BIOLIFE SOLUTIONS INC (BLFS) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company Overview
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We are a life sciences company that develops, manufactures and supplies bioproduction tools and services which are designed to improve quality and de-risk biologic manufacturing, storage, distribution, and transportation in the cell and gene therapy industry and broader biopharma market. Our products are used in basic and applied research and commercial manufacturing of biologic-based therapies. Customers use our products to maintain the health and function of biologic material during sourcing, manufacturing, storage, and distribution.
Our current portfolio of bioproduction tools and services are comprised of three revenue lines that contain seven main offerings: (i) cell processing (including biopreservation media for the preservation of cells and tissues, human platelet lysate media for the supplementation of cell expansion, cryogenic vials and automated fill machines that provide high-quality, efficient, and precise mixes of solutions), (ii) freezers and thaw systems (including a full line of mechanical ultra-low temperature (“ULT”), isothermal, and liquid nitrogen freezers and accessories, automated thaw devices which provide controlled, consistent thawing of frozen biologics in vials and cryobags), and (iii) Biostorage services (including biological and pharmaceutical storage services and transport, and “smart”, cloud connected devices for transporting biologic payloads).
We currently operate as one bioproduction tools and services business which supports several steps in the biologic material manufacturing and delivery process. We have a diversified portfolio of tools and services that focus on biopreservation, cell processing, frozen biologic storage products and services, cold-chain transportation, and thawing of biologic materials. We have in-house expertise in cryobiology and continue to capitalize on opportunities to maximize the value of our product platform for our extensive customer base through both organic growth innovations and acquisitions.
Subsequent to the second quarter of 2023, we began to seek divestment of our Freezer Business from our current product portfolio. For additional information regarding our ongoing initiative to divest the Freezer Business, see “Item 1A. Risk Factors” of this Annual Report for additional details.
Segment reporting
Management views the Company's operations and makes decisions regarding how to allocate resources as one reportable segment and one reporting unit.
Critical accounting policies and estimates
We have identified the policies and estimates below as being critical to our business operations and the understanding of our results of operations. These policies require management’s most difficult, subjective, or complex judgements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The impact of any associated risks related to these policies on our business operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition,” including in the “Results of Operations” section, where such policies affect our reported and expected financial results. Although we believe that our estimates, assumptions, and judgements are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.
Revenue recognition
To determine revenue recognition for contractual arrangements that we determine are within the scope of Financial Accounting Standards Board (“FASB”) Topic 606, Revenue from Contracts with Customers, we perform the following five steps: (i) identify each contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to our performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy the relevant performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price, taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. Payment terms and conditions vary, although terms generally include a requirement of payment within 30 to 90 days.
The Company primarily recognizes product revenues, service revenues, and rental revenues. Product revenues are generated from the sale of biopreservation media, ThawSTAR, and freezer products. We recognize product revenue,
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including shipping and handling charges billed to customers, when we transfer control of our products to our customers. Shipping and handling costs are classified as part of cost of product revenue in the Consolidated Statement of Operations. Service revenues are generated from the storage of biological and pharmaceutical materials. We recognize service revenues over time as services are performed or ratably over the contract term. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the expected value method or the most likely amount method, depending on the facts and circumstances relative to the contract. When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component or variable consideration as of and during the years ended December 31, 2023, 2022, and 2021.
The Company also generates revenue from the leasing of our property and equipment, operating right-of-use assets, and evo cold chain systems to customers pursuant to service contracts or rental arrangements entered into with the customer. Revenue from these arrangements is not within the scope of FASB ASC Topic 606 as it is within the scope of FASB ASC Topic 842, Leases. All customers leasing shippers currently do so under month-to-month rental arrangements. We account for these rental transactions as operating leases and record rental revenue on a straight-line basis over the rental term.
Business combinations
Amounts paid for acquisitions are allocated to the tangible and intangible assets acquired and liabilities assumed, if any, based on their fair values at the dates of acquisition. This purchase price allocation process requires management to make significant estimates and assumptions with respect to intangible assets and deferred revenue obligations. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions determined by management. Any excess of purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as any contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our Consolidated Statements of Operations. The fair value of contingent consideration includes estimates and judgments made by management regarding the probability that future contingent payments will be made, the extent of royalties to be earned in excess of the defined minimum royalties, etc. Management updates these estimates and the related fair value of contingent consideration at each reporting period based on the estimated probability of achieving the earnout targets and applying a discount rate that captures the risk associated with the expected contingent payments. To the extent our estimates change in the future regarding the likelihood of achieving these targets we may need to record material adjustments to our accrued contingent consideration. Changes in the fair value of contingent consideration are recorded in our Consolidated Statements of Operations. We use the income approach to determine the fair value of certain identifiable intangible assets including customer relationships and developed technology. This approach determines fair value by estimating after-tax cash flows attributable to these assets over their respective useful lives and then discounting these after-tax cash flows back to a present value. We base our assumptions on estimates of future cash flows, expected growth rates, expected trends in technology, etc. We base the discount rates used to arrive at a present value as of the date of acquisition on the time value of money and certain industry-specific risk factors. We believe the estimated purchased customer relationships, developed technologies, trademarks, tradenames, and patents amounts so determined represent the fair value at the date of acquisition and do not exceed the amount a third party would pay for the assets.
