BIOLIFE SOLUTIONS INC - Quarter Report: 2019 September (Form 10-Q)

 

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BIOLIFE SOLUTIONS, INC.

 

FORM 10-Q

 

FOR THE QUARTER ENDED September 30, 2019

 

TABLE OF CONTENTS

 

PART I.  FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018	3
	Consolidated Statements of Operations (unaudited) for the three and nine month periods ended September 30, 2019 and 2018	4
	Consolidated Statements of Shareholders’ Equity (unaudited) for the three and nine month periods ended September 30, 2019 and 2018	5
	Consolidated Statements of Cash Flows (unaudited) for the nine month periods ended September 30, 2019 and 2018	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 4.	Controls and Procedures	25
PART II.	OTHER INFORMATION
Item 6.	Exhibits	25
	Signatures	26

 

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		September 30,				December 31,
(In thousands, except per share and share data)		2019 (unaudited)				2018
Assets
Current assets
Cash and cash equivalents		$	21,205			$	30,657
Accounts receivable, trade, net of allowance for doubtful accounts of $68 and $0 at September 30, 2019 and December 31, 2018, respectively			4,313				3,045
Inventories			5,694				3,509
Prepaid expenses and other current assets			855				353
Total current assets			32,067				37,564
Property and equipment
Leasehold improvements			1,599				1,284
Furniture and computer equipment			588				706
Manufacturing and other equipment			2,247				1,657
Subtotal			4,434				3,647
Less: Accumulated depreciation			(2,298	)			(2,328	)
Net property and equipment			2,136				1,319
Assets held for rent, net			2,976				—
Operating lease right-of-use assets			1,177				—
Investments			1,000				6,548
Intangible assets, net			16,485				—
Goodwill			28,351				—
Long-term deposits			36				36
Total assets		$	84,228			$	45,467
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable		$	1,570			$	720
Accrued expenses and other current liabilities			642				91
Accrued compensation			1,576				998
Lease liability - operating, current portion			771				—
Lease liability – financing, current portion			14				—
Deferred rent, current portion			—				130
Contingent consideration - current			371				—
Total current liabilities			4,944				1,939
Deferred rent, long-term			—				349
Long-term lease liability - operating			753				—
Long-term lease liability - financing			6				—
Other long-term liabilities			3				31
Contingent consideration – long-term			1,560				—
Total liabilities			7,266				2,319
Commitments and Contingencies (Note 11)
Shareholders’ equity
Common stock, $0.001 par value; 150,000,000 shares authorized, 20,344,825 and 18,547,406 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively			20				19
Additional paid-in capital			137,392				114,160
Accumulated deficit			(60,450	)			(71,031	)
Total shareholders’ equity			76,962				43,148
Total liabilities and shareholders’ equity		$	84,228			$	45,467

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		Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands, except per share and share data)		2019				2018				2019				2018
Revenue		$	6,604			$	5,293			$	19,075			$	14,286
Cost of revenue			2,084				1,606				5,690				4,507
Gross profit			4,520				3,687				13,385				9,779
Operating expenses
Research and development			1,309				312				2,420				983
Sales and marketing			1,259				725				3,035				1,978
General and administrative			2,258				1,455				6,579				4,199
Acquisition costs			291			––					538			––
Total operating expenses			5,117				2,492				12,572				7,160
Operating income (loss)			(597	)			1,195				813				2,619
Other income (expenses), net
Interest income			110				80				417				121
Interest expense			(1	)			(1	)			(5	)			(4	)
Loss on Disposal of Assets			(13	)		––					(13	)		––
Loss from equity-method investment in SAVSU			(291	)			(43	)			(739	)			(363	)
Gain on Acquisition of SAVSU			10,108			––					10,108			––
Total other income (expenses), net			9,913				36				9,768				(246	)
Income before provision for income taxes			9,316				1,231				10,581				2,373
Income taxes		––				––				––				––
Net income			9,316				1,231				10,581				2,373
Less: Preferred stock dividends		––					(80	)		––					(279	)
Net income attributable to common stockholders		$	9,316			$	1,151			$	10,581			$	2,094
Basic net income per common share		$	0.47			$	0.07			$	0.55			$	0.13
Diluted net income per common share		$	0.37			$	0.05			$	0.43			$	0.10
Basic shares used to compute earnings per share			19,735,364				17,273,412				19,071,722				15,529,026
Diluted shares used to compute earnings per share			25,343,112				23,656,633				24,705,424				21,051,219

