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BLFS > SEC Filings for BLFS > Form 10-K on 29-Mar-2013All Recent SEC Filings

Show all filings for BIOLIFE SOLUTIONS INC

Form 10-K for BIOLIFE SOLUTIONS INC


29-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. 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 future financial and operating results, plans, objectives, expectations and intentions, costs and expenses, interest rates, outcome of contingencies, financial condition, results of operations, liquidity, business strategies, cost savings, objectives of management 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 Annual Report on Form 10-K or in documents incorporated by reference into this Annual Report on Form 10-K . We intend that such forward-looking statements be subject to the safe harbors created thereby. Examples of these forward-looking statements include, but are not limited to:

? anticipated regulatory filings and requirements;

? timing and amount of future contractual payments, product revenue and operating expenses;

? market acceptance of our products and the estimated potential size of these markets; and

? our anticipated future capital requirements and the terms of any capital financing agreements.

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 in Item 1A "Risk Factors," as well as those discussed elsewhere in the Annual Report on 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 Annual Report on 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 Annual Report on 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.

Overview

Management's discussion and analysis provides additional insight into the Company and is provided as a supplement to, and should be read in conjunction with, our audited financial statements and accompanying footnotes thereto.

Our proprietary HypoThermosol®, CryoStor®, and generic BloodStor® biopreservation media products are marketed to the biobanking, drug discovery, and regenerative medicine markets, including hospital-based stem cell transplant centers, pharmaceutical companies, cord blood and adult stem cell banks, hair transplant centers, and suppliers of cells to the drug discovery, toxicology testing and diagnostic markets. All of our products are serum-free and protein-free, fully defined, and are manufactured under current Good Manufacturing Practices ("cGMP") using United States Pharmacopeia ("USP")/Multicompendial or the highest available grade components.

Our patented biopreservation media products are formulated to reduce preservation-induced, delayed-onset cell damage and death. Our platform enabling technology provides our customers significant shelf life extension of biologic source material and final cell products, and also greatly improved post-preservation cell, tissue, and organ viability and function. We believe that our products have been incorporated into the manufacturing, storage, shipping, freezing, and clinical delivery processes of over 50 clinical trial stage regenerative medicine products and therapies.


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The discoveries made by our scientists and consultants relate to how cells, tissues, and organs respond to the stress of hypothermic storage, cryopreservation, and the thawing process. These discoveries enabled the formulation of truly innovative biopreservation media products that protect biologic material from preservation-related cellular injury, much of which is not apparent immediately after return to normothermic body temperature. Our product formulations have demonstrated remarkable reduction in apoptotic (programmed) and necrotic (pathologic) cell death mechanisms and are enabling the clinical and commercial development of dozens of innovative regenerative medicine products.

Our Mission

We strive to be the leading provider of biopreservation tools for cells, tissues, and organs; to facilitate basic and applied research and commercialization of new therapies by maintaining the health and function of biologic source material and finished products during the preservation process.

Our strategies to achieve this objective include:

Utilize Existing Sales, Distribution and Manufacturing Infrastructure.

Extensive network. We have developed a broad direct sales and distribution network for our products which we utilize to expand sales to existing customers and to gain additional customers.

Highly technical sales team. Our sales team is highly trained and are considered thought leaders in the area of biopreservation. We are able to provide highly relevant data and assist our customers with a consultative selling approach.

High degree of customer satisfaction. Our sales, marketing, customer service and technical support and service teams aspire to provide our customers exceptional service and have been highly rated in customer satisfaction surveys.

Highly accessible product. We have the ability to ship product on a same-day or next-day basis. We use this ability to provide convenient service to our customers and to generate additional product revenues.

Contract manufacturing. We utilize excess capacity in our manufacturing operations to perform contract manufacturing in both small and large lot sizes. With our extensive knowledge in cGMP media manufacturing, we are able to assist our customers and optimize their formulation processes to improve the manufactured yield and margin.

