Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit such files). Yes x No ¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No
x
The aggregate market value of common stock
held by non-affiliates of the registrant as of June 28, 2019 was $445,594,200 based on the closing sale price of such common equity
on such date (excluding 11,162,742 shares of common stock held by directors and officers, and any stockholders whose ownership
exceeds five percent of the shares outstanding as of June 28, 2019).
As of March 1, 2020, there were 37,644,867
shares of the registrant’s common stock outstanding.
PART I
Item 1. Business
Overview
Cryoport Inc. (“Cryoport”,
“we”, or “our”) is a life sciences services company that is an integral part of the supply chain supporting
the biopharma, reproductive medicine and animal health markets. We are redefining logistics for the life sciences industry by providing
a unique platform of critical solutions including highly differentiated temperature-controlled logistics, which include advanced
packaging and informatics, and biostorage services. Through our products, services and unparalleled expertise, we enable our clients
to ship, store and deliver cellular-based materials and drug products as well as other life sciences commodities in a precise,
defined temperature-controlled state.
Cryoport’s advanced
platform, comprised of comprehensive and technology-centric systems and solutions are designed to support the global high-volume
distribution of commercial biologic and cell-based products and therapies regulated by the United States Food and Drug Administration
(FDA) and other international regulatory bodies for distribution in the Americas, EMEA (Europe, the Middle East, and Africa) and
APAC (Asia-Pacific) regions. Cryoport’s solutions are also designed to support pre-clinical, clinical trials, Biologics License Applications
(BLA), Investigational New Drug Applications (IND) and New Drug Applications (NDA) with the FDA, as well as global clinical trials
initiated in other countries, where strict regulatory compliance and quality assurance is mandated. Our industry standard setting
Chain of ComplianceTM solutions, which include vital analytics, such as ‘chain-of-condition’ and ‘chain-of-custody’
information in a single data stream, empower our clients’ continuous vigilance over their respective commodities. In addition,
our Chain of ComplianceTM standard ensures full traceability of the equipment used and the processes employed, further
supporting each client’s goal of minimizing risk and maximizing success of their respective new biologics or other products
and therapies as they are introduced into the global markets.
As part of our services,
our platform of technologies provides the ability for Cryoport personnel, and our clients, to monitor conditions of the internal
shipping environment, geographic location and other specified critical variables for each shipment in near real time. In accordance
with client requirements, information is recorded and archived for each shipment for scientific, quality assurance and regulatory
purposes in a secure cloud-based system that can be accessed by authorized personnel globally. This information provides an audit
trail that can verify the in-shipment condition in which the life sciences commodity, material, product, vaccine or therapy was
shipped and/or stored.
One of the
most important features of our Cryoport Express® Solutions is the sophisticated, cloud-based, logistics
management platform, which is branded as the Cryoportal® Logistics Management Platform (the
“Cryoportal®”). The Cryoportal® supports the management of shipments through a
single interface, which includes order entry, document preparation, customs documentation, courier management, near real-time
shipment tracking and monitoring, issue resolution, and regulatory compliance requirements. In addition, it provides unique
and incisive information dashboards and validation documentation for every shipment through data collected by the
SmartPak™ Condition Monitoring System (the “SmartPakTM”). The Cryoportal® can
record and retain a fully documented history of all Cryoport Express® Shippers, including chain-of-custody,
chain-of-condition, chain-of-identity, and Chain of ComplianceTM information for each shipment, which is used
to ensure that the stability of shipped biologic commodities are maintained throughout the shipping cycle. At the
client’s option, recorded information is archived, allowing the client to meet exacting requirements necessary for
scientific work and/or proof of regulatory compliance during the logistics process.
Our Cryoport Express®
Solutions include a family of Cryoport Express® Shippers ranging from liquid nitrogen dry vapor shippers (-150℃)
to our C3TM Shippers (2-8℃), which are powered by phase-change materials. The Cryoport Express®
Shippers are precision-engineered assemblies that are reliable, cost-effective and reusable or recyclable. Our liquid nitrogen
dry vapor Cryoport Express® Shippers utilize an innovative application of ‘dry vapor’ liquid nitrogen
technology and, most often, include a SmartPakTM Condition Monitoring System. Our Cryoport Express® Shippers
are purpose built. One example is the launch of our Advanced Therapy Shippers™ for the Regenerative Medicine market, the
development of which was announced in September 2019. The Cryoport Express® Advanced Therapy Shippers™ are
designed to ensure that each shipper has only been used for human-based therapies and materials. Additionally, the Advanced Therapy
Shippers™ provide complete traceability of the condition in which the commodity was shipped and all supporting equipment
and components. The Advanced Therapy Shippers™ also provide verification information and supply chain support for biopharma
companies developing and commercializing cell and gene therapies and address potential risks of cross contamination of equipment
and materials during use, delivery and distribution of biopharmaceutical materials.
Cryoport Express®
Shippers meet International Air Transport Association (“IATA”) requirements for transport, including Class 6.2 infectious
substances. Cryoport Express® Shippers are also International Safe Transit Association (“ISTA”) “Transit
Tested” certified.
As part of our platform
of solutions, we provide clients with secondary packaging that is placed inside the main chamber of our Cryoport Express®
Shippers. In addition to vials, canes, straws, goblets, plates, cassettes, etc., we offer engineering and consulting services to
assist clients in creating and developing customized secondary packaging that meet their specific requirements.
Our advanced technologies
and dedicated personnel allow us to continue to expand our services footprint with a growing suite of services, products and competencies
supporting the life sciences industry, which currently include: consulting, information technology, primary and secondary packaging,
analytics, logistics distribution, laboratory relocation, fleet management, embedded logistics support and validation services
(e.g., for shipping lanes and packaging). A sample of our client facing, value-added solutions addressing specific client requirements
include:
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“Cell-based Autologous Immunotherapy (Personalized
Medicine) Solutions,” designed for therapies in which our Cryoport Express® Solutions serve as an
enabling technology for the safe and efficient transportation of leukapheresis or apheresis blood products as well as the manufactured
autologous cellular-based immunotherapies. This is accomplished by providing a comprehensive logistics solution for the verified
chain-of-condition, chain-of-custody, chain-of-identity, and Chain of ComplianceTM transport from, (a)
the collection of the patient’s blood or cells at a point-of-care setting, to (b) a central processing facility where they
are manufactured into a personalized medicine, to (c) the safe, cryogenically preserved delivery of these often irreplaceable
cells to a point-of-care treatment facility for infusion into the patient. The Advanced Therapy Shippers™ were designed
specifically for this market. If required, Cryoport Express® Shippers can also serve as a temporary freezer/repository
supporting the efficient distribution of the personalized medicine to the patient when and where the medical provider needs it,
without the expense and inconvenience of on-sight, cryopreservation storage freezers.
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“Allogeneic
Therapy Solutions,” designed for allogeneic therapies in which our Cryoport
Express® Solutions serve as an enabling technology for the safe and efficient
transportation of healthy donor blood products as well as the manufactured allogeneic
therapies by providing a comprehensive logistic solutions for the verified chain-of-condition,
chain-of-custody, chain-of-identity, and Chain of ComplianceTM transport
from, (a) the blood collection center, to (b) the manufacturing facility for the allogeneic
therapy, to (c) a storage and fulfillment facility, or (d) to a point-of-care treatment
facility for infusion into the patient. This is another market where the Advanced Therapy
Shipper™ will play a role. Again, if required, the Cryoport Express® Shipper
can serve as a temporary freezer/repository to allow the efficient distribution of the
personalized medicine to the patient.
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“Embedded
Solutions,” one of our most comprehensive solutions, involves our management
of the entire temperature-controlled logistics process for a client using Cryoport technology
and Cryoport employees working on-site at the client’s location to manage all of
the client’s temperature-controlled logistics needs. This solution is currently
employed in the animal health market.
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“Fleet
Management,” our fleet management support service is designed to reduce
our clients upfront and recurring costs through optimized utilization of resources and
minimization of equipment loss. We offer both complete and partial temperature-controlled
outsourced fleet management services, including fleet evaluation and disposition (if
required), inventory control, fleet maintenance and ongoing fleet requalification and
validation.
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“Packaging
Development,” using ‘Design-of-Experiment’ and ‘Quality-by-Design’
processes, Cryoport can design, engineer and employ customized packaging and/or accessories
to ensure effective distribution of our client’s critical commodities using our
in-house engineering team with packaging engineering competencies in the cryogenic, 2-8℃
and other temperature-controlled ranges to meet or exceed our client’s specifications.