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		Nine Months Ended September 30, 2019
(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
Balance, December 31, 2018			—			$	—				18,547,406			$	19			$	114,160			$	(71,031	)		$	43,148
Stock based compensation			—				—				—				—				1,907				—				1,907
Shares Issued as consideration in SAVSU Acquisition			—				—				1,100,000				1				19,931				—				19,932
Stock option/warrant exercises			—				—				590,737				—				1,394				—				1,394
Stock issued – on vested RSUs			—				—				106,682				—				—				—				—
Net income			—				—				—								—				10,581				10,581
Balance, September 30, 2019			—			$	—				20,344,825			$	20			$	137,392			$	(60,450	)		$	76,962

		Three Months Ended September 30, 2019
(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
Balance, June 30, 2019			—			$	—				18,898,609			$	19			$	116,013			$	(69,766	)		$	46,266
Stock based compensation			—				—				—				—				654				—				654
Shares Issued as consideration in SAVSU Acquisition			—				—				1,100,000				1				19,931				—				19,932
Stock option/warrant exercises			—				—				325,676				—				794				—				794
Stock issued – on vested RSUs			—				—				20,540				—				—				—				—
Net income			—				—				—				—				—				9,316				9,316
Balance, September 30, 2019			—			$	—				20,344,825			$	20			$	137,392			$	(60,450	)		$	76,962

		Nine Months Ended September 30, 2018
(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
Balance, December 31, 2017			4,250			$	—				14,021,422			$	14			$	84,036			$	(73,958	)		$	10,092
Series A preferred stock redemption			(1,063	)			—				—				—				(1,063	)			—				(1,063	)
Stock based compensation			—				—				—				—				1,131				—				1,131
Stock Issued for Private Equity Transaction – Casdin Capital, net of legal fees of $85,000			—				—				1,428,571				1				19,914				—				19,915
Stock option/warrant exercises			—				—				2,684,899				3				11,721				—				11,724
Stock issued – on vested RSUs			—				—				96,594				—				—				—				—
Stock issued for services			—				—				5,939				—				36				—				36
Preferred stock dividends			—				—				—				—				—				(279	)			(279	)
Net income			—				—				—				—				—				2,373				2,373
Balance, September 30, 2018			3,187			$	—				18,237,425			$	18			$	115,775			$	(71,864	)		$	43,929

		Three Months Ended September 30, 2018
(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
Balance, June 30, 2018			3,187			$	—				16,107,505			$	16			$	92,654			$	(73,015	)		$	19,655
Stock based compensation			—				—				—				—				383				—				383
Stock Issued for Private Equity Transaction – Casdin Capital, net of legal fees of $85,000			—				—				1,428,571				1				19,914				—				19,915
Stock option/warrant exercises			—				—				681,294				1				2,824				—				2,825
Stock issued – on vested RSUs			—				—				20,055				—				—				—				—
Preferred stock dividends			—				—				—				—				—				(80	)			(80	)
Net income							—				—				—				—				1,231				1,231
Balance, September 30, 2018			3,187			$	—				18,237,425			$	18			$	115,775			$	(71,864	)		$	43,929