Intangible assets and goodwill
Intangible assets
Intangible assets with a definite life are amortized over their estimated useful lives using the straight-line method and the amortization expense is recorded within intangible asset amortization in the Consolidated Statements of Operations. If the estimate of a definite-lived intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life. Definite-lived intangible assets and their related estimated useful lives are reviewed at least annually to determine if any adverse conditions exist that would indicate the carrying value of these assets may not be recoverable.
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Indefinite-lived intangibles are carried at the initially recorded fair value less any recognized impairment. Indefinite-lived intangibles are tested annually for impairment. Impairment assessments are conducted more frequently if certain conditions exist, including a change in the competitive landscape, any internal decisions to pursue new or different technology strategies, a loss of a significant customer, or a significant change in the marketplace, including changes in the prices paid for the Company’s products or changes in the size of the market for the Company’s products. If impairment indicators are present, the Company determines whether the underlying intangible asset is recoverable through estimated future undiscounted cash flows. If the asset is not found to be recoverable, it is written down to the estimated fair value of the asset based on the sum of the future discounted cash flows expected to result from the use and disposition of the asset.
Goodwill
We test goodwill for impairment on an annual basis, and between annual tests if events and circumstances indicate it is more likely than not that the fair value of our goodwill is less than its carrying value. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and market conditions, including a decline in the Company’s market capitalization, a significant adverse change in legal factors, business climate or operational performance of the business, and an adverse action or assessment by a regulator. Goodwill is tested for impairment in the fourth quarter of each year, or more frequently as warranted by events or changes in circumstances mentioned above. Accounting guidance also permits an optional qualitative assessment for goodwill to determine whether it is more likely than not that the carrying value of a reporting unit exceeds its fair value. If, after this qualitative assessment, we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further quantitative testing would be necessary. A quantitative assessment is performed if the qualitative assessment results in a more likely than not determination or if a qualitative assessment is not performed. The quantitative assessment considers whether the carrying amount of a reporting unit exceeds its fair value, in which case an impairment charge is recorded to the extent the reporting unit’s carrying value exceeds its fair value. The Company operates as one reporting unit as of the goodwill impairment measurement date in the fourth quarter of 2023.
Warranty guarantees
Our freezer and thaw and certain cell processing products are warranted to provide assurance that the product will function as expected and to ensure customer confidence in design and overall quality. Warranty coverage on our products is generally provided for specified periods of time and on select products' hours of usage, and generally covers parts, labor, and other expenses for non-maintenance repairs. Warranty coverage generally does not cover operator abuse or improper use.
At the time of sale, we recognize expense and record a warranty accrual by product line for estimated costs in connection with forecasted future warranty claims. Our estimate of the cost of future warranty claims is based primarily on the estimated number of products under warranty, historical average costs incurred to service warranty claims, the trend in the historical ratio of warranty claims for each part covered, and the historical length of time between the sale and resulting warranty claim. If applicable, historical claims experience may be adjusted for known product design improvements or for the impact of unusual product quality issues. We periodically assess the adequacy of our warranty accruals based on changes in our estimates and assumptions and record any necessary adjustments if the cost of actual claim experience differs from our estimate and indicates that adjustments to our warranty accrual are necessary. Factors that could have an impact on actual future claims and our warranty accrual include, but are not limited to, items such as performance of new products; product failure rates; factors impacting product usage, such as changes in sales volumes and shifts in product mix; manufacturing quality and product design issues, including significant manufacturing or design defects not discovered until after the product is delivered to customers; higher or lower than expected service and component part costs to satisfactorily address the repair, and, if applicable, changes to the warranty coverage periods. Additionally, from time to time, we also establish warranty accruals for our estimate of the costs necessary to settle major rework campaigns on a product-specific basis during the period in which the circumstances giving rise to the major rework campaign become known and when the costs to satisfactorily address the situation are both probable and estimable. The warranty accrual for the cost of a major rework campaign is primarily based on an estimate of the cost to repair each affected unit and the number of affected units expected to be repaired.
We believe that our analysis of historical warranty claim trends and knowledge of potential manufacturing and/or product design improvements or issues provide sufficient information to establish a reasonable estimate for the cost of future warranty claims at the time of sale and our warranty accruals as of the date of our Consolidated Balance Sheets. We believe that our $7.9 million warranty accrual as of December 31, 2023 is adequate and historically has been adequate; however, due to the inherent uncertainty in the accrual estimation process, including forecasting future warranty claims, costs
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associated with servicing future warranty claims, and unexpected major rework campaigns that may arise in the future, our actual warranty costs incurred may differ from our warranty accrual estimate. An unexpected increase in warranty claims and/or in the costs associated with servicing those claims would result in an increase in our warranty accruals and a decrease in our net earnings.
Contingent consideration
We estimate the acquisition date fair value of the acquisition-related contingent consideration using various valuation approaches, including option pricing models and Monte Carlo simulations, as well as significant unobservable inputs, reflecting the Company’s assessment of the assumptions market participants would use to value these liabilities. The fair value of the contingent consideration is remeasured each reporting period, with any change in the value recorded in our Consolidated Statements of Operations as change in fair value of contingent consideration.
During the year ended December 31, 2023, all contingent consideration liabilities were written off upon assessment of the probability we would achieve certain revenue targets for earnouts. For additional details on the factors considered in the write-off, see Note 3: Fair value measurement within the consolidated financial statements in Part II, Item 8 of this Annual Report.
