period regardless of the value that the award recipients ultimately receive.

 

 

Business Combinations, Goodwill and Intangible Assets

 

Business Combinations

 

The Company accounts for business acquisitions using the acquisition method as required by FASB ASC Topic 805, “Business Combinations”.

 

The Company’s identifiable assets acquired and liabilities, including identified intangible assets, assumed in a business combination are recorded at their acquisition date fair values. The valuation requires management to make significant estimates and assumptions, especially with respect to long-lived and intangible assets. Critical estimates in valuing intangible assets include, but are not limited to:

 

 

future expected cash flows, including revenue and expense projections;

 

 

discount rates to determine the present value of recognized assets and liabilities and;

            

 

revenue volatility to determine contingent consideration using option pricing models

 

The Company’s estimates of fair value are based upon assumptions it believes to be reasonable, but that are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. While the Company uses its best estimates and assumptions to value assets acquired and liabilities assumed as of the acquisition date, the estimates are inherently uncertain and subject to refinement.

 

Goodwill is calculated as the excess of the acquisition price over the fair value of net assets acquired, including the amount assigned to identifiable intangible assets. Acquisition-related costs, including advisory, legal, accounting, valuation, and other costs, are expensed in the periods in which these costs are incurred. The results of operations of an acquired business are included in the consolidated financial statements beginning at the acquisition date.

 

The Company estimates the acquisition date fair value of the acquisition-related contingent consideration using various valuation approaches, including option pricing models, as well as significant unobservable inputs, reflecting the Company’s assessment of the assumptions market participants would use to value these liabilities. The fair value of the contingent consideration is remeasured each reporting period, with any change in the value recorded as other income or expense.

 

During the measurement period, which may be up to one year from the acquisition date, any refinements made to the fair value of the assets acquired, liabilities assumed, or contingent consideration are recorded in the period in which the adjustments are recognized.  Upon the conclusion of the measurement period or final determination of the fair value of the assets acquired, liabilities assumed, or contingent consideration, whichever comes first, any subsequent adjustments are recognized in the consolidated statements of operations.

 

Goodwill

 

Goodwill represents the excess of the purchase price over the net amount of identifiable assets acquired and liabilities assumed in a business combination measured at fair value.  Goodwill is not amortized but is tested for impairment at least annually. The Company reviews goodwill for impairment annually at the end of its fourth fiscal quarter and whenever events or changes in circumstances indicate that the fair value of a reporting unit may be less than its carrying amount (a triggering event).  The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test described in FASB ASC Topic 350, “Intangibles – Goodwill and Other”. The more likely than not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the quantitative goodwill impairment test is unnecessary and goodwill is considered to be unimpaired. However, if based on the qualitative assessment the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company will proceed with performing the quantitative goodwill impairment test.  In performing the quantitative goodwill impairment test, the Company determines the fair value of each reporting unit and compares it to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired. If the carrying value of a reporting unit exceeds its fair value, the Company records an impairment loss equal to the difference.  As of December 31, 2019, management believes there are no indications of impairment.

 

 

Intangible Assets

 

Intangible assets consist of developed technology, customer relationships, and tradenames and trademarks, resulting from the Company’s acquisitions. Intangible assets are recorded at fair value on the date of acquisition and amortized over their estimated useful lives on a straight-line basis. Intangible assets and their related useful lives are reviewed at least annually to determine if any adverse conditions exist that would indicate the carrying value of these assets may not be recoverable. More frequent impairment assessments are conducted if certain conditions exist, including a change in the competitive landscape, any internal decisions to pursue new or different technology strategies, a loss of a significant customer, or a significant change in the marketplace, including changes in the prices paid for the Company’s products or changes in the size of the market for the Company’s products. If impairment indicators are present, the Company determines whether the underlying intangible asset is recoverable through estimated future undiscounted cash flows. If the asset is not found to be recoverable, it is written down to the estimated fair value of the asset based on the sum of the future discounted cash flows expected to result from the use and disposition of the asset. If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life. The Company continues to believe that its definitive-lived intangible assets are recoverable at December 31, 2019.