Packaging development may include integration of our SmartPak™ Condition Monitoring
System and the accommodation of our Cryoportal® Logistics Management Platform
into our clients’ software and packaging configurations, providing full access
to our logistics management support competencies.
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“Consulting
Services,” provides our clients an opportunity to leverage our in-house
talent to design custom logistics plans, perform lane assessment, lane and carrier validation;
design custom packaging and validation, permitting clinical trial logistics design; commercial
launch planning; systems integration; and end user training.
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“Laboratory
Relocation,” for large moves of life sciences commodities, we use redundant
temperature-controlled shippers and environmentally controlled trucks. Along with our
logistics partners, we ensure the integrity of client materials during all logistics
phases, including loading, transport, unloading and placement. Our service includes lane
and carrier permitting and validation. Our large sample capacity Cryoport Express®
CryoMax® Shipper has a capacity of up to 36,400 2.0ml vials and
a holding time of up to 20 days and includes the benefit of our SmartPak™ Condition
Monitoring System, which supplies monitoring information to our Cryoportal®
Logistic Management Platform, providing Live View™ information on the client’s
transport. By employing our 24/7/365 client support team to actively monitoring shipments
and mitigate risks, we ensure safe shipping and relocation of large-scale collections.
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“powered
by cryoport®,” available to providers of shipping and delivery
services who seek to offer a “branded” temperature-controlled logistics solution
as part of their service offerings. “powered by cryoport®”
appears prominently on the offering software interface and packaging. This option for
the client to private label its service is available upon committing to certain requirements,
such as minimum annual shipping volumes.
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In addition to the
examples above, Cryoport is continuously evaluating, expanding and improving its range of services and solutions in response to
market needs and client demand.
During 2019, we added
bioservices services to our platform of solutions to provide for our clients’ needs for comprehensive and integrated solutions
offerings and the expected growth in the global biostorage and bioservices markets, which are driven by the acceleration of clinical
trials and the commercialization of regenerative medicine therapies on a global basis. Through our recent acquisition of the biostorage
business of Cryogene Partners (“Cryogene”), we now provide comprehensive temperature-controlled sample management solution
to the life science industry, including specimen storage, sample processing, collection, and retrieval. Cryogene operates a recently
expanded 21,000 square foot state-of-the-art biostorage facility located in Houston, Texas, specializing in the secure storage
of biological specimens, materials and samples. See Note 11 to the accompanying consolidated financial statements included in Item
1 of this report for further discussion of the Cryogene acquisition.
Competitive Advantages
With our first-to-market
platform of solutions, technology-driven logistics services and over a decade of experience serving the life sciences industry,
we have established a substantial lead over potential competitors. Furthermore, we are not aware of any company that offers services
comparable to Cryoport’s full platform of solutions, capabilities or competencies. Working with our depth of information
technology, packaging and temperature-controlled logistics, our management, technical, business development and service support
teams approach our growing markets with adaptability, innovation, and creative thinking.
The most common
alternatives to Cryoport’s platform of solutions are “older technologies” and/or systems. In fact, a
portion of the biopharma market and much of the animal health market still uses hazardous liquid nitrogen or dry ice with no
ongoing validation processes for their equipment or procedures. In the case of dry ice, the technology delivers temperatures
of approximately -80℃ with standard deviations up to 14℃. Consequently, it provides an environment that allows
cellular activity to continue and cells to degrade, impacting cell line performance and cell viability. Liquid nitrogen, on
the other hand, while effective in holding cryogenic temperatures, is bulky, heavy, expensive and requires special handling
to avoid spillage and accommodate weight. Both dry ice and liquid nitrogen are classified “hazardous” by IATA
and, therefore, are also classified as “dangerous goods,” requiring additional permits and fees. Cryoport
solutions on the other hand are classified as non-hazardous.
Through our experience,
we know that logistics distribution can have a large impact on product/commodity conditions. This is especially important for high
value and at times irreplaceable commodities that we transport, whether in support of a clinical trial or the commercial distribution
of a product. We therefore go beyond traditional ISTA (International Safe Transit Association) packaging validation and have implemented
Quality-by-Design processes that allow us to assess in-field events, the impact of logistics on the commodity being shipped, and
the equipment being used for each individual shipments.
We have been qualified
as a trusted temperature-controlled logistics solutions provider for hundreds of life sciences companies and institutions and,
currently, support over 430 clinical trials in the regenerative medicine space. Cryoport has logged over 300,000 shipments to over
100 countries with hundreds of different types of life sciences materials. Our experience and reputation, combined with over a
decade of know-how and technology, provides us with significant competitive advantages. In fact, since our inception, we have experienced
minimal client attrition.
In addition, Novartis
and Kite Pharmaceuticals Inc. (a subsidiary of Gilead Sciences) have both entrusted Cryoport to manage their respective global
clinical shipments of cell therapies trials and the commercial shipments of their CAR T-cell therapies, KYMRIAH®
and YESCARTA®, respectively, which were the first two CAR T-cell therapies approved by the FDA. In June 2019, bluebird
bio’s ZYNTEGLO™ received Conditional Marketing Authorization from the European Medicines Agency (EMA), representing
the third commercially approved product that Cryoport supports. Shipment volumes for ZYNTEGLO™ are expected to ramp in 2020
following the staged commercial launch in January 2020.
Our competitive position is further strengthened
by our “powered by cryoport®” partnership agreements and alliances further described below.
We continuously enhance
and broaden our platform in order to maintain and extend what we believe to be a significant lead in the marketplace. We believe
that it would take a potential competitor an extended period of time and substantial investment to build out the tools, solutions,
and competencies we have developed along with our market-specific know-how. In addition to our lead as the first-to-market mover
and leader in market share in the regenerative medicine space, we think our biggest competitive advantage falls into our trade
secrets and our speed to market with new and effective solutions. Our market leading position enables us to be uniquely tuned to
the markets we serve, which enables us to anticipate and quickly react to client needs and market demand. We try to employ the
best people in the industry, and we foster the development and implementation of new technologies to maintain that lead.
Strategic Logistics Alliances and Collaborations
We have been successful
in establishing strategic alliances around the world, under our Compliance Unified Ecosystem™ and “powered by cryoport®”
strategies, as a long-term method of marketing our solutions to the life sciences industry. We have focused our efforts on leading
companies in the logistics services industry as well as participants in the life sciences industry. These strategies drive integration
of our solutions into our alliance partner’s services.
Cryoport supports the
three largest integrators in the world, FedEx, DHL and UPS, with its advanced cryogenic logistics solutions for the life sciences
industry and for logistics support. These three integrators, collectively, have more than 87% of the express logistics aircraft
in service and each has been expanding other parts of their respective temperature-controlled offerings for the life sciences industry.
To support each integrator’s respective marketing strategy, we operate with each independently and confidentially.
We also have relationships
using our Compliance Unified Ecosystem™ strategy with the following alliance partners:
McKesson
Specialty Health, a division of McKesson Corporation. In February 2018, we announced a strategic collaboration with McKesson
Specialty Health. Cryoport’s platform of capabilities, together with McKesson’s suite of services provides an end-to-end
solution for complex products which require high-touch patient access and adherence support as well as temperature-controlled product
transportation. McKesson Specialty Health works together with stakeholders across the healthcare delivery system to preserve and
strengthen specialty care. The collaboration is focused on helping patients avoid delays in treatment through accelerated patient
on-boarding, prior authorizations, end-user training and comprehensive adherence and educational support programs.
World
Courier, a part of AmerisourceBergen. In July 2018 we announced World Courier’s integration of Cryoport’s
full suite of temperature-controlled solutions into its global network. World Courier is a global specialty logistics company
that designs world-class supply chain programs. The integration provides World Courier clients access to Cryoport’s
Chain of ComplianceTM solutions. The integrated platform combines the strengths of both the Cryoport and World
Courier systems to their respective biopharmaceutical clients, allowing each client to proactively minimize risks to their
cell and gene therapies through the entire biopharma supply chain in order to maintain the efficacy of their valuable
commodities. Our integrated solutions will be offered through World Courier’s global network of more than 140
company-owned offices operating across 50 countries, as well as directly through Cryoport’s business development
team.