Develop innovative new products. We are continuously seeking to utilize the unique nature of our technologies to create customer application-based solutions.

Invest in Regenerative Medicine. We are the leading supplier of pre-formulated, clinical grade biopreservation media products for advancing the field of regenerative medicine. Fragile, live cells from source materials such as blood, tissue, and organs are enabling the development of biologic-based therapies and treatments for the leading causes of death and disability. These cells must be transported from the processing lab to the bedside in a refrigerated or frozen state to preserve viability, quality, and potency. We will continue to invest in adding to our suite of biopreservation product offerings to the commercial cell therapy and tissue engineering companies, hospital based stem cell transplant centers, university-based research labs engaged in this field.


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Results of Operations

Summary of 2012 Achievements

? Revenue from our core products, CryoStor®, HypoThermosol®, and BloodStor® grew 23% over 2011 as we expanded our market share in the regenerative medicine, biobanking, and drug discovery segments and ended 2012 with over $3 million in revenue from core customers.

? We executed a significant confidential multi-year contract manufacturing services agreement to perform aseptic media formulation, fill, and finish of several biopreservation solutions for a new multinational customer and delivered over $2.5 million in product to this customer in 2012.

? We signed a lease amendment to increase the size of the corporate headquarters and manufacturing capacity by approximately 100% with the addition of a second Good Manufacturing Practice (cGMP) clean room suite.

? We expanded our team from 12 people at the end of 2011 to 28 people at the end of 2012, to meet growing demand for our products and services. Team members were added to our production team and both direct and indirect sales professionals in the period.

? We signed a new private-label distribution agreement to supply HypoThermosol® and CryoStor® to a leading life sciences cell culture tools provider.

? We achieved positive cash flow from operations during the last quarter of the year for the first time in Company history.

Comparison of Annual Results of Operations

Percentage comparisons have been omitted within the following table where they
are not considered meaningful.

Revenue and Gross Margin

                                                  Year Ended
                                                 December 31,
                                               2012        2011        % Change
          Revenue:                                 ('000's)
          Product revenue
            Direct                            $ 2,291     $ 1,893            21%
            Indirect                              728         565            29%
            Core product sales                  3,019       2,458            23%
            Contract manufacturing services     2,624         281           834%
          Total product sales                   5,643       2,739           106%
          Licensing revenue                        20          20             --
          Total revenue                         5,663       2,759           105%

          Cost of sales                         3,371       1,356           149%
          Gross profit                        $ 2,292     $ 1,403            63%
          Gross margin %                        40.5%       50.9%

Core Product Sales. Our core products are sold through both direct and indirect channels to the customers in the biobanking, drug discovery, and regenerative medicine markets. Sales to our direct customers in 2012 increased compared to 2011 due primarily to higher sales to existing customers, sales to new customers, higher selling prices in 2012 compared to 2011 for our family of core products, and the addition of three team members engaged in product sales.


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Contract Manufacturing Services. To leverage our capacity and the market opportunity for contract manufacturing services, we are manufacturing products for third parties pursuant to contractual arrangements. In 2012, contract manufacturing services primarily represented shipments to one significant customer, a public company engaged in the development and marketing of organ preservation solutions and devices. This customer accounted for 46% of total revenue in 2012 and $1.2 million, or 60% of total revenue in the fourth quarter of 2012.

Cost of Product Sales. Cost of sales consists of raw materials, labor and overhead expenses. Cost of sales in 2012 increased compared to 2011 due to the significant increase in sales of both core and contract manufacturing products.

Gross Profit and Gross Margin. Gross profit increased in 2012 compared to 2011 due to the significant increase in sales of both core and contract manufacturing products. Gross margin as a percentage of revenue decreased significantly in 2012 compared to 2011 due primarily to the increase in contract manufacturing product sales, which has a higher cost of sales, compared to core product sales. Additionally, gross margin declined due to additional personnel and other costs included in cost of goods sold related to the expansion of our production operations.