Stock-based compensation
We measure and record compensation expense using the applicable accounting guidance for share-based payments related to stock options, time-based restricted stock, market-based restricted stock awards and performance-based awards granted to our directors and employees. The fair value of market-based restricted stock awards is estimated at the date of grant using the Monte Carlo Simulation model. The Monte Carlo Simulation valuation model incorporates assumptions as to stock price volatility, the expected life of options or awards, a risk-free interest rate and dividend yield. In valuing our market-based stock awards, significant judgment is required in determining the expected volatility of our common stock. Expected volatility for our market-based restricted stock awards is based on the historical volatility of our own stock and the stock of companies within our defined peer group. Further, our expected volatility may change in the future, which could substantially change the grant-date fair value of future awards and, ultimately, the expense we record. The fair value of restricted stock, including performance awards, without a market condition is estimated using the current market price of our common stock on the date of grant.
We expense stock-based compensation for stock options, restricted stock awards, and performance awards over the requisite service period. For awards with only a service condition, we expense stock-based compensation using the straight-line method over the requisite service period for the entire award. For awards with a market condition, we expense over the vesting period regardless of the value that the award recipients will ultimately receive.
Provision for income taxes
The assessment regarding whether a valuation allowance is required considers both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. In making this assessment, significant weight is given to evidence that can be objectively verified. In its evaluation, the Company considered its cumulative loss and its forecasted losses in the near-term as significant negative evidence. Based upon a review of the four sources of income identified within ASC 740, Accounting for Income Taxes, the Company determined that the Company’s recorded deferred tax liabilities as of December 31, 2023 would be a sufficient source of taxable income to realize all of its deferred tax assets except for a portion of its net operating loss carryforwards. As a result, a full valuation allowance on its deferred tax assets was recorded as of December 31, 2023. The Company will continue to assess the realizability of its assets going forward and will adjust the valuation allowance as needed.
The Company determines its uncertain tax positions based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not to be sustained upon examination by the relevant income tax authorities. The Company is generally subject to examination by U.S. federal and local income tax authorities for all tax years in which loss carryforward is available.
The Company applies judgment in the determination of the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. As of December 31, 2023, the Company has an unrecognized tax benefit of $2.2 million related to tax attributes being carried forward. The Company is generally subject to examination by U.S. federal and local income tax authorities for all tax years in which loss carryforward is available.
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As of December 31, 2023, the Company had U.S. federal net operating loss (“NOL”) carryforwards of approximately $151.9 million, which is available to reduce future taxable income. Approximately $39.2 million of NOL will expire from 2024 through 2037, and approximately $112.7 million of NOL will be carried forward indefinitely. The NOL carryforwards are subject to an annual limitation in the event of certain cumulative changes in the ownership interest. This limits the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. Subsequent ownership changes may further affect the limitation in future years.
Recent accounting standards update
See Note 1: Organization and significant accounting policies – recent accounting pronouncements, within the consolidated financial statements in Part II, Item 8 of this Annual Report for more information.
Discussions of 2021 results and year-to-year comparisons between 2022 and 2021 that are omitted in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 31, 2023.
Results of operations
The following discussion of the financial condition and results of operations should be read in conjunction with the accompanying Consolidated Financial Statements and the related footnotes thereto.
Revenue
Revenue for years ended December 31, 2023, 2022, and 2021 were comprised of the following:
| Year Ended December 31, | 2023 vs. 2022 | 2022 vs. 2021 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands, except percentages) | 2023 | 2022 | 2021⁽¹⁾ | $ Change | % Change | $ Change | % Change | ||||||||||||||||||
| Product revenue | |||||||||||||||||||||||||
| Freezer and thaw | $ | 50,622 | $ | 66,682 | $ | 56,620 | $ | (16,060) | (24 | %) | $ | 10,062 | 18 | % | |||||||||||
| Cell processing | 65,772 | 68,509 | 44,965 | (2,737) | (4 | %) | 23,544 | 52 | % | ||||||||||||||||
| Biostorage services | 1,301 | 809 | 328 | 492 | 61 | % | 481 | 147 | % | ||||||||||||||||
| Service revenue | |||||||||||||||||||||||||
| Freezer and thaw | 1,024 | 74 | — | 950 | 1284 | % | 74 | — | % | ||||||||||||||||
| Biostorage services | 16,527 | 15,234 | 9,817 | 1,293 | 8 | % | 5,417 | 55 | % | ||||||||||||||||
| Rental revenue | |||||||||||||||||||||||||
| Biostorage services | 8,025 | 10,451 | 7,426 | (2,426) | (23 | %) | 3,025 | 41 | % | ||||||||||||||||
| Total revenue | $ | 143,271 | $ | 161,759 | $ | 119,156 | $ | (18,488) | (11 | %) | $ | 42,603 | 36 | % |
(1)2021 revenue includes product revenue related to Global Cooling from May 3, 2021 through December 31, 2021 and product revenue related to Sexton from September 1, 2021 through December 31, 2021.
Total Revenue decline in the year ended December 31, 2023, as compared to the year ended December 31, 2022, was driven primarily by reduced purchases of ultra-low temperature and LN2 freezers. The Company has seen a decrease in customer purchases of these products as customers have reacted to preserve cash and abstain from acquiring inventory due to increased interest rates across the broader CGT market. Customers also reevaluated safety stock levels in the year ended December 31, 2023 for cell processing products, causing revenue levels to fall approximately 4% from the year ended December 31, 2022.