 

Certain Warrants which have Features that may Result in Cash Settlement

 

Warrants that include cash settlement features are recorded as liabilities at their estimated fair value at the date of issuance and are remeasured at fair value each reporting period with the increase or decrease in fair value recorded in the Consolidated Statements of Operations. The warrants are measured at estimated fair value using the Black Scholes valuation model, which is based, in part, upon inputs for which there is little or no observable market data, requiring the Company to develop its own assumptions. Inherent in this model are assumptions related to expected stock-price volatility, expected life, risk-free interest rate and dividend yield. We estimate the volatility of our common stock at the date of issuance, and at each subsequent reporting period, based on historical volatility that matches the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on our historical rate, which we anticipate to remain at zero. The assumptions used in calculating the estimated fair value of the warrants represent our best estimates. However, these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and different assumptions are used, the warrant liability and the change in estimated fair value could be materially different. The following is our weighted average assumptions used in the Black Scholes calculations of the warrants:

 

   

Year Ended December 31,

 
   

2019

   

2018

 

Risk free interest rate

    1.9

%

    2.6

%

Expected dividend yield

    0.0

%

    0.0

%

Expected lives

    1.7       2.8  

Expected volatility

    70.3

%

    63.4

%

 

 

Recent accounting pronouncements 

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 includes amendments that aim to improve the effectiveness of fair value measurement disclosures. The amendments in this guidance modify the disclosure requirements on fair value measurements based on the concepts in FASB Concepts Statement, “Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements,” including the consideration of costs and benefits. The amendments become effective for the Company in the year ending December 31, 2020 and early adoption is permitted. The Company will adopt this guidance in the first quarter of 2020 and expects there to be no material impact on its consolidated financial statements.

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes.” ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, including, but not limited to, the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items, the exceptions related to the recognition of a deferred tax liability related to an equity method investment and the exception to methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. ASU 2019-12 becomes effective for the Company in the year ended December 31, 2021, including interim periods. The Company is considering early adoption in 2020. Due to the full valuation allowance on the Company’s net deferred tax assets, the Company is currently expecting no material impact from the adoption of ASU 2019-12 on its consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For Smaller Reporting Companies as defined by the SEC, ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is evaluating the impact of the guidance on its financial statements. 

 

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”, which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company will adopt the standard prospectively on January 1, 2020. The Company does not expect the adoption of ASU 2018-15 to result in a material change to its financial statements.

 

 

 

2.

Restatement of Consolidated Financial Statements

 

Background

 

In March 2014, pursuant to a registered public offering and note conversion agreement with certain note holders of the Company, the Company issued warrants (“Warrants”) to purchase common stock of the Company. These Warrants were initially classified as equity. The Warrants included a cash settlement feature that could arise in certain very limited events, therefore, the Company is now of the view that the Warrants should have been accounted for as a liability, recorded at fair value at the date of issuance, and marked to market at each reporting period. All changes in fair value should have been recorded in earnings. The company has evaluated the financial statement impact of changing the warrant classification from equity to liability for previously reported periods and concluded that this impact is material.

 

As a result, the amounts previously reported for the periods ended March 31, June 30, September 30 and December 31, 2018 and March 31, June 30, and September 30 2019 are restated in these financial statements, collectively known as the “Affected Periods.” See Note 16: “Quarterly Financial Information (Unaudited)” for more information on further restatements affecting quarterly periods.

 

Impact of the Restatement

 

The cumulative effect of these adjustments on the Company’s previously-reported accumulated deficit and total shareholders’ equity was an increase of $27.4 million and a decrease of $28.5 million, respectively, as of the beginning of the fiscal year ended December 31, 2018. These adjustments do not impact the amounts previously reported for the Company’s cash and cash equivalents, net cash used for operating activities, revenue or operating expenses in any of the Affected Periods.