Be The Match
BioTherapies®. In October 2018, we announced a strategic partnership with Be The Match BioTherapies to
deliver end-to-end supply chain services to the cell and gene therapy industry. Be The Match BioTherapies is the only cell and
gene therapy solutions provider with customizable services to support the end-to-end cell therapy supply chain. Backed by the industry-leading
experience of the National Marrow Donor Program/Be The Match, and a research partnership with the CIBMTR® (Center
for International Blood and Marrow Transplant Research®), the organization designs solutions that advance cell and
gene therapies in any stage of development. By pairing Cryoport’s expertise in temperature-controlled logistics with Be The
Match BioTherapies’ expertise in apheresis center onboarding and management, case management and logistics, clinical research,
and outcomes data collection and analysis, the two organizations will offer a full end-to-end supply chain and outcomes support
for companies developing and delivering autologous and allogeneic cell and gene therapies. An important part of the agreement is
to integrate Be The Match BioTherapies’ MatchSource® cell therapy supply chain software and Cryoport’s
Cryoportal® Logistics Management Platform.
The integrated Be The
Match Biotherapies/Cryoport platform has the ability to manage more cell therapy products than any other solution in the marketplace,
enabling cell and gene therapy companies to more rapidly discover, develop and deliver next-generation therapies. Our collaboration
supports both organizations’ efforts to standardize critical elements of the cell therapy supply chain, as well as processes
in apheresis and transplant center networks.
EVERSANA™.
In July 2019, we announced the formation of a strategic alliance with EVERSANA a leading independent provider of global services
to the life science industry. EVERSANA integrated solutions are rooted in the patient experience and span all stages of the product
lifecycle to deliver long-term, sustainable value for patients, prescribers, channel partners and payers. EVERSANA serves more
than 500 organizations, including innovative start-ups and established pharmaceutical companies. Through this alliance, we provide
EVERSANA and its clients with our full suite of logistics solutions under our “powered by cryoport®”
marketing model. This includes our Cryoport Express® Shippers, Cryoportal® Logistics Management Platform,
leading-edge SmartPak™ Condition Monitoring System and our advanced logistics management capabilities.
Vineti, Inc.
In September 2019, Vineti and Cryoport announced a commercial partnership designed to extend end-to-end delivery of cell and gene
therapies to a growing number of patients. Pairing Vineti’s supply chain orchestration (SCO) platform with Cryoport’s
logistics platform provides an end-to-end solution for advanced therapies, supporting the assurance of improved drug product quality
and patient safety. Vineti and Cryoport together seek to leverage both of their commercial and clinical phase experiences and insights
from serving biopharma customers. With Vineti’s platform expected to be deployed in more than 300 clinical centers world-wide
within the next year, and Cryoport serving more than 430 clinical trials and three commercialized therapies, the collaboration
between the two companies provides a broad-based global solution. Vineti was co-founded by GE and the Mayo Clinic.
LONZA. In November
2019, Lonza, an integrated solutions provider that creates value along its Healthcare Continuum®, and Cryoport announced
a partnership to support companies in the cell and gene therapy market. As a part of this commitment, Lonza announced Cryoport
as its preferred partner in the management of transport and delivery of patient tissues on a global basis, with the continued goal
of seamless service for Lonza’s customers and their patients. Lonza and Cryoport will work to remove the supply chain hurdles
faced by developers of personalized therapeutics, including autologous therapies, matched-allogeneic therapies, and personalized
cancer vaccines, as they prepare for the commercial launch of their respective therapies.
The goal of the partnership
is to provide fully integrated solutions including, but not limited to, co-location of manufacturing, bioservices and distribution
facilities to improve and enhance responsiveness and optimized product workflow, automated data management providing integrated
data entry, and process optimization that reduces risk, increases transparency and improves certainty.
Lonza, is a global
company with more than 100 sites and offices and approximately 15,500 full-time employees worldwide at the end of 2018. Four of
the Lonza facilities are ‘centers of excellence’ dedicated to cell and gene therapy. Its flagship, dedicated
cell-and-gene-therapy manufacturing facility is located in Houston, Texas, which is in close proximity to our planned Global Supply
Chain Center in Houston, Texas, which we expect to be operational during the fourth quarter of 2020.
Cryoport’s Positioning in the
Life Sciences Industry
Life sciences
technology advancements are expected to have a significant impact on our global society over the next 25 years. The industry
is growing in a way where research and manufacturing pipelines span the globe. These complex and sensitive pipelines will
drive increasing requirements to mitigate supply chain risks, especially for cellular-based therapies/products and other life
sciences commodities today and tomorrow.
Cryoport, with its
platform solutions, has assumed the leadership position in supporting a crucial part of the rapidly growing regenerative medicine
market that is poised for continued expansion. According to the Alliance for Regenerative Medicine (“ARM”) update as
of the end of 2019, there were over 987 regenerative medicine companies worldwide, with 547 (55%) in the Americas, in 238 (24%)
in EMEA and 202 (21%) in APAC. According to the ARM update, these companies were conducting a total of 1,066 clinical trials of
which 381 were in Phase I, 591 in Phase II and 94 in Phase III. The total targeted enrollment of patients in regenerative medicine
clinical trials worldwide was reported as 59,757 patients in January 2019. For t2019, the total global financings in this space
totaled $9.8 billion. An FDA spokesperson stated that it anticipates it will receive more than 200 INDs per year beginning in 2020,
and that the FDA will be approving 10 to 20 cell and gene therapies per year by 2025. This data amplifies the significant position
regenerative medicine is taking in the development of new therapies and products within the life sciences industry.
According to market
research reports, the total cold chain logistics market for the life sciences industry has historically grown faster per annum
than the total life sciences logistics market. For 2018, global cold chain logistics spending, overall, was forecasted to be $15.0
billion; with approximately $3.4 billion in spending supporting global clinical trials. By 2022, the global life sciences cold
chain logistics market is forecast to grow to $18.6 billion for a 24% increase. The majority of the growth is a result of the recent
advancements in the development of biologics and cell-based therapies. As a result, scientists, intermediaries, and manufacturers
require means for cryogenically transporting and storing their work and products, such as CAR-T cell therapies, where temperatures
must be maintained below the “glass point” (generally, below minus 136℃).
On the other hand,
our Cryoport Express® C3™ solution was specifically developed to address the front-end logistics of some autologous
therapies that transport whole blood to the point of manufacturing, requiring a stable 2-8℃ temperature range. It is more
robust than competing shippers with its exacting and reliable design. This solution incorporates our Cryoportal®
Logistics Management Platform and the SmartPakTM Condition Monitoring System, giving our clients a seamless logistics
record of all vital information for each therapy shipped on a worldwide basis.
We believe Cryoport
is well positioned as a life sciences platform company focused on redefining logistics by providing a platform of advanced solutions
such as temperature-controlled logistics, bioservices and end-product fulfillment, to the regenerative medicine, reproductive medicine
and animal health markets. Our differentiated platform of products and services enable our clients to ship, store and deliver
biologics and other commodities required to remain in a continual cryogenic or temperature-controlled state, such as CAR-T therapies
and other cell therapies, gene therapies, embryos for reproductive medicine, vaccines, and stem cells. Our standard-setting Chain
of ComplianceTM, which includes vital analytics, including chain-of-condition and chain-of-custody information,
in a single data stream, allows our clients continuous vigilance over their commodities through traceability of the equipment used
and the processes employed to minimize risk and maximize success in the development of new products and therapies.
Life Sciences Agreements
Our clients include
life sciences companies and institutions that have engaged us to support their clinical studies and trials as well as the global
distribution of their commercial biologics, vaccines and other products with our platform of temperature-controlled logistics and
bioservices solutions. Our most significant agreements are as follows:
Zoetis. In
December 2012, we signed an agreement with Pfizer Inc. relating to Zoetis Inc. (a global animal health company spun off from
Pfizer), which was subsequently amended such that we are now managing all cryogenic shipments of Zoetis’ key poultry vaccines.
Under this arrangement, we provide our embedded solution of on-site logistics personnel and our Cryoportal® Logistics
Management Platform to manage shipments from the Zoetis manufacturing site in the United States to domestic customers as well as
various international distribution centers. In addition to utilizing the Cryoport Express® Shippers, Cryoport also
manages Zoetis’ own fleet of shippers used for this purpose, including liquid nitrogen shippers. In April 2019, the agreement
was further amended and extended through March 2022, subject to certain termination and extension provisions.
Novartis.
In May 2017, we signed an agreement with Novartis Inc. to manage the global clinical and commercial shipments of its CAR-T
cell therapies, including the commercial launch of CAR-T cell therapy, KYMRIAH® (CTL019), for children and
young adults with B-cell ALL that is refractory or has relapsed at least twice. On August 30, 2017 Novartis received from the
FDA the first ever CAR-T cell approval for the first indication of KYMRIAH®. Subsequently on May 1,
2018, the FDA approved KYMRIAH® for the treatment of adult patients with relapsed/refractory DLBCL.
