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BIOLIFE SOLUTIONS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 7, 2014

Forward Looking Statements

The statements contained in this Quarterly Report on Form 10-Q, including under the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations," include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including, without limitation, statements regarding BioLife Solutions, Inc. ("BioLife" or the "Company") management's expectations, hopes, beliefs, intentions or strategies regarding the future. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," "plan" and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on the Company's current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be those that it has anticipated. These forward-looking statements involve a number of risks, uncertainties or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include those factors described in greater detail in the risk factors disclosed in our Form 10-K for the fiscal year ended December 31, 2013 filed with the SEC. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those anticipated in these forward-looking statements. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

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 annual report on Form 10-K for the fiscal year ended December 31, 2013 filed with the SEC.

BioLife was originally incorporated in Delaware in 1987 under the name Trans Time Medical Products, Inc. In 2002, the Company, then known as Cryomedical Sciences, Inc., and engaged in manufacturing and marketing cryosurgical products, completed a merger with our wholly-owned subsidiary, BioLife Solutions, Inc., which was engaged as a life sciences tools provider. Following the merger, we changed our name to BioLife Solutions, Inc. We do not have any subsidiaries.

We develop, manufacture and market patented hypothermic storage and cryopreservation solutions for cells and tissue. Our product offerings include:

? Patented biopreservation media products for cells, tissues, and organs ? Generic formulations of blood stem cell freezing media products ? Custom product formulation and custom packaging services ? Precision thermal packaging products ? Contract aseptic manufacturing formulation, fill, and finish services of liquid media products



Our proprietary HypoThermosol® FRS and CryoStor®, generic BloodStor® biopreservation media products and precision thermal packaging 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 Pharmacopia (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 100 hospital-approved or clinical trial stage regenerative medicine applications.

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 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 notable 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.

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Recent Developments Reverse Stock Split



On January 17, 2014, our Board of Directors approved an amendment to our certificate of incorporation to effect a reverse stock split by a ratio of 1 for 14, with no reduction in the number of shares of common stock that were previously authorized in our certificate of incorporation. The reverse stock split was effective on January 29, 2014. Unless otherwise noted, all share and per share data in this Quarterly Report on Form 10-Q give effect to the 1-for-14 reverse stock split of our common stock.

Public Offering of Units

On March 25, 2014, we closed a registered public offering of 3,588,878 units for gross proceeds of $15,432,175. Each unit consisted of one share of the Company's common stock and one warrant, each warrant exercisable for seven years to purchase one share of the Company's common stock at an exercise price of $4.75. Net of placement agent fees of $1,211,734 and offering costs of $624,211, we received net proceeds of $13,596,230. Of the gross proceeds, $9.1 million was allocated to common stock and $6.3 million was allocated to warrants, based on relative fair values.

Conversion of Notes and Interest to Equity

Pursuant to previously disclosed note conversion agreements with WAVI Holding AG and Taurus4757 GmbH (the "Note Holders"), concurrently with the closing of the Company's public offering of units, the Company converted approximately $14.3 million of indebtedness, including accrued interest, to the Note Holders into equity, issuing to the Note Holders an aggregate of 3,321,405 units having terms substantially similar to the public offering units. In connection with the note conversion, the Company's $14.3 million indebtedness to the Note Holders under the terms of the Company's previously disclosed facility agreements was extinguished, all remaining unamortized deferred finance costs were recorded to additional paid in capital, and the Note Holders agreed to release all security interests. Of the total conversion amount, $8.4 million was allocated to common stock and $5.8 million was allocated to warrants, based on relative fair values.

Listing of Common Stock on NASDAQ Capital Market

On March 26, 2014, our common stock was listed on the Nasdaq Capital Market under the symbol BLFS.