Licensing Revenue. We have entered into license agreements with one customer that provides this customer with limited access to our intellectual property under certain conditions. This customer paid upfront fees for the specific rights and we recognize license revenue ratably over the term of the agreements.

Revenue Concentration. In 2012, we derived approximately 46% of our product revenue from our relationship with one contract manufacturing customer, which we commenced deliveries to in the second quarter of 2012. Either party may terminate the agreement with this contract manufacturing customer for any reason on six months' notice. No other customer accounted for more than 10% of revenue in 2012. In 2011, no individual customer accounted for more than 10% of sales. Revenue from customers located in foreign countries represented 11% and 13% of total revenue during the years ended December 31, 2012 and 2011, respectively.

Operating Expenses

Our operating expenses for the years ended December 31, 2012 and 2011 were:

                                                    Year Ended
                  (dollars in 000's)               December 31,
                                                 2012        2011
                  Research and development      $   464     $   516
                     % of revenue                    8%         19%
                  Sales and marketing               619         267
                     % of revenue                   11%         10%
                  General and administrative      2,152       1,829
                     % of revenue                   38%         66%

                  Total operating expenses        3,235       2,613
                     % of revenue                   57%         95%

Research and Development. Research and Development expenses consist primarily of salaries and other personnel-related expenses, consulting and other outside services, laboratory supplies, and other costs. We expense all research and development costs as incurred. Research and development expenses decreased in 2012 compared to 2011 due primarily to reduced spending with contract research organizations, which accounted for approximately $25,000 of the variance and lower spending on patent related legal expenses, which accounted for $45,000 of the difference. This was offset slightly by an increase in personnel related costs.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries, trade association sponsorships, and other personnel-related expenses, consulting, trade shows and advertising. The increase in sales and marketing expenses in 2012 compared to 2011 was primarily due to increased personnel costs which resulted from the additional team members on this team which were added in the second quarter of 2012. The additional team members were added to focus on our sales of our core products through both direct sales to customers and through our indirect distribution network.


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General and Administrative Expenses. General and administrative expenses consist primarily of salaries, bonuses and other personnel-related expenses, non-cash stock-based compensation for administrative personnel and non-employee members of the board of directors, professional fees, such as accounting and legal, corporate insurance and facilities costs. General and administrative expenses were higher in 2012 compared to 2011 due to higher personnel costs in 2012, offset somewhat by a reduction in consulting expenses due to the termination of one consulting agreement in the third quarter of 2011.

Other Income (Expenses)

Interest Expense. The increase in interest expense in 2012 compared to 2011 was due to a higher average debt balance.

Amortization of Deferred Financing Costs. Amortization of deferred financing costs represents the cost of warrants issued which are being amortized over the life of the warrants.

Liquidity and Capital Resources

We have been unable to generate sufficient income from operations in order to meet our operating needs and have an accumulated deficit of approximately $56 million at December 31, 2012. Of this amount, approximately $18 million has accumulated since the merger of the Company in 2002.

We believe our current cash and cash provided by operations will satisfy our working capital requirements, debt obligations and capital expenditures for the foreseeable future. Our future capital requirements and the adequacy of our available funds will depend on many factors, including future profitable operations, debt repayment, and competing technological and market developments.

Our working capital factors, such as inventory turnover and days sales outstanding, fluctuate on a quarterly basis and, on an interim basis during the year, may require an influx of short-term working capital. The Company will continuously assess the most appropriate method of financing the Company's short and long term operations. While conditions of the credit market at any given time may impact our ability to obtain credit, the Company believes that it has the ability to raise funding, if needed, through public and private markets.

Future debt repayment or future acquisitions may be financed by a combination of cash on hand, our positive cash flow generation, a revolving credit facility, or an issuance of new debt or stock.

We have outstanding $10.6 million principal amount of promissory notes due January 11, 2016 under the facilities held by our two most significant stockholders, secured by all of the assets of the Company. An event of default, including from the failure to observe or comply with any material covenant or condition in the promissory notes could, if not cured or waived, result in the acceleration of our outstanding indebtedness.