Revenue concentrations with one customer decreased to 16% in the year ended December 31, 2023 from 18% from the same customer in the year ended December 31, 2022. This concentration remained relatively consistent despite significant changes in product mix, as the customer's reduction in demand for capital purchases was less pronounced than others in 2023.
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Revenue is impacted by the relatively high degree of customer concentration, the timing of orders, the development efforts of our customers or end-users and regulatory approvals for biologics that incorporate our products, which may result in significant quarterly fluctuations. Such fluctuations are expected, but they may not be predictive of future revenue or otherwise indicative of a trend.
Costs and operating expenses
Total costs and operating expenses for years ended December 31, 2023, 2022, and 2021 were comprised of the following:
| Year Ended December 31, | 2023 vs. 2022 | 2022 vs. 2021 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands, except percentages) | 2023 | 2022 | 2021 | $ Change | % Change | $ Change | % Change | ||||||||||||||||||
| Cost of product, rental, and service revenue | $ | 96,519 | $ | 107,937 | $ | 82,108 | $ | (11,418) | (11 | %) | $ | 25,829 | 31 | % | |||||||||||
| General and administrative | 55,725 | 47,670 | 33,668 | 8,055 | 17 | % | 14,002 | 42 | % | ||||||||||||||||
| Sales and marketing | 24,583 | 21,570 | 14,006 | 3,013 | 14 | % | 7,564 | 54 | % | ||||||||||||||||
| Research and development | 18,796 | 14,798 | 11,821 | 3,998 | 27 | % | 2,977 | 25 | % | ||||||||||||||||
| Asset impairment charges | 15,485 | 110,364 | — | (94,879) | (86 | %) | 110,364 | - | % | ||||||||||||||||
| Intangible asset amortization | 5,181 | 9,697 | 8,202 | (4,516) | (47 | %) | 1,495 | 18 | % | ||||||||||||||||
| Acquisition costs | — | 18 | 1,636 | (18) | (100) | % | (1,618) | (99 | %) | ||||||||||||||||
| Change in fair value of contingent consideration | (2,193) | (4,754) | 2,875 | 2,561 | (54) | % | (7,629) | (265 | %) | ||||||||||||||||
| Total operating expenses | $ | 214,096 | $ | 307,300 | $ | 154,316 | $ | (93,204) | (30 | %) | $ | 152,984 | 99 | % |
Cost of product, rental, and service revenue
In the year ended December 31, 2023, cost of product, rental, and service revenue decreased $11.4 million, or 11%, from the year ended December 31, 2022. This decrease was primarily driven by decreased sales compared to the prior year. We expect the cost of product, rental, and service revenue to fluctuate in future quarters based on production volumes and product mix.
Cost of product, rental, and service revenue as a percentage of revenue was 69% and 70% for the years ended December 31, 2023 and 2022, respectively. Cost of product, rental, and service revenue in the years ended December 31, 2023 and 2022 includes zero and $251,000, respectively, in inventory step-up expense recorded in the purchase accounting of our Global Cooling, CBS, and AsteroBio Corporation (“Astero”) acquisitions.
General and administrative expenses
During the years ended December 31, 2023, 2022, and 2021, general and administrative (“G&A”) expense consisted primarily of personnel-related expenses, stock-based compensation, professional fees, such as accounting and consulting fees, and corporate insurance.
In the year ended December 31, 2023, G&A expenses increased by $8.1 million, or 17%, compared with the year ended December 31, 2022. Of this increase, $3.7 million, or 31%, was driven by increased consulting fees related to our strategic transaction on the Freezer Business. The remaining costs primarily relate to an increase of $1.4 million in severance related to the departure of the former CEO and other staff in addition to a reduction in headcount that occurred in the quarter ended September 30, 2023.
Sales and marketing expenses
During the years ended December 31, 2023, 2022, and 2021, sales and marketing expense (“S&M”) consisted primarily of personnel-related costs, stock based compensation, consulting, advertising, and travel expenses.
S&M expense increased $3.0 million in the year ended December 31, 2023, or 14%, compared with the year ended December 31, 2022. The increase is primarily due to $2.0 million of increased stock compensation and $0.7 million of increased advertising.
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Research and development expenses
During the years ended December 31, 2023, 2022, and 2021, research and development (“R&D”) expense consisted primarily of personnel-related costs, consulting, research supplies, and milestone expenses related to third party research agreements.
R&D expense increased $4.0 million in the year ended December 31, 2023, or 27%, compared with the year ended December 31, 2022. The increase is primarily due to $2.5 million of increased stock-based compensation expenses and $1.0 million of scrapped research materials related to an adjustment in the design of a future freezer product release that rendered certain components obsolete.
Asset impairment charges
Asset impairment charges in the year ended December 31, 2023 consist of the impairment incurred of $15.5 million during the quarter ended September 30, 2023. Asset impairment charges in the year ended December 31, 2022 consist of the impairments incurred of $69.9 million and $40.5 million during the quarter ended June 30, 2022 and impairment assessment date of October 1, 2022, respectively. These impairment charges impacted both definite and indefinite-lived intangible assets acquired during the acquisition of Global Cooling and Custom Biogenic Systems. See Note 2: Impairment of property and equipment and definite-lived intangible assets within the consolidated financial statements in Part II, Item 8 of this Annual Report for more information on the events and assessment leading to these non-cash impairment charges during the years ended December 31, 2023 and 2022.