Thereafter, Novartis announced that KYMRIAH® was approved for both ALL and DLBCL: by the EU on August 27,
2018, , by Canada on September 6, 2018, and by Australia on December 20, 2018. In April 2019, Novartis announced that
KYMRIAH® had received approval from the Japanese regulator authority for both ALL and DLBCL. Novartis has
qualified over 200 treatment centers and more than 20 countries worldwide have coverage for at least one indication. Novartis
reported fiscal year 2019 revenue of $278 million from KYMRIAH® compared to $76 million for fiscal year
2018. Under our agreement with Novartis, Cryoport provides its full platform of cryogenic packaging and shipping using
its Cryoport Express® Shippers, monitoring using its SmartPakTM Condition Monitoring System
technology and communications and information recording using its Cryoportal® Logistics Management Platform to
manage shipments from the Novartis manufacturing sites to their clinical and commercial sites for patient administration
globally.
Kite/Gilead.
In July 2017, we signed an agreement with Kite Pharmaceuticals
Inc. (a subsidiary of Gilead Sciences) to manage the clinical and commercial shipments of its CAR-T cell therapy, YESCARTA®
(Axicabtagene Ciloleucel). On October 18, 2017, YESCARTA® became the first CAR-T therapy approved by the FDA for
the treatment of adult patients with relapsed or refractory large B-cell lymphoma. Additionally, YESCARTA® received
EU approval on August 27, 2018 for relapsed/refractory DLBCL and PMBCL. As of the end of 2019, Kite had 168 certified centers
authorized to treat patients globally. Through these centers approximately 2,500 patients have been treated with YESCARTA®.
Gilead reported fiscal year 2019 revenue of $456 million from YESCARTA® compared to 264 million for fiscal year
2018. In addition to YESCARTA®, Kite filed for regulatory approval of KTE-X19 for the treatment of mantle cell lymphoma
in the fourth quarter of 2019 and expects commercial approval in the second half of 2020. Under our agreement with Kite, we provide
our platform of cryogenic packaging and shipping using our Cryoport Express® Shippers, monitoring using our SmartPakTM
Condition Monitoring System technology and communications and information recording using our Cryoportal® Logistics
Management Platform to manage shipments from the Kite manufacturing sites to their clinical and commercial sites of patient administration
globally.
bluebird bio.
We are currently supporting bluebird bio’s clinical activity with our platform of temperature-controlled logistics solutions
and are now also supporting bluebird bio’s commercial activity of the gene therapy, ZYNTEGLOTM. ZYNTEGLOTM
is a one-time autologous gene therapy that adds functional copies of a modified form of the BetaGlobin gene into a patient’s
own hematopoietic (blood) stem cells (HSC’s). On June 3, 2019, the EU approved ZYNTEGLOTM for patients 12 years
and older with certain forms of Transfusion-Dependent BetaThalassemia (TDT). On January 13, 2020, bluebird bio announced the commercial
launch in Germany at the University Hospital of Heidelberg. bluebird bio has initiated the rolling BLA submission for approval
of ZYNTEGLOTM in the U.S. and is engaged with the FDA in discussions regarding the requirements and timing
of the various components of the rolling BLA submission. Subject to these ongoing discussions, bluebird bio has indicated that
it is currently planning to complete the BLA submission in the first half of 2020.
Cryoport’s platform
is made up of the following technologies and solutions:
Cryoportal®
Logistics Management Platform (the “Cryoportal®”)
The Cryoportal®
records and retains a fully traceable and documented history of all serialized equipment and components as part of our Chain of
ComplianceTM solution, as well as chain-of-condition and chain-of-custody for every shipment, helping
ensure that quality, safety, efficacy, and stability of shipped commodities are maintained throughout the logistics process. Additionally,
the Cryoportal® is used by Cryoport, our clients and business partners to automate the entry of orders, documentation
preparation, to assist in managing logistics operations and to reduce administrative costs typically provisioned through manual
labor relating to order-entry, order processing, preparation of shipping documents and back-office accounting. It is also used
to support the high level of customer service expected by the life sciences industry.
Although
focused on effectiveness and risk reduction, certain features of the Cryoportal® are designed to reduce operating
costs and facilitate the scaling of Cryoport’s business. Examples of these features include automation of order entry, development
of key performance indicators (“KPIs”) to support efforts for continuous process improvements in our business, and
programmatic exception monitoring to detect and sometimes anticipate delays in the shipping process, often before the customer
or the shipping company is aware of them. These features offer significant value to our customers in terms of cost avoidance and
risk mitigation.
The Cryoportal®
also serves as the communications center for the management, collection and analysis of SmartPakTM Condition Monitoring
System data from the field. Collected data is converted into information reports containing valuable and actionable information
that becomes the quality control or “pedigree” of the shipment. This information can be utilized by Cryoport to provide
valuable feedback to our clients relating to their shipments. Additionally, our SmartPakTM Condition Monitoring System
provides the ability to apply Quality by Design fundamentals to our logistics solutions enabling intervention and risk mitigation
capabilities to be employed.
The Cryoportal®
has been developed as a “carrier-agnostic” system, allowing clients and the Cryoport Logistics Management team to work
with any combination of integrators, freight forwarders, couriers and/or brokers depending on the specific requirements and/or
client preferences. To increase operational efficiencies, the Cryoportal® is integrated with the tracking systems
of FedEx, DHL and UPS and other key logistics providers.
The
Cryoportal® was developed for time-and temperature-sensitive shipments that are required to be maintained at
specific temperatures, beginning with the most demanding cryogenic temperatures (-150℃) and moving upward to ambient
(20-25℃) to ensure that the shipped samples, commodities, products or therapies are not subject to degradation or out
of a designated “safe” range temperature band. While our current focus is on cryogenic (-150℃) as well as
2-8℃ logistics within the life sciences industry, the use of the Cryoportal® can and may be extended
into other temperature-controlled ranges for the life sciences. To our knowledge, the Cryoportal® is unique to
temperature-controlled logistics in the life sciences industry. It is robust and has considerable capabilities and we
frequently receive favorable feedback about the Cryoportal® from our clients and partners.
Cryoport Express®
Shippers
Our Cryoport
Express® Shippers are a family of shippers engineered specifically to serve the life sciences industry. Engineering
of these devices, which are made up of proprietary packaging, a dewar vacuum flasks, near real time electronic monitoring systems
and engineered shock absorbing overpackaging requires multiple and varied engineering disciplines. Each Cryoport Express®
Shipper is ISTA validated and IATA, UN, International Civil Aviation Organization (“ICAO”) compliant. We believe Cryoport
Express® Shippers are the most comprehensively developed temperature-controlled packaging solutions serving the
life sciences industry.
Amongst other technologies
employed, Cryoport’s cryogenic Cryoport Express® Shippers include liquid nitrogen vapor
shipper vacuum flask tanks capable of maintaining cryogenic temperatures of minus 150℃ or below for a dynamic shipping
period of 10 days or more. It uses liquid nitrogen contained inside a vacuum insulated vessel (vacuum
flask tank), which serves as a refrigerant to provide stable storage temperatures below minus 150℃. Our Cryoport Express®
Shippers are designed to ensure that there is no pressure build up as the liquid nitrogen evaporates. Our retention system ensures
that liquid nitrogen stays inside the vacuum container, which allows the shipper to be designated as a dry vapor shipper, meeting
IATA requirements. Biological or pharmaceutical specimens are stored in a specimen chamber, referred to as a “well”
inside the container and refrigeration is provided by gas evaporating from the liquid nitrogen entrapped within the retention system.
Biological material that may be transported using our cryogenic shipper include live cells, scientific or pharmaceutical commodities
such as cancer therapies, vaccines, diagnostic materials, semen, eggs, embryos, infectious substances, and other cellular commodities
that require continuous exposure to cryogenic temperatures, i.e., temperatures below minus 150℃.
The dry vapor liquid
nitrogen storage containers (vacuum flask tanks) are reusable and combine the best features of life sciences packaging, cryogenics
science and vacuum insulation technology. The inner chamber of the shippers is surrounded by a high surface, low-density material
which retains the liquid nitrogen in-situ by absorption and surface tension. Absorption is defined as the taking up of matter in
bulk by other matter, as in the dissolving of a gas by a liquid, whereas adsorption is the surface retention of solid, liquid or
gas molecules, atoms or ions by a solid or liquid. This material absorbs liquid nitrogen relatively rapidly, while providing our
shippers with hold times and capacities to transport biological materials safely and conveniently. The specimen-holding chamber
has a primary cap to enclose the specimens/commodities, and a removable and replaceable secondary cap to further enclose the specimen/commodity-holding
container and to contain the liquid nitrogen dry vapor.
