Biolife Solutions Inc (BLFS) SEC Quarterly Report (10-Q) for Q2 2018

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2018

For the transition period from to

Commission File Number 001-36362

BioLife Solutions, Inc.

(Exact name of registrant as specified in its charter)

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)

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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post 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 August 7, 2018, 16,461,711 shares of the registrant's common stock were outstanding.

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BIOLIFE SOLUTIONS, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2018

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Business

BioLife Solutions, Inc. ("BioLife," "us," "we," "our," or the "Company") is a developer, manufacturer and marketer of proprietary clinical grade cell and tissue hypothermic storage and cryopreservation freeze media. Our proprietary HypoThermosol® and CryoStor® platform of solutions are highly valued in the biobanking, drug discovery, and regenerative medicine markets. Our biopreservation media products are serum-free and protein-free, fully defined, and are formulated to reduce preservation-induced cell damage and death. Our enabling technology provides commercial companies and clinical researchers significant improvement in shelf life and post-preservation viability and function of cells, tissues, and organs. Additionally, for our direct, distributor, and contract customers, we perform custom formulation, fill, and finish services. 

Basis of Presentation

We have prepared the accompanying unaudited 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 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 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, 2017 on file with the SEC.

There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in the financial statements in our Annual Report on Form 10-K for the year ended December 31, 2017, except the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606).

Significant Accounting Policies Update

Revenue Recognition

On January 1, 2018, we adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) using the modified retrospective approach applied to those contracts in effect as of January 1, 2018. Under this transition method, results for reporting periods beginning after January 1, 2018 are presented under the new standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 605, Revenue Recognition. Adoption of the new standard did not have an impact on the amounts reported in our financial statements and there were no other significant changes impacting the timing or measurement of our revenue or our business processes and controls.

To determine revenue recognition for contractual arrangements that we determine are within the scope of Topic 606, 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 products. We generally recognize product revenue, including shipping and handling charges billed to customers, when we transfer control of our products to our customers as our contracts have a single performance obligation (transfer of control generally occurs upon shipment of our product). We are not required to disclose the value of unsatisfied performance obligations as our contracts have a duration of one year or less.

We invoice and receive payment from our customers after we recognize revenue, resulting in receivables from our customers that are presented as accounts receivable on our balance sheet. 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.

Equity Method Investments

We account for our ownership in our SAVSU Technologies, Inc. joint venture ("SAVSU") using the equity method of accounting. 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 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 statements of operations. On January 22, 2018, as a result of SAVSU signing a global distribution agreement with World Courier, we amended our agreement with SAVSU to fix our equity position at 35%, prior to any dilution created by financing activities post December 31, 2016, and terminated the sales and marketing services agreement. Our ownership was effectively reduced from 35% to 26.7% during the three months ended March 31, 2018 due to additional cash contributions made by the majority owner, SAVSU Technologies LLC. We increased our ownership to 30.5% for the three months ended June 30, 2018 due to additional cash contributions made by the Company. For the three and six months ended June 30, 2018, SAVSU's net loss totaled $0.6 million and $1.1 million, respectively which our ownership resulted in a $0.2 million and $0.3 million loss, respectively which was recorded as "Loss from equity-method investment in SAVSU." For the three and six months ended June 30, 2017, SAVSU's net loss totaled $0.6 million and $1.1 million, respectively, of which our 45% ownership resulted in a $0.3 million and $0.5 million loss, respectively.

Concentrations of credit risk and business risk

In the three months ended June 30, 2018, we derived approximately 38% of our product revenue from three customers and in the six months ended June 30, 2018, we derived approximately 27% of our revenue from two customers. In the three and six months ended June 30, 2017, we did not derive 10% or more of our product revenue from any one customer. No other customer accounted for more than 10% of revenue in the three months ended March 31, 2018 or 2017. At June 30, 2018, three customers accounted for approximately 38% of total gross accounts receivable. At December 31, 2017, two customers accounted for approximately 41% of total gross accounts receivable.

Revenue from customers located in foreign countries represented 11% and 13% of total revenue during the three and six months ended June 30, 2018, respectively, and 14% and 18% during the three and six months ended June 30, 2017, respectively. All revenue from foreign customers is denominated in United States dollars.