 

All of the following adjustments relate to marking the Warrants to fair value at period end. The effects of the restatement on the following financial statement line items as of and for the periods indicated are summarized in the following tables:

 

   

Balance Sheet

 

(In thousands)

 

As Previously Reported

   

Adjustments

   

 

As Restated

 

As of December 31, 2018

                       

Warrant liability

  $     $ 28,516     $ 28,516  

Total liabilities

  $ 2,319     $ 28,516     $ 30,835  

Additional paid in capital

  $ 114,160     $ (1,152

)

  $ 113,008  

Accumulated deficit

  $ (71,031

)

  $ (27,364

)

  $ (98,395

)

Total shareholders’ equity

  $ 43,148     $ (28,516

)

  $ 14,632  

 

 

   

Statement of Operations

 

(In thousands, except per share data)

 

As Previously Reported

   

Adjustments

   

 

As Restated

 

For the year ended December 31, 2018

                       

Change in fair value of warrants

  $     $ (28,271

)

  $ (28,271

)

Total other expense

  $ (396

)

  $ (28,271

)

  $ (28,667

)

Net income (loss) before provision for income taxes   $ 3,266     $ (28,271 )   $ (25,005 )

Net income (loss)

  $ 3,266     $ (28,271

)

  $ (25,005

)

Net income (loss) attributable to common stockholders

  $ 2,927     $ (28,271

)

  $ (25,344

)

Basic net income (loss) per common share

  $ 0.18     $ (1.74

)

  $ (1.56

)

Diluted net income (loss) per common share

  $ 0.14     $ (1.70

)

  $ (1.56

)

 

 

   

Statement of Shareholders’ Equity / Deficit

 

(In thousands)

 

As Previously Reported

   

Adjustments

   

 

As Restated

 

From March 31, 2014 to January 1, 2018

                       

Additional paid-in capital

  $ 84,036     $ (20,531

)

  $ 63,505  

Accumulated deficit

  $ (73,958

)

  $ 907     $ (73,051

)

Total shareholders’ equity / (deficit)

  $ 10,092     $ (19,624

)

  $ (9,532 )

 

   

Statement of Cash Flows

 

(In thousands)

 

As Previously Reported

   

Adjustments

   

 

As Restated

 

For the year ended December 31, 2018

                       

Net income (loss)

  $ 3,266     $ (28,271

)

  $ (25,005

)

Change in fair value of warrant liability

  $     $ 28,271     $ 28,271  

 

 

 

3.

Fair Value Measurement

 

In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” (“ASC Topic 820”), the Company measures its cash and cash equivalents and investments at fair value on a recurring basis. The company also measures certain assets and liabilities at fair value on a non-recurring basis when applying acquisition accounting. ASC Topic 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC Topic 820 establishes a three-tier value fair hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1 – Observable inputs that reflect quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2 – Observable inputs other than quoted prices included in Level 1 for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

 

Level 3 – Unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

 

As of December 31, 2019, the Company valued the Astero and CBS contingent consideration and warrant liabilities at fair value. As of December 31, 2018, the Company valued warrant liabilities at fair value.

 

There were no remeasurements to fair value during the year ended December 31, 2019 of financial assets and liabilities that are not measured at fair value on a recurring basis.