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		Nine Month Period Ended September 30,
(In thousands)		2019				2018
Cash flows from operating activities
Net income		$	10,581			$	2,373
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation			373				245
Loss on disposal of property and equipment			13				—
Stock-based compensation expense			1,907				1,131
Amortization of deferred rent related to lease incentives							(95	)
Amortization of operating lease liability			(132	)			—
Interest expense – finance type lease			2				—
Loss from equity method investment in SAVSU			739				363
Gain on acquisition of SAVSU			(10,108	)			—
Amortization of intangible assets			465				—
Change in operating assets and liabilities
(Increase) Decrease in
Accounts receivable, trade			(372	)			(1,678	)
Inventories			(1,730	)			(1,064	)
Prepaid expenses and other current assets			(272	)			(49	)
Other assets, net			(87	)			—
Increase (Decrease) in
Accounts payable			377				343
Accrued compensation and other current liabilities			558				205
Other liabilities			(98	)			(11	)
Net cash provided by operating activities			2,216				1,763
Cash flows from investing activities
Cash acquired on acquisition of SAVSU			1,251				—
Payments related to the Astero Bio Acquisition, net of cash acquired			(12,439	)			—
Investment in iVexSol			(1,000	)			—
Investment in SAVSU			—				(6,000	)
Purchase of property and equipment			(356	)			(339	)
Purchase of Assets Held for Rent			(453	)			—
Net cash used in investing activities			(12,997	)			(6,339	)
Cash flows from financing activities
Proceeds from private equity transaction			—				20,000
Payment of costs related to Stock Issuances			(44	)			(43	)
Payments on equipment loan			(12	)			(8	)
Payments on finance lease obligations			(9	)			(10	)
Proceeds from exercise of common stock options and warrants			1,394				11,724
Payments of preferred stock dividends			—				(306	)
Payments for redemption of preferred stock			—				(1,063	)
Net cash provided by financing activities			1,329				30,294
Net increase (decrease) in cash and cash equivalents			(9,452	)			25,718
Cash and cash equivalents - beginning of period			30,657				6,663
Cash and cash equivalents - end of period		$	21,205			$	32,381
Non-cash investing and financing activities
Series A preferred stock dividends accrued not yet paid		$	—			$	80
Stock issued for services provided in prior period included in liabilities at year-end			—				36
Receivables converted to equity investment in SAVSU			—				150
Purchase of equipment with debt			—				18
Purchase of property and equipment not yet paid			146				49
Financing costs not yet paid			53				—
Stock Issued as consideration to acquire SAVSU		$	19,932			$	—

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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 and automated thawing products for cell and gene therapies. Our CryoStor^® freeze media and HypoThermosol^® hypothermic storage and shipping media are highly valued 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 products 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 recent acquisition, SAVSU Technologies, Inc. (“SAVSU”), which we purchased the remaining 56% of equity we did not previously own in August 2019, designs, manufactures and markets integrated, innovative high-performance cloud-connected passive storage and transport containers and enabling cold chain cloud applications for temperature-sensitive biologics and pharmaceuticals.

 

Basis of Presentation

 

We have prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Pursuant to these rules and regulations, we have condensed or omitted certain information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments) necessary to fairly present our financial position, results of operations and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full year. These consolidated financial statements and accompanying notes should be read in conjunction with the financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2018 on file with the SEC.

 

Changes in Significant Accounting Policies

 

The following significant accounting policies have been added or updated since our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Business Combinations

 

The Company’s identifiable assets acquired and liabilities 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:

 

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future expected cash flows, including revenue and expense projections;

 

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

            

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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.

 

Goodwill is calculated as the excess of the purchase 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 Financial Accounting Standards Board (“FASB”)  Accounting Standards Codification (“ASC”) Topic 350. 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 September 30, 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.

 

Assets held for rent

 

Assets held for rent consist of SAVSU 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. Our customers rent the shippers under a rental agreement. We retain the right to the shippers and the evo tracking software platform. At the end of the rental agreement, the customer returns the shipper to the Company. When the shipper is sent to our customers, we deprecate the cost of the shippers over its estimated useful life of three years.

 

Revenue

 

We account for revenue related to the rental of SAVSU shippers under the accounting standard for leases as the customer has the right to use the asset over a period of time under a rental agreement. We record revenue ratably over the rental term.

 

Significant Accounting Policies Update

 

In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases: Topic 842 (“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 Statements of Operations. Lessor accounting is largely unchanged under ASU 2016-02.

 

 

We adopted ASU 2016-02 and related ASUs (collectively ASC 842) effective January 1, 2019 using the additional transition option for 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 842. These amounts were eliminated at the time of adoption and are included in the lease liabilities. Adoption of ASC 842 did not have a material impact on the Company’s net earnings and had no impact on cash flows.

 

Principles of Consolidation

 

The consolidated financial statements for the three and nine months ended September 30, 2019 include the accounts of the Company, as of April 1, 2019, its wholly-owned subsidiary, Astero Bio Corporation (“Astero”) and, as of August 8, 2019, its wholly-owned subsidiary, SAVSU. All intercompany balances and transactions have been eliminated in consolidation. The acquisition of Astero closed on April 1, 2019 and the acquisition of SAVSU closed on August 8, 2019, thus the financial statements for the three and nine months ended September 30, 2018 and the balance sheet as of December 31, 2018, only include accounts of the Company.