An important
feature of our Cryoport Express® Shippers is their compliance with the stringent packaging requirements of IATA
Packing Instructions 602 and 650, respectively. These specifications include meeting internal pressure (hydraulic) and drop performance
requirements. Under IATA guidelines, Cryoport Express® Shippers are classified as “non-hazardous,” whereas
older technologies often use dry ice and liquid nitrogen, which are classified as “hazardous” by IATA and, therefore,
are also classified as “dangerous goods.” Our shippers are also in compliance with ICAO regulations that prohibit egress
of liquid nitrogen residue from the shipping packages. The ICAO is a United Nations organization that develops regulations for
the safe transport of dangerous goods by air.
We currently
offer liquid nitrogen dry vapor shippers with varying storage capacities, including our Cryoport Express® Standard
Shipper, Cryoport Express® High Volume Shipper, Cryoport Express® Sliderite® Shipper,
Cryoport Express® CXVC1 Shipper and Cryoport Express® CryoMax®, which has a capacity
of 36,400 2.0 ml vials. The core of our Cryoport Express® Shippers are composed of aluminum (aircraft-grade) material,
with an engineered well for holding high value biologics or other materials in its inner chamber.
Because Cryoport
Express® Shippers are “powered” by liquid nitrogen in dry vapor form they are lighter than liquid nitrogen
flasks, which yields a safer form of transportation and lower freight costs. In addition to the advanced dewar flasks, our Cryoport
Express® Shippers are engineered units that consist of advanced electronics and engineered outer packaging. The
entire dewar vessel is then wrapped in a plurality of cushioning materials and placed in an outer packaging that been specifically
engineered for absorbing shock and the challenges encountered in transportation. This outer packaging also houses the SmartPak™
Condition Monitoring System which communicates with the Cryoportal™ Logistics Management Platform.
Cryoport Express®
Advanced Therapy Shippers™
In September
2019, the Company announced it was expanding its Cryoport Express® product line with the launch of the Advanced
Therapy Shippers™ dedicated to the Regenerative Medicine market. The Advanced Therapy Shippers™ are designed to ensure
that each shipper has been used only for human-based material and advanced therapies and provides complete traceability of all
equipment, components and commodities. The Advanced Therapy Shippers™ provide verification information and supply chain support
for biopharma companies researching and commercializing cell and gene therapies and addresses the potential risk of cross contamination
of materials during use, delivery and distribution of biopharmaceutical materials.
Cryoport Express®
C3™ Shippers
Non-cryogenic,
temperature-controlled Cryoport Express® Shippers employ sourced components that are modified and assembled to meet
the requirements of the task for which they were designed. An example is the Cryoport Express® C3™ Shipper.
Cryoport
Express® C3™ Shippers are designed to maintain a controlled temperature range of 2-8°C for up to
96 hours under dynamic shipping conditions. These reusable shippers are offered as part of our Cryoport. Certified. Cool.TM
or C3TM Solution. It includes our SmartPak™ Condition Monitoring System, which communicates with the Cryoportal®
Logistics Management Platform. This solution was introduced to support the growing need in the regenerative therapy market and
to enable our clients to utilize our solutions for both, the transportation of leukapheresis and apheresis blood products (2-8°C)
as well as the manufactured autologous cellular-based immunotherapies (cryogenic temperatures).
Cryoport Express®
Shipper Summary
We believe
the Cryoport Express® Shippers used in our Cryoport Express® Solutions are uniquely designed to mitigate
risks and our Cryoport Express® Solutions are the most advanced and cost-effective, temperature-controlled logistics
solutions available to the life sciences industry. We believe Cryoport Express® Solutions satisfy client needs and
scientific and regulatory requirements relating to each shipment of time- and temperature-critical, frozen and/or refrigerated
transport of biological materials, such as stem cells, cell lines, pharmaceutical clinical trial samples, gene biotechnology, infectious
materials handling, animal and human reproduction markets. We believe that due to our proprietary technology, innovative design
and systems, our Cryoport Express® Shippers are less prone to losing critical functional hold time than competing
products.
Cryoport Express®
SmartPakTM Condition Monitoring System
For our clients, condition
monitoring is a critical high-value feature as it is an effective and reliable method to determine that their commodity/product
was not damaged and did not experience degradation during shipment due to temperature fluctuations or other undesirable conditions.
Our SmartPak™ Condition Monitoring System is designed to track the key aspects and condition of each shipment that could
affect the quality and/or timing of delivery of the commodity/product to its intended destination. This includes near real-time
tracking using GPS, cellular and Wi-Fi technologies, technology monitoring of internal and external temperatures, humidity, barometric
pressure, shock, orientation of the shipper, as well as exposure to light as a measure of security breaches, compromised packaging
or shipper openings during transit. Our exacting temperature sensors are positioned within our Cryoport Express® Shippers
to record the most accurate readings. The resultant temperature mapping includes both the temperature inside the chamber (which
is closest to the actual biomaterial) and the external temperature. Our advanced SmartPak™ Condition Monitoring System
is engineered to work in tandem with our Cryoportal® Logistics Management Platform, enabling predictive and proactive
monitoring of materials shipped. The data collected and resulting analytics, combined with the mapping of shipment check-in points,
provide a holistic view of the complete shipping process. At the client’s election, shipments can have a full chain-of-custody,
chain-of-condition, and chain-of-identity along with other data monitoring analytics. Archival storage is available
for every shipment for quality assurance and regulatory purposes.
Chain-of-Condition, Chain-of-Custody,
and Chain-of-Identity
Chain-of-condition
information is essential for many life sciences customers. Our monitoring services are provided by our SmartPakTM Condition
Monitoring System, which provides data on the condition of our Cryoport Express® Shipper and the conditions in which
commodities/products are being shipped, which is critical for temperature-sensitive biologics.
Chain-of-custody relates
to the traceability of which party has the physical custody of the Cryoport Express® Shipper during each segment
of transport. With the assistance of an overlay on carrier check-ins and our algorithms, our SmartPakTM Condition Monitoring
System supplies a data monitor that reports chain-of-custody information, which is another essential information element required
for temperature-sensitive biologics.
Chain-of-identity refers
to the traceability of the identity of each client’s or patient’s therapy that is inside of the Cryoport Express®
Shipper, which can also be tracked through the Cryoportal® Logistics Management Platform
The Cryoportal®
serves as the data repository for all shipment and condition information. Our customers can access their specific information via
the cloud-based Cryoportal® through an internet connection anywhere in the world and all data is securely retained
for quality assurance and regulatory purposes.
Chain of Compliance™
During 2018 we introduced
Cryoport’s Chain of Compliance™ solution, as a new industry standard. Cryoport’s Chain of Compliance™ goes
beyond chain of condition, chain of custody and chain of identity by providing traceability of the equipment and
processes supporting each client or patient therapy. The Chain of ComplianceTM enables Cryoport to recall every transport
that an individual Cryoport Express® Shipper has taken, the client it supported, the commodity transported, it’s
performance during transit, and each step that Cryoport performs before the shipper is put back into service. This includes container
performance and requalification history, commodity history, courier handling and performance history, calibration history, and
correlation competencies that can link in field events to equipment performance. A review of these requirements are as follows:
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1.
|
Container performance history: All transportation equipment should have a validated hold
time standard that can change over time for multi-use equipment. Data supporting an accurate calculation of the hold time of a
cold chain container should include the nitrogen evaporation rate, liquid nitrogen capacity, vacuum integrity, dynamic hold time,
as well as the actual in field temperature, humidity, shock, and orientation data.
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|
2.
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Commodity history: In addition to the performance of the equipment utilized for a given
shipment, a complete historical record of the contents shipped in any given container should be tracked such that it can be certified
that a given piece of equipment has only been used for the distribution of non-infectious human materials.
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3.
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Container (re)qualification history: Additionally, accurate records should be maintained
as to the requalification or testing of the performance of the equipment to be utilized. These records should also include any
repairs or maintenance performed on the equipment, any deviations or damage during use, as well as any contamination or sterility
issues over the entire historical usage of the equipment.
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|
4.
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Calibration history: All calibration data for any electronic components of a given package
should be traceable back to the equipment. This should include thermocouple calibration or validation data, battery performance,
software or firmware updates by date and version, and serialized accessories that are archived by part number.
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|
5.