At December 31, 2012, we had cash and cash equivalents of $196,478 compared to cash and cash equivalents of $16,864 at December 31, 2011. At December 31, 2012, we had working capital of $262,421, compared to working capital of $581,159 at December 31, 2011. The decline in our working capital is due primarily to an increase in our accounts payable related to purchases of materials, which has significantly increased in 2012.

Net Cash Provided by (Used in) Operating Activities

During the year ended December 31, 2012, net cash provided by operating activities was $854,934 compared to net cash used by operating activities of $989,917 for the year ended December 31, 2011. Cash used in operating activities relates primarily to funding net losses and changes in operating assets and liabilities, offset by non-cash compensation related to stock options and depreciation. In 2012, cash provided by operating activities included an increase in deferred rent of $901,000 related to lease incentives received from our landlord.


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Net Cash Used in Investing Activities

Net cash used in investing activities totaled $1,150,320 during the year ended December 31, 2012, and $91,430 during the year ended December 31, 2011. Cash used in investing activities was due primarily to the increase in tenant improvements related to our expanded manufacturing facility and the purchase of equipment.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $475,000 and $1,095,000 during the years ended December 31, 2012 and 2011, respectively. Cash provided by financing activities resulted from funding from two existing shareholders under the existing Facilities.

At December 31, 2012, the unused portion of the Facilities was approximately $900,000.

Outlook

In 2013, BioLife management expects revenue to be in the range of $6.5 million to $7.0 million. This increase will be driven by continued increases in sales to existing customers, the addition of new customers in the regenerative medicine market as our customers continue to move their cell and tissue based therapies and products through the clinical trial and regulatory approval processes, and continued focus on sales through our existing distribution network.

We expect gross margin as a percentage of revenue of approximately 38% - $41% in 2013 with fluctuation occurring as a result of changes in the mix of core product sales and contract manufacturing services revenue.

We expect operating expenses in 2013 to increase 10% - 20% over 2012, with increases expected in all areas primarily in personnel related costs.

We will continue to focus on generating positive operating income in 2013, and expect the results for the full year to increase over 2012. We believe cash generated from customer collections will provide sufficient funds to operate our business.

Critical Accounting Policies and Significant Judgments and Estimates

Management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate estimates, including, but not limited to those related to accounts receivable allowances, determination of fair value of share-based compensation, contingencies, income taxes, and expense accruals. We base our estimates on historical experience and on other factors that we believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

Share-based Compensation

We account for share-based compensation by estimating the fair value of share-based compensation using the Black-Scholes option pricing model on the date of grant. We utilize assumptions related to stock price volatility, stock option term and forfeiture rates that are based upon both historical factors as well as management's judgment. Non-cash compensation expense is recognized on a straight-line basis over the applicable requisite service period of one to four years, based on the fair value of such share-based awards on the grant date.


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Income Taxes

We follow the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and on the expected future tax benefits to be derived from net operating loss carryforwards measured using current tax rates. A valuation allowance is established if it is more likely than not that some portion or all of the deferred tax assets will not be realized. We have not recorded any liabilities for uncertain tax positions or any related interest and penalties. Our tax returns are open to audit for the years ending December 31, 2009 to 2012.

Off-Balance Sheet Arrangements

As of December 31, 2012, we did not have any off-balance sheet financing arrangements.

Contractual Obligations

In November of 2012 we signed an amended lease agreement, which expanded the premises leased by us from the landlord to approximately 26,000 rentable square feet. The term of the lease was extended to July 31, 2021. The amendment includes two (2) options to extend the term of the lease, each option is for an additional period of five (5) 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 increased to approximately $35,000 effective January 1, 2013, and will increase to approximately $46,000 estimated to be effective in May 2013, upon the completion of leasehold improvement, with scheduled annual increases each August. We will be required to pay an amount equal to our proportionate share of certain taxes and operating expenses.

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