Summary of Results for the Second Quarter of 2014

? Total revenue decreased 48% for the second quarter of 2014 compared to the second quarter of 2013 and 41% from the first quarter of 2014, due to the cancellation of our contract manufacturing services agreement with an organ preservation company. ? We announced the execution of a long-term contract manufacturing services agreement with Somahlution LLC, a Jupiter, Florida-based biotechnology company in July 2014. This agreement is expected to start generating revenue in the fourth quarter of 2014. We will manufacture DuraGraft™, a tissue preservation solution for storage of harvested veins used in coronary artery bypass graft (CABG) and other vascular access surgeries. ? Core product revenue in the second quarter of 2014 increased 14% over the second quarter of 2013, with increased sales to the regenerative medicine market, as well as strong sales to cell suppliers. Core product revenue was down 5% from the first quarter of 2014. Our core product revenue is subject to significant quarter-to-quarter fluctuations and can be concentrated in particular quarters. It is heavily dependent on the progress and timing of our customers' clinical trials. ? Net loss for the second quarter of 2014 increased to $883,356, compared to $282,506 in the second quarter of 2013 and $559,371 in the first quarter of 2014. The increase is the result of reduction in revenue from the cancellation of our contract manufacturing services agreement. We also reported higher research and development and selling and marketing expenses, with the ramp up in our efforts in both of those areas. General and administrative expenses also impacted net loss, with higher consulting fees for investor relations, higher personnel costs, including salaries and bonuses, and higher corporate costs, including corporate insurance, directors' fees, legal fees and accounting fees. ? Net cash used by operating activities was $1,767,644 in the first half of 2014 compared to cash provided by operations of $79,992 in the first half of 2013. The difference being primarily attributable to the reduction in revenue from the cancellation of our contract manufacturing services agreement. 14



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? TxCell, a Nice, France-based biotechnology company developing innovative, personalized cell-based immunotherapies using antigen specific regulatory T cells (Ag-Tregs) for severe chronic inflammatory and autoimmune diseases, announced they adopted BioLife's CryoStor clinical grade cell freezing media for use in their European phase IIb clinical trial of Ovasave® immunotherapy in refractory Crohn's Disease, which is planned to start in the second half of 2014. ? We announced that we expect to launch biologistex, a new integrated service platform combining cloud-based information service and precision thermal shipping products for cells and tissues. We are finalizing the terms of this relationship and expect to be in beta trials with customers by the fourth quarter of this year. ? We received the Frost & Sullivan 2014 Technology Innovation Leadership Award for Biopreservation Media, recognizing our position as a market leader.



Results of Operations

Our revenue, results of operations and cash balances are likely to fluctuate significantly from quarter-to-quarter. These fluctuations are due to a number of factors, especially the progress of our customers' clinical trials. The majority of our net sales come from a relatively small number of customers and a limited number of market sectors. Each of these sectors is subject to macroeconomic conditions as well as trends and conditions that are sector specific. Any weakness in the market sectors in which our customers are concentrated could affect our business and results of operations.

Comparison of Results of Operations for the Three and Six Month Periods Ended June 30, 2014 and 2013

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

Revenue and Gross Margin Three Month Period Ended June 30, 2014 2013 % Change Revenue: Core product sales $ 1,076,780$ 941,568 14% Contract manufacturing services 135,120 1,388,450 (90)% Total revenue 1,211,900 2,330,018 (48)% Cost of sales 666,580 1,501,575 (56)% Gross profit $ 545,320$ 828,443 (34)% Gross margin % 45.0% 35.6% Six Month Period Ended June 30, 2014 2013 % Change Revenue: Core product sales $ 2,209,025$ 1,711,701 29% Contract manufacturing services 1,067,905 2,169,162 (51)% Licensing revenue -- 609,167 (100)% Total revenue 3,276,930 4,490,030 (27)% Cost of sales 1,828,221 2,536,103 (28)% Gross profit $ 1,448,709$ 1,953,927 (26)% Gross margin % 44.2% 43.5%