 

The following tables set forth the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and December 31, 2018, based on the three-tier fair value hierarchy:

 

(In thousands)  

As of December 31, 2019

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                               

Money market accounts

  $ 6,448     $     $     $ 6,448  

Convertible debt held at fair value

                1,000       1,000  

Total

    6,448             1,000       7,448  

Liabilities:

                               

Contingent consideration - business combinations

                1,914       1,914  

Warrant liability

  $     $     $ 39,602     $ 39,602  

Total

                41,516       41,516  

 

As of December 31, 2018

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                               

Money market accounts

  $ 30,657     $     $     $ 30,657  

Liabilities:

                               

Warrant liability (restated)

  $     $     $ 28,516     $ 28,516  

 

 

The fair values of money market funds classified as Level 1 were derived from quoted market prices as active markets for these instruments exist. The fair values of investments and contingent consideration classified as Level 3 were derived from management assumptions (see Note 1 – “Organization and Significant Accounting Policies.”) There have been no transfers of assets or liabilities between the fair value measurement levels. The following table presents the changes in investments held at fair value which are measured using Level 3 inputs:

 

   

Year ended

December 31,

 

(In thousands)

 

2019

 

Beginning balance

  $  

Purchases

    1,000  

Change in fair value recognized in net income

     

Total

  $ 1,000  

 

The following table presents the changes in fair value of contingent consideration liabilities which are measured using Level 3 inputs:

 

   

Year ended

December 31,

 

(In thousands)

 

2019

 

Beginning balance

  $  

Additions

    2,347  

Change in fair value recognized in net income

    50  

Payments earned, reclassified to accrued liabilities

    (483

)

Total

  $ 1,914  

 

The following table presents the changes in fair value of warrant liabilities which are measured using Level 3 inputs:

 

(In thousands)

 

Year ended

December 31,

2019

   

Year ended

December 31,

2018

(restated)

 

Beginning balance (as restated)

  $ 28,516     $ 19,623  

Exercised warrants

    (1,749

)

    (19,378

)

Change in fair value recognized in net income

    12,835       28,271  

Ending balance

  $ 39,602     $ 28,516  

 

 

 

4.

Inventories

 

Inventories consist of the following at December 31, 2019 and 2018:

 

(In thousands)

 

2019

   

2018

 

Raw materials

  $ 2,979     $ 1,453  

Work in progress

    1,896       652  

Finished goods

    6,097       1,404  

Total

  $ 10,972     $ 3,509  

 

 

 

5.

Assets held for rent

 

Assets held for rent consist of the following at December 31, 2019:

 

 

(In thousands)

 

December 31,

2019

 

Shippers placed in service

  $ 3,073  

Accumulated depreciation

    (174

)

Net

    2,899  

Shippers and related components in production

    1,023  

Total

  $ 3,922  

 

Shippers and related components in production include shippers complete and ready to be deployed and placed in service upon a customer order, shippers in the process of being assembled, and components available to build shippers. We recognized $174,000 in depreciation expense related to assets held for rent during the year ended December 31, 2019.

 

 

 

6.

Leases

 

We lease approximately 32,106 square feet in our Bothell, Washington headquarters. The term of our lease continues until July 31, 2021 with two options to extend the term of the lease, each of which is for an additional period of five years, with the first extension term commencing, if at all, on August 1, 2021, and the second extension term commencing, if at all, immediately following the expiration of the first extension term. In accordance with the amended lease agreement, our monthly base rent is approximately $63,000 at December 31, 2019, with scheduled annual increases each August and again in October for the most recent amendment. We are also required to pay an amount equal to the Company’s proportionate share of certain taxes and operating expenses.

 

We lease approximately 1,250 square feet in our Menlo Park, California location. The term of our lease continues until July 1, 2020. In accordance with the lease agreement, the monthly base rent is approximately $5,000 at December 31, 2019. We are also required to pay an amount equal to the Company’s proportionate electrical expenses.

 

We lease approximately 9,932 square feet in our Albuquerque, New Mexico location. The term of our lease continues until December 31, 2021 with two options to extend the terms of the lease, each of which is for an additional period of three years, with the first extension term commencing, if at all, on December 1, 2021, and the second extension term commencing, if at all, December 1, 2024. In accordance with the lease agreement, the monthly base rent is approximately $9,000 at December 31, 2019, with a monthly increase if the term is extended.