 

Investments

 

Investments at September 30, 2019, consist entirely of a $1.0 million convertible note receivable from iVexSol. We account for our $1.0 million convertible debt in iVexSol under the cost method of accounting. This investment is reported at cost net of any impairment losses.

 

Equity Method Investments

 

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, during the three and nine months ended September 30, 2019, SAVSU’s net loss totaled $0.7 million and $1.7 million, respectively which our ownership resulted in a $0.3 million and $0.7 million loss, respectively. For the three and nine months ended September 30, 2018, SAVSU’s net loss totaled $16,000 and $1.1 million, respectively, of which our ownership resulted in a $43,000 and $0.4 million loss, respectively.

 

Concentrations of credit risk and business risk

 

In the three months ended September 30, 2019, we derived approximately 33% of our product revenue from three customers and in the nine months ended September 30, 2019, we derived approximately 17% of our revenue from one customer. In the three months ended September 30, 2018, we derived approximately 41% of our product revenue from three customers and in the nine months ended September 30, 2018, we derived approximately 28% of our revenue from two customers. No other customer accounted for more than 10% of revenue in the three and nine months ended September 30, 2019 or 2018. In the three months ended September 30, 2019 and 2018, we derived approximately 81% and 90%, of our revenue from CryoStor products, respectively. In each of the nine months ended September 30, 2019 and 2018, we derived approximately 84% and 88%, of our revenue from CryoStor products, respectively. At September 30, 2019, one customers accounted for approximately 11% of total gross accounts receivable. At December 31, 2018, three customers accounted for approximately 71% of total gross accounts receivable. 

 

Revenue from customers located in Canada represented 12% and 17% and in all other foreign countries represented 11% and 14% of total revenue during the three and nine months ended September 30, 2019, respectively. Revenue from customers located in Canada represented 15% and 13% and in all other foreign countries represented 8% and 10% of total revenue during the three and nine months ended September 30, 2018, respectively. All revenue from foreign customers is denominated in United States dollars.

 

Recent Accounting Pronouncements

 

There have been no new accounting pronouncements not yet effective that have significance, or potential significance, to our Financial Statements. 

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2.	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 short-term investments at fair value on a recurring basis. 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 September 30, 2019, the Company valued the Astero contingent consideration at fair value. As of December 31, 2018, the Company did not have liabilities that are measured at fair value.

 

The following tables set forth the Company’s financial assets measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018, based on the three-tier fair value hierarchy:

 

 

 

 

The fair values of cash and cash equivalents classified as Level 1 were derived from quoted market prices as active markets for these instruments exist. The fair value of contingent consideration classified as Level 3 determined using the option pricing model based on the most recent guidance from the Appraisal Foundation. There was no change in contingent consideration from the acquisition date to September 30, 2019, during the three and nine months ended September 30, 2019. The Company has no level 2 or level 3 financial assets. The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2019 and the twelve months ended December 31, 2018. 

 

3.	Business Combinations

 

On August 8, 2019, we closed the acquisition of SAVSU pursuant to a Share Exchange Agreement. Pursuant to the Share Exchange Agreement, SAVSU Origin, LLC (“the Seller”) agreed to transfer to the us and we agreed to acquire from the Seller 8,616 shares of common stock of SAVSU, representing the remaining 56% of the outstanding shares of SAVSU that we did not previously own, in exchange for 1,100,000 shares of BioLife common stock. As a result of the acquisition, SAVSU became a wholly-owned subsidiary on August 8, 2019, the acquisition date.

 

Please see footnote 3 to our consolidated financial statements included in our 10-Q for the quarter ended June 30, 2019 for information related to our Astero business combination.

 

Consideration transferred

 

The SAVSU acquisition was accounted for as a purchase of a business under FASB ASC Topic 805, “Business Combinations”. The acquisition of 56% of SAVSU was funded through a transfer of 1,100,000 shares of BioLife common stock, which had a fair value of $18.12 per share or $19.9 million at time of closing. The total value of 100% of SAVSU consisting of the fair value of the stock issued and the fair value of our existing investment in SAVSU was $35.8 million at time of closing. Prior to the acquisition, we accounted for our investment of SAVSU using the equity method of accounting which resulted in a recorded book value of $5.8 million at the acquisition date. We remeasured to fair value the equity interest in SAVSU held immediately before the business combination. The fair value of our equity interest was determined to be $15.9 million on our existing 44% ownership based on the fair value of shares transferred at the time of acquisition for the 56% we did not previously own. As a result, we recorded a non-operating gain of $10.1 million.