Intangible asset amortization expense
Amortization expense consists of charges related to the amortization of intangible assets associated with the acquisitions of Global Cooling, Custom Biogenic Systems (“CBS”), SciSafe, Sexton, SAVSU Technologies, Inc. (“SAVSU”), and Astero in which we acquired definite-lived intangible assets.
Acquisition costs
Acquisition costs consist of legal, accounting, third-party valuations, and other due diligence costs related to our Global Cooling and Sexton acquisitions.
Change in fair value of contingent consideration
Change in fair value of contingent consideration consists of changes in estimated fair value of our potential earnouts related to our SciSafe and Custom Biogenic Systems acquisitions. The benefit recognized in the year ended December 31, 2023 relates primarily to changes in our estimated probability of achieving earnout targets set forth within the purchase agreements.
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Other income and expenses
Total other income and expenses for the years ended December 31, 2023, 2022, and 2021 were comprised of the following:
| Year Ended December 31, | 2023 vs. 2022 | 2022 vs. 2021 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands, except percentages) | 2023 | 2022 | 2021 | $ Change | % Change | $ Change | % Change | ||||||||||||||||||
| Change in fair value of warrant liability | $ | — | $ | — | $ | (121) | $ | — | — | % | $ | 121 | (100) | % | |||||||||||
| Change in fair value of investments | — | 697 | — | (697) | (100 | %) | 697 | — | % | ||||||||||||||||
| Interest expense, net | (1,812) | (687) | (485) | (1,125) | 164 | % | (202) | 42 | % | ||||||||||||||||
| Other income | 1,264 | 704 | 289 | 560 | 80 | % | 415 | 144 | % | ||||||||||||||||
| Gain on settlement of Global Cooling escrow | 5,115 | — | — | 5,115 | — | % | — | — | % | ||||||||||||||||
| Gain on acquisition of Sexton Biotechnologies, Inc. | — | — | 6,451 | — | — | % | (6,451) | (100 | %) | ||||||||||||||||
| Total other income, net | $ | 4,567 | $ | 714 | $ | 6,134 | $ | 3,853 | 540 | % | $ | (5,420) | (88 | %) |
Change in fair value of warrant liability.
Reflects the changes in fair value associated with the periodic “mark-to-market” valuation of certain warrants that were issued in 2014. See Note 1: Organization and significant accounting policies, “Certain Warrants which have Features that may Result in Cash Settlement” within the consolidated financial statements in Part II, Item 8 of this Annual Report for more information.
Change in fair value of investments.
Reflects fair value adjustments to our investment in iVexSol.
Interest expense, net.
Interest expense incurred in the year ended December 31, 2023 related primarily to the loan obtained in September 2022 and two loans that were assumed in the acquisition of Global Cooling. We also earn interest on cash held in our money market account. Increases in interest expenses during the year ended December 31, 2023 can also be attributed primarily to interest incurred on the Term Loan (as defined under Note 13: Long-term debt within the consolidated financial statements in Part II, Item 8 of this Annual Report) drawn in the quarter ended September 30, 2022.
Gain on settlement of Global Cooling escrow.
Reflects the non-cash gain associated with our post-closing adjustments for indemnifications and negotiated terms in connection with our acquisition of Global Cooling, and subsequent release and cancellation of these shares of our common stock from the third-party escrow account established in connection with that transaction. For additional information, see Note 12 within the consolidated financial statements in Part II, Item 8 of this Annual Report.
Gain on acquisition of Sexton Biotechnologies, Inc.
Reflects the non-cash gain associated with our investment in Sexton due to the step-acquisition of the remaining shares of Sexton and subsequent consolidation of Sexton in our financial statements.
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Income Tax (Expense) Benefit
Income tax benefit for the years ended December 31, 2023, 2022, and 2021 was as follows:
| Year Ended December 31, | 2023 vs. 2022 | 2022 vs. 2021 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands, except percentages) | 2023 | 2022 | 2021 | $ Change | % Change | $ Change | % Change | ||||||||||||||||||
| Income tax (expense) benefit | $ | (169) | $ | 5,022 | $ | 20,118 | $ | (5,191) | (103) | % | $ | (15,096) | (75 | %) | |||||||||||
| Effective tax rate | — | % | 4 | % | 69 | % |
The income tax benefit recognized in the year ended December 31, 2023 primarily related to losses generated in 2023. Our effective tax rate for 2023 was lower than the U.S. statutory rate of 21% primarily due to the change in our valuation allowance.
The income tax benefit recognized in the year ended December 31, 2022 primarily related to losses generated in 2022. Our effective tax rate for 2022 was lower than the U.S. statutory rate of 21% primarily due to our valuation allowance.
Liquidity and capital resources
We believe our cash, cash equivalents, restricted cash, cash generated from operations, available-for-sale securities, and credit lines will satisfy, for at least the next twelve months from the date of this filing, our liquidity requirements, both globally and domestically, including the following: working capital needs, capital expenditures, ongoing initiative for divestiture of the Freezer Business, contractual obligations, commitments, principal and interest payments on debt, and other liquidity requirements associated with our operations.