Recent Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). The updated guidance clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. We adopted the new standard on January 1, 2018, with no material impact on our financial statements.

In February 2016, the FASB issued Accounting Standards Update 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. The new guidance will be effective for fiscal years and interim periods within those years beginning after December 15, 2018. Early adoption will be permitted for all entities. The Company will adopt ASU 2016-02 on January 1, 2019.

The FASB has issued several additional ASUs that provide additional clarification to certain issues existing after the original ASU was released. In July 2018, the FASB issued ASU 2018-11 Leases (Topic 842) Targeted Improvements which provides entities with an additional and optional transition method to adopt the new lease standard and provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if certain criteria are met. Also, in July 2018, the FASB issued ASU 2018-10 Codification Improvements to Topic 842 to make amendments addressing sixteen issues related to various aspects of ASU 2016-02. The effective date and transition requirements for the amendments in ASU 2018-11 and ASU 2018-10 will be the same as the effective date and transition requirements in ASU 2016-02. The Company is evaluating the effect of ASU 2018-11 and ASU 2018-10 on its consolidated financial statements. While the Company is continuing to evaluate the effects of this ASU, the Company expects to record material right of use assets and lease liabilities on its consolidated balance sheet upon adoption. The new standard will also require expanded qualitative and quantitative disclosures regarding the Company's leases.

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities: Topic 825 (ASU 2016-01). The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. We adopted the new standard on January 1, 2018, with no material impact on our financial statements.

With the exception of the new standards discussed above, there have been no new accounting pronouncements not yet effective that have significance, or potential significance, to our Financial Statements.

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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 June 30, 2018 and December 31, 2017, the Company does 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 June 30, 2018 and December 31, 2017, based on the three-tier fair value hierarchy:

The fair values of bank deposits and money market funds classified as Level 1 were derived from quoted market prices as active markets for these instruments exist. 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 six months ended June 30, 2018 and the twelve months ended December 31, 2017. 

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Inventory consists of the following at June 30, 2018 and December 31, 2017:

Deferred rent consists of the following at June 30, 2018 and December 31, 2017:

During the three and six month periods ended June 30, 2018, the Company recorded $31,750 and $63,499, respectively, in deferred rent amortization of these landlord funded leasehold improvements. During the three and six month periods ended June 30, 2017, the Company recorded $31,750 and $63,499, respectively, in deferred rent amortization of these landlord funded leasehold improvements.

Straight line rent adjustment represents the difference between cash rent payments and the recognition of rent expense on a straight-line basis over the terms of the lease.

Service Vesting - Based Stock Options

The following is a summary of service vesting-based related stock option activity for the six month period ended June 30, 2018, and the status of service vesting-based options outstanding at June 30, 2018:

We recognized stock compensation expense related to service vesting-based options of $149,612 and $146,538 during the three months ended June 30, 2018 and 2017, respectively and $302,315 and $316,861 during the six months ended June 30, 2018 and June 30, 2017, respectively. As of June 30, 2018, there was $21,325,800 of aggregate intrinsic value of outstanding service vesting-based stock options, including $15,888,154 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 June 30, 2018. 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 June 30, 2018 and 2017 was $723,532 and $21,104, respectively and during the six months ended June 30, 2018 and 2017 was $993,773 and $91,817, respectively. Weighted average grant date fair value for service based-vesting options granted during the three months ended June 30, 2018 and 2017 was none and for the six months ended June 30, 2018 and 2017 was none and $1.13 per share, respectively. The weighted average remaining contractual life of service vesting-based options outstanding and exercisable at June 30, 2018, is 5.9 years and 5.5 years, respectively. Total unrecognized compensation cost of service vesting-based stock options at June 30, 2018 of $848,055 is expected to be recognized over a weighted average period of 1.8 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 may be 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% will vest on March 8, 2019.