 

Under the acquisition method of accounting, the assets acquired and liabilities assumed from SAVSU were recorded as of the acquisition date, at their respective fair values, and consolidated with those of BioLife. The fair value of the net tangible assets acquired is estimated to be approximately $4.6 million, the fair value of the intangible assets acquired is estimated to be approximately $12.4 million, and the residual goodwill is estimated to be approximately $18.8 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.

 

 

Total consideration recorded for the acquisition of SAVSU is as follows (amounts in thousands):

 

 

This stock consideration plus the fair value of our existing equity investment in SAVSU of $15.9 million results in the total purchase price for accounting purposes of $35.8 million. Transaction costs related to the acquisition are expensed as incurred and are not included in the calculation of consideration transferred. The Company incurred $116,000 in transaction costs in each of the three and nine months ended September 30, 2019.

 

Fair Value of Net Assets Acquired

 

The table below represents the purchase price allocation to the net assets acquired based on their estimated fair values (amounts in thousands). We may make appropriate adjustments to the fair value measurements of the intangible assets and residual goodwill, if any, as additional information is received including finalization of third-party valuations prior to the completion of the measurement period, which is up to one year from the acquisition date. Such amounts were estimated using the most recent financial statements from SAVSU as of August 7, 2019.

 

 

The fair value of SAVSU’s identifiable intangible assets and estimated useful lives have been preliminary estimated as follows (amounts in thousands):

 

 

Fair value measurement methodologies used to calculate the value of any asset can be broadly classified into one of three approaches, referred to as the cost, market and income approaches. In any fair value measurement analysis, all three approaches must be considered, and the approach or approaches deemed most relevant will then be selected for use in the fair value measurement of that asset. The fair value of identifiable intangible assets was determined primarily using variations of the “income approach,” which is based on the present value of the future after-tax cash flows attributable to each identifiable intangible asset. The fair value of assets held for rent and property, plant and equipment was determined using both the “cost approach” and the “market approach”.

 

Some of the more significant assumptions inherent in the development of intangible asset fair values, from the perspective of a market participant, include, but are not limited to (i) the amount and timing of projected future cash flows (including revenue and expenses), (ii) the discount rate selected to measure the risks inherent in the future cash flows, (iii) the assessment of the asset’s life cycle, and (iv) the competitive trends impacting the asset.

 

These preliminary estimates of fair value and estimated useful lives may be different from the amounts included in the final acquisition accounting, and the difference could have a material impact on the accompanying unaudited pro forma condensed combined financial statements.

 

 

Acquired Goodwill

 

The goodwill of $18.8 million represents future economic benefits expected to arise from synergies from combining operations and commercial organizations to increase market presence and the extension of existing customer relationships. Substantially all of the goodwill recorded is not expected to be deductible for income tax purposes.

 

Revenue, Net Income and Pro Forma Presentation

 

The Company recorded revenue from SAVSU of $211,000 and a net loss of $676,000 in its consolidated statements of operations for the three and nine months ended September 30, 2019. The Company has included the operating results of SAVSU in its consolidated statements of operations since the August 8, 2019 acquisition date. The following pro forma financial information presents the combined results of operations of BioLife, SAVSU and recently acquired AsteroBio on April 1, 2019, as if the acquisitions had occurred on January 1, 2018 after giving effect to certain pro forma adjustments. The pro forma adjustments reflected herein include only those adjustments that are directly attributable to the SAVSU and Astero acquisitions, factually supportable and have a recurring impact. These pro forma adjustments for the nine months ended September 30, 2019 and 2018 include a $1.0 million and $1.5 million net increase in amortization expense, respectively, to record amortization expense for the $17.0 million of acquired identifiable intangible assets, adjustments to stock-based compensation of $147,000 and $396,000, respectively, and $116,000 and $210,000, respectively, for salary increases related to employment agreements signed in conjunction with the acquisitions. In addition, acquisition-related transaction costs of $538,000 and a $155,000 purchase accounting adjustment to record inventory at net realizable value and the $10.1 million gain on acquisition of SAVSU were excluded from pro forma net income for the nine months ended September 30, 2019. The pro forma financial information does not reflect any adjustments for anticipated expense savings resulting from the acquisitions and is not necessarily indicative of the operating results that would have actually occurred had the transactions been consummated on January 1, 2018 or of future results. Dilutive earnings per share has been omitted as common stock equivalents are anti-dilutive due to the Company’s pro forma net losses:

 

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4.