On December 31, 2023, we had $52.3 million in cash, cash equivalents, and available-for-sale securities, compared to $64.1 million as of December 31, 2022, as follows:
| Year Ended December 31, | 2023 vs. 2022 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands, except percentages) | 2023 | 2022 | $ Change | % Change | ||||||||||
| Cash and cash equivalents | $ | 35,407 | $ | 19,442 | $ | 15,965 | 82 | % | ||||||
| Restricted cash | 31 | 31 | — | — | % | |||||||||
| Available-for-sale securities | 16,836 | 44,592 | (27,756) | (62) | % | |||||||||
| Maturities in less than one year | 16,288 | 43,260 | (26,972) | (62) | % | |||||||||
| Maturities in greater than one year | 548 | 1,332 | $ | (784) | (59) | % | ||||||||
| Total cash, cash equivalents, and available-for-sale securities | $ | 52,274 | $ | 64,065 | $ | (11,791) | (18) | % |
The increase in cash and cash equivalents of $16.0 million as of December 31, 2023 is primarily due to the sale and maturity of our available for sale securities of $27.8 million, change in accounts receivable of $15.4 million, and proceeds from financing activities of $10.6 million. These increases were partially impacted by $14.0 million in net loss after non-cash adjustments, use of cash in accounts payable and inventory of $17.0 million, and acquisition of property and equipment and assets held for rent of $11.2 million.
Our available-for-sale securities consist of U.S. government securities, corporate debt securities, and other debt securities. Management classifies investments at the time of purchase and reevaluates such classification at each balance sheet date. The decrease in available-for-sale securities of $27.8 million resulted from the maturity of $52.7 million of available-for-sale securities during the year, offset by purchases of similar instruments of $27.1 million.
On October 19, 2023, we entered into a Securities Purchase Agreement with Casdin Partners Master Fund, L.P. ("Casdin") whereby the Company sold, and Casdin purchased, 927,165 shares of common stock of the Company at a share price of $11.19 per share for an aggregate purchase price of $10.4 million.
On September 20, 2022, the Company, and certain of its subsidiaries, entered into a term loan agreement, which provided for up to $60 million in aggregate principal to be drawn with $30 million being available upon closing and an additional
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$30 million available in three separate tranches, subject to the Company meeting revenue milestones by a certain date or at the discretion of the lender by a certain date. The Company borrowed $20 million upon closing. As of December 31, 2023, the Company had not drawn additional funding outlined within the Loan Agreement. For additional information on terms, see Note 13: Long-term debt within the consolidated financial statements in Part II, Item 8 of this Annual Report.
Cash flows
| Year Ended December 31, | 2023 vs. 2022 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands, except percentages) | 2023 | 2022 | $ Change | % Change | ||||||||||
| Operating activities | $ | (12,498) | $ | (8,488) | $ | (4,010) | (47 | %) | ||||||
| Investing activities | 17,837 | (58,117) | 75,954 | 131 | % | |||||||||
| Financing activities | 10,591 | 16,316 | (5,725) | (35) | % | |||||||||
| Net increase (decrease) in cash and cash equivalents | $ | 15,930 | $ | (50,289) | $ | 66,219 | 132 | % |
Operating activities
In the year ended December 31, 2023, our operating activities used cash of $12.5 million reflecting net loss of $66.4 million and non-cash charges totaling $53.9 million primarily related to stock-based compensation, impairment of assets, depreciation, amortization, changes in fair value of contingent consideration, gain on settlement of Global Cooling escrow, and non-cash lease charges. Significant changes in operating assets and liabilities include a decrease of accounts receivable of $15.3 million, an increase in inventory of $8.6 million, and a decrease in accounts payable of $8.4 million.
In the year ended December 31, 2022, our operating activities used cash of $8.5 million reflecting net loss of $139.8 million and non-cash charges totaling $146.2 million primarily related to impairment of intangible assets, depreciation, amortization, changes in fair value of contingent consideration, deferred income tax benefit, stock-based compensation, and non-cash lease charges. An increase in accrued expenses and current liabilities of $5.7 million was primarily driven by a $3.7 million non-income tax liability estimated for sales taxes owed and approximately $1.8 million increase in accrued compensation for increased headcount compared to the prior year. The increase in accrued expenses and current liabilities was offset by a $6.9 million reduction in warranty liability and $1.6 million reduction in accounts payable.
Investing activities
Our investing activities generated $17.8 million of cash in the year ended December 31, 2023. We had $29.1 million in net proceeds of available-for-sale securities to fund capital projects and operations. Capital expenditures and purchases of assets held for rent to maintain and expand the Company's operations used $11.2 million.
Our investing activities used $58.1 million of cash in the year ended December 31, 2022. We invested $44.6 million in available-for-sale securities in addition to continued investment in capital expenditures and purchases of assets held for rent, using an additional $13.9 million.
Financing activities
In the year ended December 31, 2023, cash provided by financing activities was $10.6 million. The increase in cash provided by financing activities compared to the prior year is primarily due to a private placement of $10.4 million and proceeds from financed insurance premiums of $2.6 million, offset by payments on financed insurance premiums of $2.4 million.
In the year ended December 31, 2022, cash provided by financing activities was $16.3 million. The increase in cash provided by financing activities compared to the prior year is primarily due to drawing $20 million on a term loan obtained on September 20, 2022, offset by payments on outstanding debt of $1.7 million and payments on financed insurance premiums of $1.4 million.