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Correlation: Lastly, the ability to cross reference in-field handling events including shock,
damage, delays, orientation, and anti-tamper competencies to the impact on the commodity shipped is a key requirement and should
include the ability to cross reference the historical custody of the container. This should include all locations receiving the
container, as well as the courier for freight partners who were responsible for the transportation and delivery of the container
from origin to destination.
|
We believe the main
reason that the FDA and other regulatory bodies are interested in Cryoport’s Chain of ComplianceTM is that it
provides the ability to collect, interpret, and leverage comprehensive data enabling a significantly more intelligent supply chain.
Rather than reactively trying to determine what has gone wrong after multiple failures, it becomes possible to take a proactive
approach. Moreover, we believe that effective implementation provides historical traceability of logistics processes, equipment,
and third-party support entities, which enables the critical assessment of the complete supply chain designed to minimize failures
and risk.
Cryoport Express®
Analytics information is captured by the Cryoportal® Logistics Management Platform to provide us and our clients
access to important information from the shipments, which assist in the management of our clients’ logistics needs. We use
anonymized information to support planning for future features of our solutions offering. Analytics is a term used by information
technology (IT) professionals to refer to performance benchmarks or KPIs that management utilizes to measure performance against
desired standards. Examples of analytics tracked through the Cryoportal® include time-based metrics for order processing
time and on-time deliveries by our shipping partners, as well as profiling shipping lanes to determine average transit times and
predicting potential shipping exceptions based on historical metrics. Our analytics are utilized internally to proactively improve
our client services and develop new offerings. Cryoport Express® Analytics information is also used by Cryoport
Consulting to support some of its work.
Logistics Expertise and Support
Cryoport’s client
services professionals provide 24/7/365 live logistics and monitoring services with specialized knowledge in the domestic and global
logistics of life sciences material requiring controlled temperatures. Cryoport logistics professionals have validated shipping
lanes in and out of over 100 countries to ensure shipments maintain temperatures and arrive securely and on time.
Consulting services
Consulting Services
leverages Cryoport’s industry-leading expertise and capabilities to support our clients at all phases of their commercialization,
from early clinical studies and trials all way into their commercialization to ensure proactive regulatory compliance, employ best
practices and ensure full Chain of Compliance™ for their temperature-sensitive materials.
Our Consulting Services
teams provide end to end temperature-controlled solutions expertise operating as extensions of our clients’ teams and trusted
advisors. We customize our solutions to our client needs and our suite of offerings include: Shipping Risk Assessments and Shipping
Lane Validations, Packaging Validation and Support, Custom Packaging and Accessory Design, Commercial Launch Planning, Systems
Integration, Custom Reporting, Development of Standard Operating Procedures (SOPs) and Documentation, Training and Onboarding Services,
as well as new service offerings to support our client’s needs.
Other Development Activities
We continue to build
out our Compliance Unified EcosystemTM through partnerships and alliances. We are, also, continuing our research, engineering
and development efforts to further advance our technology applications for temperature-controlled logistics and bioservices. We
are further expanding the functionality of our Cryoportal® Logistics Management Platform and will advance our Smart
Pak™ Condition Monitoring technology to ensure our continued leadership and the highest level of effectiveness and efficiency
in the temperature-controlled logistics for the life sciences industry.
As a result of the Cryogene
acquisition in May 2019, we currently operate in two reportable segments: Global Logistics Solutions and Global Bioservices. The
Global Logistics Solutions segment provides a platform of temperature-controlled logistics solutions to the life sciences industry
through its purpose-built proprietary packaging, information technology and specialized cold chain logistics expertise. The Company
provides leading edge logistics solutions to the biopharma, reproductive medicine and animal health markets to ship, store and
deliver biologic materials, such as immunotherapies, stem cells, CAR-T cell therapies, vaccines and reproductive cells for clients
worldwide. The Global Bioservices segment provides a comprehensive temperature-controlled sample management solution to the life
science industry, including specimen storage, sample processing, collection, and retrieval. The spectrum of temperature-controlled
solutions provided by the Company ranges from ambient, or controlled room temperature (20°C to 25°C), refrigerated (2°C
to 8°C), to frozen and cryogenic (below 0°C to as low as −150°C). Our Chief Executive Officer is the chief operating
decision maker for both segments.
Government Regulations
We are subject to numerous
domestic federal, state and local laws and regulations and the laws and regulations of global jurisdictions relating to matters
regarding shipments, customs, import, export, safe working conditions, manufacturing practices, environmental protection and disposal
of hazardous or potentially hazardous substances. We may incur significant costs to comply with such laws and regulations now or
in the future.
The shipping of biologic
products, biologic commodities, diagnostic specimens, infectious substances and dangerous goods, whether via air or ground, falls
under the jurisdiction of many state, federal and international agencies. The quality of the packaging that protects a product
or biologic commodity determines whether it will arrive at its destination in a satisfactory condition. Currently the most stringent
regulations we are subject to are the dangerous goods regulations. Many of the regulations for transporting dangerous goods in
the United States are determined by international rules formulated under the auspices of the United Nations. Dangerous goods are
usually one-time shipments and are not a part of our standard recyclable Cryoport Express® service. When we ship
dangerous goods, we follow strict and stringent guidelines.
ICAO is the United
Nations organization that develops regulations (Technical Instructions) for the safe transport of dangerous goods by air. If shipment
is by air, compliance with the rules established by the IATA is required. IATA is a trade association made up of airlines and air
cargo couriers that publishes annual editions of the IATA Dangerous Goods Regulations. These regulations interpret and add to the
ICAO Technical Instructions to reflect industry practices. Additionally, the Centers for Disease Control (“CDC”) has
regulations (published in the Code of Federal Regulations) for interstate shipping of specimens.
Our Cryoport Express®
Shippers meet Packing Instructions 602 and 650 and are certified for the shipment of Class 6.2 Dangerous Goods per the requirements
of the ICAO Technical Instructions for the Safe Transport of Dangerous Goods by Air and IATA. Our present and planned future versions
of the Cryoport SmartPak™ Condition Monitoring Systems will likely be subject to regulation by the Federal Aviation Administration
(“FAA”), Federal Communications Commission (“FCC”), Food and Drug Administration (“FDA”), IATA
and possibly other agencies which may be difficult to determine on a global basis.
Storage of biological
materials that are classified as drug products for human therapeutic use (either for investigational use or commercially approved)
or materials used in the manufacture of drug products for human therapeutic use, is regulated by the FDA under Title 21 Code of
Federal Regulations (“CFR”) part 210 & 211. Facilities must be compliant with current Good Manufacturing Practice
(“GMP”) regulations which are enforced by the FDA through registration and audit. If the drug product is exported to
other countries, then the storage needs to comply with the relevant local regulations.
Manufacturing and Raw Materials
Manufacturing.
We source components for our Cryoport Express® Shippers from multiple suppliers that manufacture to our engineering
specifications using in part proprietary technology and know-how to mitigate supply chain risks. We also use “of-the-shelf”
products, which we may modify to meet our requirements. For some components, however, there are relatively few alternate sources
of supply and the establishment of additional or replacement suppliers may or may not be accomplished immediately. Should this
occur, we endeavor to mitigate risk by an increase in our inventory level to cover our total forecasted demand giving us time to
secure additional qualified suppliers. Some of our Cryoport Express® Shippers also use components that were formerly
manufactured in-house and that are now outsourced. The central electronic devices currently used in our SmartPakTM Condition
Monitoring Systems have been acquired from a single source with calibration and alterations done by an independent third party.
Our vendor/partner
relationships allow us to concentrate on further advancing and expanding our platform of solutions for the life sciences to meet
the growing and varied demands for validated temperature-controlled solutions in the life sciences industry. We think our current
supply structure provides us the opportunity to rapidly scale to support our client’s commercialization activities; however,
we continue to work to improve our current sourcing and to continue to mitigate risks therein.
Raw Materials.
Various common raw materials are used in the manufacture of our shippers and in the development of our technologies. These raw
materials are generally available from several alternate distributors and manufacturers. We have not experienced any significant
difficulty in obtaining these raw materials.
Patents, Copyrights, Trademarks and
Proprietary Rights
In
order to remain competitive, we must develop and maintain protection on the proprietary aspects of our platform of technologies.
We rely on a combination of patents, copyrights, trademarks, trade secret laws and confidentiality agreements to protect our intellectual
property rights.
We
file patent applications to protect innovations arising from our research, development and design. We currently own approximately
4 issued patents and are pursuing approximately 14 pending patent applications throughout the world. Our patents generally protect
certain aspects of our shippers, packaging, and related technology. We also own certain copyrights relating to certain aspects
of our products and services. We own 16 registered U.S. trademarks and 27 additional trademark applications pending in the U.S.
and foreign countries. Many of our trademark rights in foreign countries are filed under the Madrid Protocol and designate China,
Japan, Australia, Singapore, or the European Union. Our trademarks generally protect the names of our company, products, and key
service brands.