Inventory

 

Inventory consists of the following at September 30, 2019 and December 31, 2018:

 

 

5.	Assets held for rent

 

Assets held for rent consist of the following at September 30, 2019:

 

 

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.

 

6.	Deferred Rent

 

Deferred rent consists of the following at December 31, 2018. We eliminated our deferred rent at January 1, 2019 as a result of the implementation of ASU 2016-02 (see Note 13):

 

 

During the three and nine month periods ended September 30, 2019, the Company recorded no deferred rent amortization of landlord funded leasehold improvements. During the three and nine month periods ended September 30, 2018, the Company recorded $32,000 and $95,000, respectively, in deferred rent amortization of these landlord funded leasehold improvements.

 

Straight line rent adjustment for the three and nine months ended September 30, 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. 

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7.	Share-based Compensation

 

Service Vesting-Based Stock Options

 

The following is a summary of service vesting-based stock option activity for the nine month period ended September 30, 2019 and the status of service vesting-based options outstanding at September 30, 2019:

 

 

We recognized stock compensation expense related to service vesting-based options of $65,000 and $147,000 during the three months ended September 30, 2019 and 2018, respectively, and $305,000 and $449,000 during the nine months ended September 30, 2019 and September 30, 2018, respectively. As of September 30, 2019, there was $25.0 million of aggregate intrinsic value of outstanding service vesting-based stock options, including $22.8 million of aggregate intrinsic value of exercisable service vesting-based stock options. Intrinsic value is the total pretax intrinsic value for all “in-the-money” options (i.e., the difference between the Company’s closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number of shares) that would have been received by the option holders had all option holders exercised their options on September 30, 2019. This amount will change based on the fair market value of the Company’s stock. Intrinsic value of service vesting-based awards exercised during the three months ended September 30, 2019 and 2018 was $1.7 million and $2.1 million, respectively, and during the nine months ended September 30, 2019 and 2018 was $5.2 million and $3.1 million, respectively. There were no service based-vesting options granted during the nine months ended September 30, 2019 and 2018. The weighted average remaining contractual life of service vesting-based options outstanding and exercisable at September 30, 2019 is 5.1 years and 5.1 years, respectively. Total unrecognized compensation cost of service vesting-based stock options at September 30, 2019 of $213,000 is expected to be recognized over a weighted average period of 1.2 years.

 

 

Performance-based Stock Options

 

The Company’s Board of Directors implemented a Management Performance Bonus Plan for 2017. Based on achieving varying levels of specified revenue for the year ended December 31, 2017, up to 1,000,000 options to purchase shares of the Company’s common stock could have vested. The options have an exercise price of $1.64, and if revenue levels for 2017 were met, would vest 50% on the release of the Company’s audited financial statements for 2017, and 50% one year thereafter. If the minimum performance targets were not achieved, no options would vest. On February 27, 2018, the Company’s Board of Directors determined that, subject to the completion of the 2017 audit, the specified revenue target had been achieved. Accordingly, 999,997 options to purchase shares of the Company’s common stock vest as follows: 50% of the options vested on March 8, 2018 and the remaining 50% vested on March 8, 2019.

 

The following is a summary of performance-based stock option activity for the nine month period ended September 30, 2019, and the status of performance-based options outstanding at September 30, 2019:

 

 

We recognized stock compensation expense related to performance-based options of none and $128,000 during the three month periods ending September 30, 2019 and 2018, respectively, and none and $381,000 during the nine month periods ending September 30, 2019 and 2018. As of September 30, 2019, there was $12.4 million of aggregate intrinsic value of outstanding and exercisable performance-based stock options. Intrinsic value is the total pretax intrinsic value for all “in-the-money” options (i.e., the difference between the Company’s closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number of shares) that would have been received by the option holders had all option holders exercised their options on September 30, 2019. This amount will change based on the fair market value of the Company’s stock. Intrinsic value of performance-based awards exercised during the three months and nine months ended September 30, 2019 was $2.3 million and in the three and nine months ended September 30, 2018 was none and $285,000, respectively. The weighted average remaining contractual life of performance-based options outstanding and exercisable at September 30, 2019, is 2.2 years. All compensation cost of performance-based stock options outstanding at September 30, 2019 has been recognized.