Contractual obligations
Our cash flows from operations are dependent on a number of factors, including fluctuations in our operating results, accounts receivable collections, inventory management, and the timing of tax and other payments. As a result, the impact
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of contractual obligations on our liquidity and capital resources in future periods should be analyzed in conjunction with such factors. Despite these uncertainties, we believe that our balances of cash, cash equivalents, available-for-sale securities, and restricted cash in addition to our cash flows from operations are adequate to meet our liquidity requirements in the next 12 months.
The following summarizes certain of our contractual obligations as of December 31, 2023 and the effect such obligations are expected to have on our cash flows in the next fiscal year:
Long-term debt, including interest
These amounts represent expected cash payments, including principal and interest. Debt obligations are described in Note 13 of the Consolidated Financial statements in Part II, Item 8 of this Annual Report. As of December 31, 2023, our total obligations were $25.2 million, of which $6.8 million was short-term.
Lease obligations
We have various operating and financing lease agreements for office space, warehouses, manufacturing, research equipment, machinery, and production locations as well as vehicles and other equipment. Lease obligations are described in Note 6 of the Consolidated Financial statements in Part II, Item 8 of this Annual Report. As of December 31, 2023, our total obligations were $17.5 million, of which $3.2 million was short-term.
Purchase obligations
Purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable pricing provisions and the approximate timing of the transactions. As of December 31, 2023, our total obligations were $13.9 million, of which $13.7 million was short-term.
Sales Tax
We are in the process of evaluating a state sales tax liability analysis for states in which we have economic nexus, and collecting exemption documentation from our customers. It is probable that we will be subject to sales tax liabilities plus interest and penalties relating to historical activity in certain states. We have estimated a contingent liability for sales tax which is recorded in the Consolidated Balance Sheet. The liability includes significant judgments and estimates that may change in the future, and the liability may exceed our current estimate. We may be subject to examination by the relevant state tax authorities and we can provide no assurances that outcomes from these examinations will not have a significant effect on our operating results, financial condition, and cash flows.
Capital requirements
Our future capital requirements will depend on many factors, including the following:
•the expansion of our cell and gene therapy tools and services business
•the ability to sustain product revenue and profits of our cell and gene therapy products and services;
•The degree to which we implement additional automated production equipment throughout our facilities;
•our ability to acquire additional cell and gene therapy products and services;
•the scope of and progress made in our research and development activities; and
•the success of any proposed financing efforts.
Absent acquisitions of additional products, product candidates, or intellectual property, we believe our current cash, cash equivalents, and available-for-sale securities balances, in addition to our cash flows from operations, are adequate to meet our cash needs for at least the next 12 months as of the date of this filing. We expect operating expenses in the year ending December 31, 2024 to decrease as we continue to seek opportunities for the divestiture of our freezer product lines from our current product portfolio. We expect to incur continued spending related to the expansion of our other existing product lines and expansion of our commercial capabilities for the foreseeable future. Our future capital requirements may include, but are not limited to, purchases of property and equipment, the acquisition of additional cell and gene therapy products and technologies, and continued investment in our intellectual property portfolio.
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We actively evaluate various strategic transactions on an ongoing basis, including acquiring complementary products, technologies or businesses that would complement our existing portfolio. We continue to seek to acquire such potential assets that may offer us the best opportunity to create value for our shareholders. In order to acquire such assets, we may need to seek additional financing to fund these investments. If our available cash balances and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements, including because of any such acquisition-related financing needs or lower demand for our products, we may seek to sell common or preferred equity or convertible debt securities, enter into a credit facility or another form of third-party funding, or seek other debt funding. The sale of equity and convertible debt securities may result in dilution to our stockholders, and those securities may have rights senior to those of our common shares. If we raise additional funds through the issuance of preferred stock, convertible debt securities or other debt financing, these securities or other debt could contain covenants that would restrict our operations. Any other third-party funding arrangement could require us to relinquish valuable rights. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available on reasonable terms, if at all.
Sexton Biotechnologies, Inc. acquisition
On August 9, 2021, BioLife entered into an Agreement and Plan of Merger (the “Sexton Merger Agreement”) with BLFS Merger Sub, Inc., a Delaware corporation (“Sexton Merger Sub”), Fortis Advisors LLC, in its capacity as the representative of the stockholders of Sexton (the “Sexton Seller Representative”) and Sexton Biotechnologies, Inc., a Delaware corporation.
On September 1, 2021, the Company completed the merger of Sexton Merger Sub with and into Sexton and Sexton became a wholly owned subsidiary of the Company (the “Sexton Merger”). As consideration for the Sexton Merger (the “Sexton Merger Consideration”), holders of common stock, preferred stock and options of Sexton, other than the Company (collectively, the “Sexton Participating Holders”), were entitled to receive an aggregate of 530,502 newly issued shares of the Company’s common stock, subject to certain post-closing adjustments, of which 477,452 shares of Common Stock were issued to the Sexton Participating Holders at the Closing, and 53,050 shares of Common Stock, or approximately 10% of the Merger consideration, were deposited into an escrow account for indemnification and post-closing purchase price adjustment purposes. Prior to the merger, the Company held preferred stock in Sexton, which was accounted for using a measurement alternative that measures the securities at cost minus impairment, if any. The Company accounted for the merger as a step acquisition, which required remeasurement of the Company’s existing ownership in Sexton to fair value prior to completing the acquisition method of accounting. Using step acquisition accounting, the Company increased the value of its existing equity interest to its fair value, resulting in the recognition of a non-cash gain of $6.5 million, which was included in the gain on acquisition of Sexton Biotechnologies, Inc. in the Consolidated Statements of Operations in the year ended December 31, 2021. The Company utilized a market-based valuation approach to determine the fair value of the existing equity interest based on the total merger consideration offered and the Company’s stock price at acquisition.