Our
success depends in part upon our ability to continue to develop proprietary products and technologies and to obtain patent coverage
for these products and technologies. We intend to file trademark and patent applications covering any newly developed products,
methods and technologies. However, there can be no guarantee that any of our pending or future filed applications will be issued
as patents or registered as trademarks. There can be no guarantee that the U.S. Patent and Trademark Office or some third party
will not initiate an interference proceeding involving any of our pending applications or issued patents. Finally, there can be
no guarantee that our issued patents or future issued patents, if any, will provide adequate protection from competition.
Patents
provide some degree of protection for our proprietary technology. However, the pursuit and assertion of patent rights involve
complex legal and factual determinations and, therefore, are characterized by significant uncertainty. In addition, the laws
governing patent issuance and the scope of patent coverage continue to evolve. Moreover, the patent rights we possess or are
pursuing generally cover our technologies to varying degrees. As a result, we cannot ensure that patents will issue from any
of our patent applications, or that any of the issued patents will offer meaningful protection. In addition, our issued
patents may be successfully challenged, invalidated, circumvented or rendered unenforceable so that our patent rights may not
create an effective barrier to competition. We must also pay maintenance fees at set intervals for our patents to not expire
prematurely. The laws of some foreign countries may not protect our proprietary rights to the same extent as the laws of the
United States. There can be no assurance that any patents issued to us will provide a legal basis for establishing an
exclusive market for our products or provide us with any competitive advantages, or that patents of others will not have an
adverse effect on our ability to do business or to continue to use our technologies freely. As with all patents, we may be
subject to third parties filing claims that our technologies or products infringe on their intellectual property. We cannot
predict whether third parties will assert such claims against us or whether those claims will hurt our business. If we are
forced to defend against such claims, regardless of their merit, we may face costly litigation and diversion of
management’s attention and resources. As a result of any such disputes, we may have to develop, at a substantial cost,
non-infringing technology or enter into licensing agreements. These agreements may be unavailable on terms acceptable to such
third parties, or at all, which could seriously harm our business or financial condition.
With
respect to our trademarks, we file and pursue trademark registrations on words, symbols, logos, and other source identifiers that
consumers use to associate our products and services with us. Although our registered trademarks carry a presumption of validity,
they can be challenged and invalidated and as such, we cannot guarantee that any trademark registration is infallible.
We
also rely on trade secret protection of our intellectual property. We attempt to protect trade secrets by entering into confidentiality
agreements with employees, consultants and third parties, although, in the past, we have not always obtained such agreements. It
is possible that these agreements may be breached, invalidated or rendered unenforceable, and if so, our trade secrets could be
disclosed to our competitors. Despite the measures we have taken to protect our intellectual property, parties to such agreements
may breach confidentiality provisions in our contracts or infringe or misappropriate our patents, copyrights, trademarks, trade
secrets and other proprietary rights. In addition, third parties may independently discover or invent competitive technologies,
or reverse engineer our trade secrets or other technology. Therefore, the measures we are taking to protect our proprietary technology
may not be adequate.
Customers and Distribution
As a result of growing
globalization, including in such areas as biologics, biopharma, biotechnology, clinical trials, distribution of biopharmaceutical
products and reproductive medicine, the requirement for effective and reliable solutions for keeping clinical samples, pharmaceutical
products and other specimen at controlled temperatures takes on added significance due to the more complex shipping routes, extended
shipping times, potential custom delays and general logistics challenges. We believe our platform of Cryoport Express®
Shippers, SmartPak™ Condition Monitoring Systems, the Cryoportal® Logistics Management Platform and our logistics
expertise enable us to be well positioned to take advantage of the growing demand for effective and efficient international transport
of temperature sensitive life sciences commodities/products resulting from the value and sensitivity of the commodities/products
being shipped and continued globalization, which is a notable trend within the life sciences and biotechnology industries. This
is especially the case for the new therapies being developed in the regenerative medicine market, such as CAR-T cell therapies,
that require cryogenic temperatures to maintain efficacy.
There were two customers
that accounted for 24.1% and 12.8% of our total revenues during the year ended December 31, 2019. There was one customer that accounted
for 18.2% of revenues during the year ended December 31, 2018. No other single customer accounted for over 10% of our total revenues
during the years ended December 31, 2019 and 2018. Revenues from one customer of our Global Bioservices segment represents approximately
80.2% of that segment’s net revenues, however, it was less than 10% of our total revenues for the year ended December 31,
2019.
Our geographical revenues, by origin, for
the years ended December 31, 2019 and 2018, were as follows:
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|
2019
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2018
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Americas
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|
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84.9
|
%
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|
|
91.0
|
%
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Europe, the Middle East and Africa (EMEA)
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13.3
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%
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|
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7.0
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%
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Asia Pacific (APAC)
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1.8
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%
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2.0
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%
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Pharmaceutical Clinical
Trials. Every United States based pharmaceutical company developing a new drug or therapy must seek development protocol approval
by the FDA. These clinical trials are designed to test the safety and efficacy of the potential new drug/therapy among other things.
A significant amount of clinical trial activity is managed by several large Clinical Research Organizations (“CROs”).
In connection
with the clinical trials, due to globalization, companies can enroll patients from all over the world and may need to
regularly submit a blood or other specimen at the local hospital, doctor’s office or laboratory. These samples are then
sent to specified testing laboratories, which may be local or in another country. The testing laboratories will typically set
the requirements for the storage and shipment of blood specimens. In addition, therapies used by the patients may require
frozen shipping to the sites of the clinical trials. While both domestic and international shipping of these specimens may be
accomplished using dry ice today, international shipments especially present several problems, as dry ice, under the best of
circumstances, can only provide freezing for one to two days in the absence of re-icing (which is quite costly). Because
shipments of packages internationally can take longer than one to two days or be delayed due to flight cancellations,
incorrect destinations, labor problems, ground logistics, customs delays and safety reasons, dry ice is not always a reliable
and/or cost-effective option. Clinical trial specimens are often irreplaceable because each one represents clinical data at a
prescribed point in time, in a series of specimens on a given patient, who may be participating in a trial for years. Sample
integrity during the shipping process is vital to retaining the maximum number of patients in each trial. Our shippers are
ideally suited for this market, as our longer hold time ensures that specimens can be sent over long distances with minimal
concern that they will arrive in a condition that will cause their exclusion from the trial. There are also many instances in
domestic shipments where Cryoport Express® Shippers will provide higher reliability and be cost effective.
Furthermore, the IATA
requires that all airborne shipments of laboratory specimens be transmitted in either IATA Instruction 650 or 602 certified packaging.
We have developed and obtained IATA certification of our Cryoport Express® platform, which is ideally suited for
this market, due to the elimination of the cost to return the reusable shipper.
Biotechnology and
Diagnostic Companies. The biotechnology market includes basic and applied research and development in diverse areas such as
stem cells, gene therapy, DNA tumor vaccines, tissue engineering, genomics, and blood products. Companies participating in the
foregoing fields rely on the frozen transport of specimens in connection with their research and development efforts, for which
our Cryoport Express® Shippers are ideally suited.
Cell Therapy Companies.
Rapid advancements are underway in the research and development of cell-based therapies, which involve cellular material being
infused into a patient. In allogeneic cell therapies, the donor is a different person than the recipient of the cells. Autologous
cell therapy is a personalized therapeutic intervention that uses an individual’s cells, which are cultured and expanded
outside the body, and reintroduced into the donor. Once cells are manufactured into a cellular therapy, in either case, they must
be shipped cryogenically for which our Cryoport Express® Shippers are ideally suited.
Central Laboratories.
With the increase and globalization of clinical studies and trials, logistics has become more complex and ensuring sample integrity
has become more challenging. International courier costs are now consuming a significant portion of global protocol budgets. We
believe laboratories performing the testing of samples collected during the conduct of these global multi-site studies are looking
for reliable state-of-the-art logistics solutions.
Pharmaceutical Distribution.
The current focus for the Cryoport Express® platform also includes the area of pharmaceutical distribution. There
are a significant number of therapeutic therapies currently or anticipated soon to be undergoing clinical trials. After the FDA
approves them for commercial marketing, it will be necessary for the manufacturers to have a reliable and economical method of
distribution to the physician who will administer the product to the patient. It is likely that the most efficient and reliable
method of distribution will be to ship a single dosage to the administering physician. These therapies are typically identified
to individual patients and therefore will require a complete tracking history from the manufacturer to the patient. The most reliable
method of doing this is to ship a unit dosage specifically for each patient. If such therapies require maintenance at frozen or
cryogenic temperatures, each such shipment will require a cryogenic shipping solution. Cryoport can provide the technology to meet
this need.