 

There were no stock options granted to employees and non-employee directors in the three and nine month periods ended September 30, 2019 and 2018.

 

 

Restricted Stock

 

Service vesting-based restricted stock

 

The following is a summary of service vesting-based restricted stock activity for the nine month period ended September 30, 2019, and the status of unvested service vesting-based restricted stock outstanding at September 30, 2019:

 

 

The aggregate fair value of the service vesting-based awards granted during the three months ended September 30, 2019 and 2018 was $802,000 and $148,000, respectively, and during the nine months ended September 30, 2019 and 2018 was $4.0 million and $1.3 million, respectively, which represents the market value of our common stock on the date that the restricted stock awards were granted. The aggregate fair value of the service vesting-based awards that vested during the three months ended September 30, 2019 and 2018 was $368,000 and $393,000, respectively and during the nine months ended September 30, 2019 and 2018 was $1.6 million and $874,000, respectively.

 

We recognized stock compensation expense of $303,000 and $108,000 related to service vesting-based awards for the three months ended September 30, 2019 and 2018, respectively and $777,000 and $301,000 related to service vesting-based awards for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, there was $4.0 million in unrecognized compensation costs related to service vesting-based awards. We expect to recognize those costs over 3.3 years.

 

Performance-based restricted stock

 

In 2019, we engaged an independent executive compensation firm, FW Cook, to review current compensation practices and make updated recommendations to the Compensation Committee and the full Board of Directors. With consideration to the recommendations of FW Cook, including an evaluation of the compensation practices of a like-situated peer group of public life science companies, our Compensation Committee recommended and our Board of Directors approved a compensation program which included apportioning a portion of management’s equity compensation to performance-based restricted stock awards. Specifically, our executive officers were granted service-based restricted stock awards (94,247 shares of restricted stock in the aggregate vesting over four years) and performance-based restricted stock awards (94,247 shares of restricted stock in the aggregate). The performance-based restricted stock awards will vest as to between 0% and 200% of the number of restricted shares granted to each recipient based on our total shareholder return during the period beginning on January 1, 2019 through December 31, 2020 as compared to the total shareholder return of 20 of our peers (such peers having been determined by our Compensation Committee with assistance of FW Cook immediately prior to the grant date). The 94,247 performance-based restricted stock awards will be awarded if we are in the 50th percentile of total shareholder return versus the peer group. The maximum number of performance-based restricted stock awards that may be granted (188,494 shares in the aggregate) will be awarded if we are in the 80th percentile of total shareholder return versus the peer group and no units will be awarded for less than 30th percentile of total shareholder return versus the peer group. We granted an additional 29,604 performance based awards on April 1, 2019 to two newly hired employees from the Astero acquisition.

 

 

 

For the period ended September 30, 2019, the aggregate grant date fair value of the performance-based restricted stock awards expected to vest was $2.2 million. We recognized stock compensation expense of $286,000 and $825,000 for the three and nine months ended September 30, 2019, respectively. As of September 30, 2019, there was $1.4 million in unrecognized non-cash compensation costs related to performance-based restricted stock awards expected to vest. We expect to recognize those costs over 1.3 years.

 

Total Stock Compensation Expense

 

We recorded total stock compensation expense for the three and nine month periods ended September 30, 2019 and 2018, as follows:

 

 

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8.

Warrants

 

At September 30, 2019 and December 31, 2018, we had 3,963,505 and 4,080,005 warrants outstanding, respectively and exercisable with a weighted average exercise price of $4.33 and $4.35, respectively. During the three and nine month period ended September 30, 2019, 87,500 and 116,500 warrants were exercised with a weighted average exercise price of $4.75, yielding proceeds of $416,000 and $553,000, respectively. The outstanding warrants have expiration dates between March 2021 and May 2021. 