 

We lease approximately 106,998 square feet in our Detroit, Michigan location. The term of our lease continues until November 30, 2020 with one option to extend the term of the lease, for an additional sixty months, with the extension term commencing, if at all, on November 12, 2020. These extension options are not accounted for under ASC Topic 842, “Leases” because we are not reasonably certain we will enter into the renewal options in their current terms and the current term is less than 12 months. With adequate notice prior to expiration of the option notice period, we have the right to purchase the premises for a purchase price that is mutually acceptable to landlord and tenant as agreed to by the parties on or before the expiration of the option notice period. In the event that the parties are unable to mutually agree on the option purchase price then each party shall obtain, at its sole cost and expense, an appraisal of the premises and the option purchase price will be the average of the two appraisals. For the avoidance of doubt, tenant’s right to elect to purchase the premises for the option purchase price shall terminate upon the expiration of the option notice period, but tenant shall not be obligated to close on the purchase of the premises prior to the expiration of the initial term. In accordance with the lease agreement, the monthly base rent is approximately $15,000 at December 31, 2019, with scheduled annual increases if the term is extended.

 

Operating leases recorded on our consolidated balance sheet are primarily related to our Bothell, Washington headquarters space lease and our Albuquerque, New Mexico, SAVSU, space lease. We have not included extension options in our ROU assets or lease liabilities as we are not reasonably certain we will enter into the renewal options in their current terms. Our Detroit, Michigan and Menlo Park, California lease are not recorded on our consolidated balance sheet as the term expires in one year or less.

 

Our financing lease is related to research equipment.

 

We used a weighted average discount rate of 6.5%, our market collateralized borrowing rate, and 8.1%, the weighted average implied interest on our leases, to determine our operating and financing lease liabilities, respectively. The weighted average remaining term of our operating and financing leases are 1.8 years and 1.2 years, respectively. We initially recognized $1.3 million in operating lease right of use assets and initially recognized $1.8 million in operating lease liabilities. Through the SAVSU acquisition we acquired $232,000 in operating lease right of use assets and acquired $232,000 in operating lease liabilities. The operating lease costs recognized in the year ended December 31, 2019 were $663,000, which consist of $612,000 in operating lease costs and $51,000 in short-term lease costs, we did not have any variable lease costs. The operating lease cash paid in the year ended December 31, 2019 of $778,000. Rent expense for the year ended December 31, 2018, was recognized under prior GAAP (ASC 840) and amounted to $809,000.

 

Maturities of our operating lease liabilities as of December 31, 2019 is as follows:

 

(In thousands)

 

Operating

Leases

   

Financing

Leases

 

2020

  $ 873     $ 15  

2021

    559       3  

Total lease payments

    1,432       18  

Less: interest

    (78

)

    (1

)

Total present value of lease liabilities

  $ 1,354     $ 17  

 

The following table provides the future minimum lease payments under noncancelable operating leases with lease terms in excess of one year at December 31, 2018 in accordance with ASC 840:

 

(In thousands)

 

Operating

Leases

 

2019

  $ 748  

2020

    764  

2021

    452  

Total

    1,964  

 

 

 

7.

Deferred Rent

 

We eliminated our deferred rent at January 1, 2019 as a result of the implementation of ASU 2016-02. Deferred rent consists of the following at December 31, 2018:

 

(In thousands)

 

2018

 

Landlord-funded leasehold improvements

  $ 1,125  

Less accumulated amortization

    (757

)

Total (current portion $130 December 31, 2018)

    368  

Straight line rent adjustment

    111  

Total deferred rent

  $ 479  

 

During the year ended December 31, 2018, the Company recorded $127,000 in deferred rent amortization of these landlord funded leasehold improvements.

 

Straight line rent adjustment for the year ended December 31, 2018 represents the difference between cash rent payments and the recognition of rent expense on a straight-line basis over the terms of the lease. 

 

 

8.

Goodwill and Intangible Assets

 

Goodwill

 

The following tabl