The Sexton Merger was accounted for as a purchase of a business under FASB ASC Topic 805, Business Combinations. The fair value of the net tangible assets acquired was approximately $4.1 million, the deferred tax liability acquired was approximately $1.5 million, the fair value of the intangible assets acquired was approximately $8.8 million, and the residual goodwill was approximately $28.5 million. The fair value calculations required critical estimates, including, but not limited to, future expected cash flows, revenue and expense projections, discount rates, revenue volatility, and royalty rates.
Global Cooling, Inc. acquisition
On March 19, 2021, the Company entered into an Agreement and Plan of Merger (the “GCI Merger Agreement”) with BLFS Merger Subsidiary, Inc., a Delaware corporation (“GCI Merger Sub”), Global Cooling, a Delaware corporation and Albert Vierling and William Baumel, in their capacity as the representatives of the stockholders of GCI (collectively, the “GCI Seller Representative”).
On May 3, 2021, pursuant to the GCI Merger Agreement, subject to the terms and conditions set forth therein, the transactions contemplated by the GCI Merger Agreement were consummated (the “GCI Closing”), GCI Merger Sub merged with and into GCI (the “GCI Merger” and, together with other transactions contemplated by the GCI Merger Agreement, the “GCI Transactions”), with GCI continuing as the surviving corporation in the GCI Merger and a wholly owned subsidiary of the Company. In the GCI Merger, all of the issued and outstanding shares of capital stock of GCI immediately prior to the filing of the Certificate of Merger with the Secretary of State of the State of Delaware (other than those properly exercising any applicable dissenter’s rights under Delaware law) were converted into the right to receive the
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GCI Merger Consideration (as defined below). The Company paid the GCI Merger Consideration to the holders of common stock and preferred stock of GCI (collectively, the “GCI Stockholders”).
The aggregate merger consideration paid pursuant to the GCI Merger Agreement to the GCI Stockholders was 6,646,870 newly issued shares of common stock, provided, however, that the GCI Merger Consideration otherwise payable to GCI Stockholders was subject to the withholding of the GCI Escrow Shares (as defined below) and was subject to reduction for indemnification obligations. The GCI Merger Consideration allocable to one GCI stockholder was reduced by 10,400 shares to satisfy an outstanding note receivable of $374,000. In accordance with ASC 805, the Company recognized the settlement of pre-existing relationships in the forms of cash deposits, trade receivables, and trade payables, which are included in the consideration transferred. The GCI Merger Consideration is not subject to any purchase price adjustments.
At the GCI Closing, approximately nine percent (9%) of the GCI Merger Consideration (the “Escrow Shares”, along with any other dividends, distributions or other income on the GCI Escrow Shares, the “GCI Escrow Property”) otherwise issuable to the GCI Stockholders (allocated pro rata among the GCI Stockholders based on the GCI Merger Consideration otherwise issuable to them at the GCI Closing), was deposited into a segregated escrow account in accordance with an escrow agreement entered into in connection with the GCI Transactions (the “GCI Escrow Agreement”).
The GCI Escrow Property was held for a period of up to twenty-four (24) months after the GCI Closing as the sole and exclusive source of payment for any post-GCI Closing indemnification claims (other than fraud claims). On September 28, 2022, BioLife asserted an indemnification claim pursuant to the GCI Merger Agreement. On June 5, 2023, the Company entered into a Settlement Agreement with the representatives of the GCI Stockholders, pursuant to which the parties agreed to release 65% of the General Escrow Shares, totaling 216,024 shares, to the Company from the GCI Escrow Account. These shares were returned to the Company and subsequently cancelled. As a result of the settlement, the Company recorded a $5.1 million gain recognizing the return of the shares during the second quarter of 2023.
The GCI Merger was accounted for as a purchase of a business under FASB ASC Topic 805, Business Combinations. The fair value of the net tangible assets acquired was $740,000, the deferred tax liability acquired was $24.1 million, the fair value of the intangible assets acquired was $120.5 million, and the residual goodwill was $137.8 million. The fair value calculations for intangible assets required critical estimates, including, but not limited to, future expected cash flows, revenue and expense projections, discount rates, revenue volatility, and royalty rates.
Supply chain considerations
Our domestic and international supply chain operations were affected during the years ended December 31, 2021 and 2022 by the global COVID-19 pandemic and the resulting volatility and uncertainty it caused in the U.S. and international markets. The onset of the COVID-19 pandemic caused supply chains globally to become constrained, and these constraints historically impacted our business through both increased difficulty in obtaining semiconductor chips and increased pricing on available parts across our product lines during the years ended December 31, 2021 and 2022. However, during the year ended December 31, 2023, both availability and pricing of semiconductor chips have improved and no longer pose constraints on our supply chain. We currently have sufficient supply for electrical component parts within our operations and do not foresee constraints to return over our supply chain.