 

9.	Income Taxes

 

We have recorded a full valuation allowance against our deferred tax assets. As we continue to have multiple quarters of positive net income, we will assess our valuation allowance. Based on all available evidence, we determined that we have not yet attained a sustained level of profitability. Therefore, we have maintained the full valuation allowance as of September 30, 2019. We may release all, or a portion, of the valuation allowance in the near-term, dependent on the verifiable positive evidence observed in future quarters.

 

10.	Net Income per Common Share

 

Basic earnings per share is calculated by dividing the net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated using the weighted average number of common shares outstanding plus dilutive common stock equivalents outstanding as determined by the treasury method during the period. In periods when we have a net loss, common stock equivalents are excluded from our calculation of earnings per share as their inclusion would have an antidilutive effect. For the three and nine month periods ended September 30, 2019 and 2018, we excluded a nominal amount of unvested stock awards from our calculation of diluted weighted average shares because they were antidilutive.

 

The following table shows the calculation of basic and diluted earnings per shares:

 

 

11.	Commitments & Contingencies

 

Employment Agreements

 

We have employment agreements with our Chief Executive Officer, Chief Financial Officer, Chief Technology Officer, Vice President of Operations, Vice President of Marketing, Vice President of Sales – Thaw Technologies, Vice President of Product Development – Thaw Technologies, Senior Vice President of Cold Chain Technologies, Vice President of Sales, evo platform and Vice President of Sales. None of these employment agreements is for a definitive period, but rather each will continue indefinitely until terminated in accordance with its terms. The agreements provide for a base annual salary, payable in monthly (or shorter) installments. Under certain conditions and for certain of these officers, we may be required to pay additional amounts upon terminating the officer or upon the officer resigning for good reason. 

 

Litigation

 

From time to time, the Company is subject to various legal proceedings that arise in the ordinary course of business, none of which are currently material to the Company’s business.

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12.

Revenue

 

We currently operate as one reportable operating segment focusing on biopreservation tools.

 

The following table disaggregates revenue by market segment and distributors:

 

 

 The following table disaggregates revenue by product category:

 

 

13.

Leases

 

Our operating leases are primarily related to our Bothell, Washington headquarters space lease and our Albuquerque, New Mexico SAVSU space lease. The term of our Bothell 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. Our Albuquerque lease continues until December 31, 2021. We have two options to extend the term of the lease, each 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, immediately following the expiration of the first extension term. We have not included these extension options in our ROU assets or lease liabilities as we are not reasonably certain we will enter into the renewal option in their current terms. 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 1.4 years, respectively. The operating lease costs and cash paid in the three months ended September 30, 2019 was $160,000 and $204,000, respectively. The operating lease costs and cash paid in the nine months ended September 30, 2019 was $444,000 and $576,000, respectively.

 

Maturities of lease liabilities as of September 30, 2019

 

 

14.	Subsequent Event

 

On October 2, 2019, we funded $1.5 million in privately held Sexton Biotechnologies (“Sexton”) a recent spinout of Cook Regentec, in exchange for an 18% ownership stake. Formerly part of Cook Regentec, Sexton has developed and is marketing a portfolio of advanced packaging solutions and human platelet lysate (HPL) serum-replacement media used in cell therapy manufacturing. BioLife and Sexton also plan to establish a cross-marketing partnership to promote their respective product brands within the cell and gene therapy industry. BioLife's investment includes certain rights related to the potential acquisition of Sexton at a future date. 

 

On November 12, 2019, we announced that we acquired the assets of Custom Biogenic Systems, Inc. (“CBS”), a Michigan corporation through a wholly-owned subsidiary, Arctic Solutions, Inc. in consideration for $15 million, comprised of $11 million in cash and $4 million in BioLife common stock. John Brothers, former CBS CEO and sole shareholder, and now Vice President, Advanced Freezer Technologies at BioLife, is eligible to earn up to an additional $15 million in cash or stock, based on attainment of specific revenue goals over the next five years.

 

Due to the limited time since the acquisition date and the effort required to assess the fair value of assets acquired and liabilities assumed, the initial accounting for the business combination is incomplete at the time of this filing. As a result, the Company is unable to provide the amounts recognized for the major classes of assets acquired and liabilities assumed, acquisition contingencies and goodwill. Also, the Company is unable to provide pro forma revenues and earnings of the combined entity. This information is expected to be included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. 

 

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