Core Product Sales. Our core products are sold through both direct and indirect channels. Sales to our core customers in the three and six months ended June 30, 2014 increased by 14% and 29%, respectively. The increase was due to a 22% increase in liters sold during the three months ended June 30, 2014 compared to the same period in 2013 and a 32% increase in liters sold during the six months ended June 30, 2014 compared to the same period in 2013. Sales to our core customers tend to be uneven due to the pace of product evaluation, adoption, and clinical trials. Management believes that our opportunity in the regenerative medicine market will start to become fully realized over the next three to five years as some customers receive regulatory and marketing approvals for their clinical cell and tissue-based products. We continue to have a goal for 2014 of increasing our core product sales at a rate of 25-35% over 2013. Our 2014 core product sales will depend on a number of factors, including the level and pace of market adoption of our products; the clinical and commercial success of our customers; competition; and the risks set forth in our annual report on Form 10-K under the heading "Risk Factors". No assurance can be provided that we will achieve our product sales goal.

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Contract Manufacturing Services. Contract manufacturing services represents sales of product to one significant customer, ORS. The contract with this customer was terminated in May of 2014.

Licensing Revenue. During the first quarter of 2013, we negotiated a new intellectual property license agreement that provides one customer with limited access to our intellectual property under certain conditions. This customer paid upfront fees for the specific rights and there are no future performance obligations. The upfront fee of $500,000 was recognized as revenue during the quarter and $109,167 in deferred revenue associated with this customer was recognized as all future performance obligations associated with the previous license agreements were cancelled with the agreement signed in the first quarter of 2013.

Cost of Sales. Cost of sales consists of raw materials, labor and overhead expenses. Cost of sales in the three and six months ended June 30, 2014 decreased compared to the same periods in 2013 due primarily to the significant reduction in volume in our contract manufacturing services revenue and costs related to the manufacture of this product.

Gross Margin. Gross margin as a percentage of revenue was 45% in the three months ended June 30, 2014 compared to 35.6% in the three months ended June 30, 2013. The increase was due to the increase in core product and the decrease in contract manufacturing revenue. The contract manufacturing revenue had a lower gross margin than the core product revenue.

Gross margin for the six months ended June 30, 2014 increased slightly over the same period in 2013. Gross margin as a percentage of revenue in the six months ended June 30, 2013 included the impact of recognition of significant license revenue during the quarter with no associated costs, which resulted in a significant improvement in gross margin as a percentage of revenue in 2013. Excluding the impact of the license revenue, gross margin would have been 34.7% for the six months ended June 30, 2013. The increase in gross margin as a percentage of revenue resulted from the change in mix, with sales of the Company's core products having a higher gross margin than the contract manufacturing revenue.

Operating Expenses

Our operating expenses for the three and six month periods ended June 30, 2014 and 2013 were: Three Month Period Ended June 30, 2014 2013 % Change Operating Expenses: Research and development $ 192,778$ 94,908 103% Sales and marketing 270,616 214,762 26% General and administrative 969,799 601,617 61% Operating Expenses 1,433,193 911,287 57% % of revenue 118% 39% Six Month Period Ended June 30, 2014 2013 % Change Operating Expenses: Research and development $ 360,065$ 200,876 79% Sales and marketing 512,016 417,520 23% General and administrative 1,833,542 1,226,044 50% Operating Expenses 2,705,623 1,844,440 47% % of revenue 83% 41% 16



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Research and Development. Research and development expenses consist primarily of salaries and other personnel expenses, consulting and other outside services including legal services, laboratory supplies, and other costs. We expense all research and development costs as incurred. Research and development expenses for the three and six months ended June 30, 2014 increased compared to the same periods in 2013 primarily due to increased personnel expenses, including salaries and bonuses and additional legal spending in the first quarter of 2014 related to patent renewal.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries and other personnel-related expenses, consulting, trade shows and advertising. The increases in the three and six months ended June 30, 2014 compared to the same periods in 2013 were due primarily to higher personnel expenses, including salaries and bonuses, and higher spending on marketing materials.

General and Administrative Expenses. General and administrative expenses consist primarily of salaries 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. The increases in general and administrative expenses in the three and six months ended June 30, 2014 compared to the same periods in 2013 were due primarily to higher consulting fees for investor relations, higher personnel costs, including salaries and bonuses, and higher corporate costs, including corporate insurance, directors' fees, legal fees and accounting fees.