The following is a summary of performance-based stock option activity for the six month period ended June 30, 2018, and the status of performance-based options outstanding at June 30, 2018:

We recognized stock compensation expense related to performance-based options of $126,901 and $126,903 during the three month periods ending June 30, 2018 and 2017, respectively and $252,408 and $252,411 during the six month periods ending June 30, 2018 and 2017. As of June 30, 2018, there was $9,428,021 of aggregate intrinsic value of outstanding performance-based stock options, including $4,543,060 of aggregate intrinsic value of 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 June 30, 2018. 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 six months ended June 30, 2018 was $285,250 and no performance-based options were exercised in the three and six months ended June 30, 2017. The weighted average remaining contractual life of performance-based options outstanding and exercisable at June 30, 2018, is 3.5 years. Total unrecognized compensation cost of performance-based stock options at June 30, 2018 of $256,592 is expected to be recognized over a weighted average period of 0.5 years.

The fair value of stock options to employees and non-employee directors is estimated on the measurement date using the Black-Scholes model using the following weighted average assumptions (N/A for 2018 as no options were granted in that period).

The fair value of share-based payments made with stock options to employees and non-employee directors was estimated on the measurement date using the Black-Scholes model using the following weighted average assumptions.

Restricted Stock

The following is a summary of restricted stock activity for the six month period ended June 30, 2018, and the status of unvested restricted stock outstanding at June 30, 2018:

The aggregate fair value of the awards granted during the three and six months ended June 30, 2018 was $154,440 and $1,125,048, respectively, and during the three and six months ended June 30, 2017 was none and $364,936, 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 restricted stock awards that vested for the three months ended June 30, 2018 and 2017 was $173,678 and $20,123, respectively and for the six months ended June 30, 2018 and 2017 was $480,736 and $61,157, respectively.

We recognized stock compensation expense of $97,867 and $40,432 related to restricted stock awards for the three months ended June 30, 2018 and 2017, respectively and $193,082 and $74,496 related to restricted stock awards for the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, there was $1,241,718 in unrecognized compensation costs related to restricted stock awards. We expect to recognize those costs over 3.3 years.

We recorded total stock compensation expense for the three and six month periods ended June 30, 2018 and 2017, as follows:

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At June 30, 2018 and December 31, 2017, we had 4,863,158 and 6,688,849 warrants outstanding, respectively and exercisable with a weighted average exercise price of $4.41 and $4.50, respectively. During the three and six month period ended June 30, 2018, 1,813,691 and 1,825,691 warrants were exercised with a weighted average exercise price of $4.75, yielding proceeds of $8.6 million and $8.7 million, respectively. Subsequent to quarter end through July 30, 2018, an additional 274,798 warrants were exercised with a weighted average exercise price of $4.75, yielding $1.3 million in proceeds to the Company. The outstanding warrants have expiration dates between March 2021 and May 2021. 

We have recorded a full valuation allowance against our deferred tax assets. As we trend towards positive net income, we will continue to 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 quarter ended June 30, 2018. 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.

Basic earnings per share is calculated by dividing the net income (loss) 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 six month periods ended June 30, 2018, we excluded a nominal amount of unvested stock awards from our calculation of diluted weighted average shares because they were antidilutive. For the three and six month periods ended June 30, 2017, we excluded 3 million common stock options, 7 million warrants, and 273,000 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:

Leases

We lease approximately 30,000 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 $58,000 at June 30, 2018, 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. 

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, 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.

As of June 30, 2018, we accrued a dividend of $93,258 on the series A preferred stock which is included in accrued expenses and other current liabilities in the balance sheet at June 30, 2018. The dividend was paid subsequent to quarter end on July 2, 2018. On May 17, 2018, we redeemed 1,063 series A preferred shares for $1,063,000. There are 3,187 Series A shares outstanding as of June 30, 2018.

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We currently operate as one operating segment focusing on biopreservation media.

The following table disaggregates revenue by market segment and distributors:

On August 9, 2018, Casdin Capital LLC, ("Casdin") a New York-based, life science-focused investment firm and current stockholder, agreed to invest $20 million in BioLife to support the Company's growth strategy of acquiring synergistic cell and gene therapy manufacturing tools and services or technologies. Casdin's private purchase of an additional 1,428,571 newly issued shares of common stock at a price of $14.00 per share was pursuant to a share purchase agreement, pursuant to which Casdin also agreed to restrict any re-sale of the new se shares for a 12 month period. 

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