Other Income (Expenses)

Interest Expense. The reduction in interest expense in the three and six months ended June 30, 2014 compared to the same period in 2013 is due to the conversion of the notes and interest through March 25, 2014, and did not include a full quarter of interest. See above, "Results of Operations - Recent Developments - Conversion of Notes and Interest to Equity."

Amortization of Deferred Financing Costs. During the three and six months ended June 30, 2014, the Company recorded $13,022 in amortization of deferred financing costs. In connection with the termination of the note facility agreements, the Company recorded $101,852, the remaining unamortized costs, as an adjustment to additional paid in capital. See above, "Results of Operations - Recent Developments - Conversion of Notes and Interest to Equity."

Liquidity

We believe that our current level of cash and cash equivalents will be sufficient to meet our liquidity needs for the foreseeable future. We expect to have ongoing cash requirements which we plan to fund through total available liquidity and cash flows generated from operations. Our future uses of cash, which may vary from time to time based on market conditions and other factors, are centered around growing our core business, and continuing to strengthen our balance sheet and competitive position.

Our liquidity plans are subject to a number of risks and uncertainties, including those described in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC on February 12, 2014, some of which are outside our control. Macroeconomic conditions could limit our ability to successfully execute our business plans and therefore adversely affect our liquidity plans.

We continue to monitor and evaluate opportunities to strengthen our balance sheet and competitive position over the long-term. These actions may include the possibility of acquisitions or strategic alliances that we believe would generate significant advantages and substantially strengthen our business.

On June 30, 2014, we had $11,914,537 in cash, cash equivalents and short term investments, compared to cash and cash equivalents of $156,273 at December 31, 2013.

Net Cash Provided by (Used In) Operating Activities

During the six months ended June 30, 2014, net cash used in operating activities was $1,767,644 compared to cash provided by operations of $79,992 for the six months ended June 30, 2013. Cash used in operating activities increased primarily due to the use of cash to fund a higher net loss in 2014 compared to 2013, payment in the first quarter of 2014 of accrued compensation and other liabilities that were accrued at the end of 2013, and the reduction of accounts payable from December 31, 2013 to June 30, 2014.

Net Cash Used in Investing Activities

Net cash used in investing activities totaled $6,163,223 and $225,723 during the six months ended June 30, 2014 and 2013, respectively. Of the amount used in the first quarter of 2014, $6,065,524 was used to purchase short term investments classified as available-for-sale. In addition, during both periods, cash was used in investing activities related to the purchase of equipment.

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Net Cash Provided by Financing Activities

Net cash provided by financing activities was $13,676,822 in the six months ended June 30, 2014, which included gross proceeds of $15,432,175 received in the registered public stock offering completed on March 25, 2014, net of placement agent fees of $1,211,735 and offering costs of $624,211 and $80,592 from the exercise of employee stock options. Net cash provided by financing activities of $25,458 during the six months ended Jun 30, 2013 was the result of proceeds received from warrant and employee stock option exercises.

Upon conversion of all of our outstanding notes and interest to equity on March 25, 2014, we terminated the facility agreements.

Off-Balance Sheet Arrangements

As of June 30, 2014, we did not have any off-balance sheet arrangements.

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.

Our critical accounting policies and estimates have not changed significantly from those policies and estimates disclosed under the heading "Critical Accounting Policies and Significant Judgments and Estimates" in Part II, Item 7, "Management's Discussion and Analysis of Financial Conditions and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the SEC.

Contractual Obligations

We previously disclosed certain contractual obligations and contingencies and commitments relevant to us within the financial statements and Management Discussion and Analysis of Financial condition and Results of Operations in our Annual report on Form 10-K for the year ended December 31, 2013, as filed with the SEC on February 12, 2014. There have been no material changes to the disclosure under the heading "Contractual Obligations" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2013 Annual Report on Form 10-K. for more information regarding our current contingencies and commitments, see note 10 to the financial statements included above.


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