Fertility Clinics
and In Vitro Fertilization (“IVF”). Maintaining cryogenic temperatures during shipping and transfer of in vitro
fertilization specimens like eggs, sperm, or embryos is critical for cell integrity in order to retain viability, stabilize the
cells, and ensure reproducible results and successful IVF treatment. We believe that our solutions for this market, branded as
CryoStork® services, are very compelling and well received. The global IVF services revenue market generated $12.5
billion in 2018 and is projected to reach $26.4 billion by 2026, growing at a compound annual growth rate (CAGR) of 9.8% from 2019
to 2026. The Assisted Reproductive Technology (“ART”) industry is also starting to undergo a significant change due
to the consolidation of clinic networks into large corporations or venture backed organizations, which we believe will allow us
to further build out our leadership position and set industry standards.
Animal Health
Companies. The global animal health market size is expected to reach $73.6 billion by 2027, representing a CAGR of 5.8%
from 2016 through 2027. The market is largely driven by a significant rise in the zoonotic and food-borne diseases globally.
This unprecedented disease prevalence has encouraged companies to produce advanced vaccines and pharmaceuticals. The high
demand has also resulted in the subsequent rise in the number of companies making consistent efforts to control risks of
pathogen contamination and food-borne diseases, which is contributing to market growth. In addition to food animal
production, companion animal support is another emerging area in which companies are investing heavily. This can be
attributed to the fact that in the U.S. alone, 68 percent of households now include a pet, up from 58 percent in 1988, with
total U.S. pet industry expenditures projected to rise. Globally, 62% of animal health revenue is driven by food animals and
38% companion animals. Cryoport is well positioned to support both vaccine distribution and distribution of animal sperm and
embryos on a global basis, both of which require our platform of temperature-controlled logistics solutions.
Sales and Marketing
We have a sales and
marketing team led by our Chief Commercial Officer that drives our business development, program management, consulting, marketing
and other related activities. Given the global nature of our business, we plan to continue to broaden our sales and marketing reach
in all corners of the world with emphasis on the Americas, EMEA and the Asia-Pacific regions. We plan to hire additional sales
and marketing personnel globally and implement marketing initiatives intended to increase awareness of Cryoport and its advanced
temperature-controlled solutions serving the life sciences industry.
Industry and Competition
Our products and services
are sold into a rapidly growing segment of the temperature-controlled supply chain industry focused on the temperature sensitive
packaging, shipping and storing of biologics and other life sciences commodities. This growth is fueled in part by the advancements
in biology and continued globalization, and is expected to continue to increase even more in the future as more domestic and international
biotechnology firms expand clinical trials and introduce pharmaceutical products into the market that require continuous transportation
and storage at cryogenic temperatures. This principle also applies to the animal health and reproductive medicine markets. We believe
these advances will require a greater dependence on passively controlled temperature transport systems (i.e., systems having no
external power source). In addition, we expect that industry standards and regulations will be introduced globally, requiring more
comprehensive tracking and validation of shipping temperatures.
We believe that advancements
and growth in the following markets have resulted in the need for increased reliability, efficiencies and greater flexibility in
the temperature sensitive segment of the life sciences logistics and supply chain market:
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biopharmaceuticals
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cell-based therapies
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gene therapy
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stem cell technology
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cell lines
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vaccines
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biopharmaceutical product distribution
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clinical trials, including transport of tissue culture samples
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diagnostic specimens
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infectious sample materials
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inter/intra-laboratory diagnostic testing
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temperature-sensitive specimens
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biological samples, in general
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environmental sampling
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reproductive material for in vitro fertilization (IVF)
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Animal Health
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Cryoport’s platform
of solutions are comprehensive and integrated for maximum reliability, economy and total effectiveness. Cryoport’s total
platform enables life sciences companies to utilize the superior liquid nitrogen dry vapor technology without having to make capital
investments or developing in-house logistics expertise and systems by offering a complete solution, which includes the cloud-based
Cryoportal® logistics management platform, the SmartPak™ Condition Monitoring Systems and our 24/7/365 logistics
support. Cryoport allows the clients to outsource logistics and focus on its core competencies while maintaining visibility of
all logistics related information.
Within our targeted
biotechnology and life sciences markets there is limited known direct competition to our Cryoport Express® Solutions.
We compete with liquid nitrogen and dry ice solutions effectively by use of the improved and integrated hardware and software technology
in our products, including our comprehensive logistics management software platform, the Cryoportal® and through
the use of our service-enabled business model. Our Cryoport Express® Solutions provide simple and cost-effective
solutions for temperature-controlled transport of biologics and other life sciences materials. The Cryoportal® assists
with the management, scheduling and shipping of the Cryoport Express® Shippers, removing the burdens associated
with other methods.
Factors that we believe
give us a competitive advantage is our comprehensive and tested business model that fully integrates our Cryoport Express®
shippers with our Cryoportal® Logistics Management Platform and SmartPak™ Condition Monitoring Systems into
a seamless shipping, tracking and monitoring solution. In addition, we have a first-mover advantage, supporting over 430 clinical
trials in the regenerative medicine space. Our reputation, combined with over a decade of know-how and technology, provides us
with significant competitive advantages. Since our inception, we have experienced minimal client attrition.
Companies that offer
services that could be considered competitive to certain components of our platform of solutions in our Global Logistics and Global
Bioservices segments include Thermo Fisher Scientific Inc., specialty couriers, such as World Courier Group, Inc., Quick Life Science
Group and Marken Limited, the division of Biolife Solutions known as SAVSU Technologies, Inc and Brooks Life Sciences. In addition,
life science companies can develop their own inhouse temperature-controlled logistics solutions by sourcing containers and data
loggers and developing software, systems and procedures to cover their logistics needs. However, we have not identified any competition
that offers a solution that is as comprehensive as our platform of solutions are and has been proven in the global market to the
same extent as our solutions have.
Engineering and Development
Our research, development
and engineering efforts are focused on continually investigating new technologies that can improve our services and improving the
features of our platform of Cryoport Express® Solutions, which includes our cloud-based Cryoportal®
Logistics Management Platform, Cryoport Express® Shippers, secondary packaging solutions, our SmartPak™ and
other condition monitoring systems. These efforts are expected to lead to the introduction of additional features, including shippers
of varying sizes and for various temperature ranges, based on market requirements, further advanced informatics and improved monitoring
systems. We are continuously researching alternative and new technologies, lower cost materials, utilization of higher volume assembly
methods, enabling technologies, etc. that will make it practical to provide a wider range of Cryoport Express® Solutions.
Alternative technologies
to liquid nitrogen in dry vapor form, alternative materials and/or new information and communication technologies may be used in
the future to expand our potential market for our platform of Cryoport Express® Solutions.
Cryoport’s Quality Assurance Program
Cryoport’s Quality
System is based upon ISO 9001:2015 (Quality management systems – Requirements) as a foundation, along with a structure of
procedures and instructions based upon strong operational practices of checks and balances. This system ensures proper controls
from the initial contract, through processing, shipping and storage, to proper monitoring and data collection, to successful completion
of each transaction or shipment.
Cryoport is currently
working with an Accredited Certification Body to attain ISO Certification, which is expected to be completed by the second quarter
of 2020. In addition, the Quality Management System is being enhanced and integrated with GxP elements (i.e. Good Manufacturing
Practices and Good Distribution Practices) that are applicable to temperature-controlled logistics and bioservices for the life
sciences industry. It is Cryoport’s mandate to provide the highest level of quality and to meet and/or exceed customer requirements.
This system will further
integrate additional elements of Cryoport’s business processes, risk management, design controls, software systems validation,
and leadership commitment to the Quality Management System.
Employees
The efforts of our
employees are critical to our success. We believe that we have assembled a strong management team with the experience and expertise
needed to execute our business strategy. We anticipate hiring additional personnel as needs dictate to implement our global growth
strategy. As of December 31, 2019, we had 125 employees and consultants: 105 full-time, one part-time, 16 temporary and 3 consultants.
Corporate History and Structure
We are a
Nevada corporation originally incorporated under the name G.T.5-Limited (“GT5”) on May 25, 1990. In connection with
a Share Exchange Agreement, on March 15, 2005 we changed our name to Cryoport, Inc. and acquired all of the issued and outstanding
shares of common stock of Cryoport Systems, Inc., a California corporation, in exchange for 200,901 shares of our common stock
(which represented approximately 81% of the total issued and outstanding shares of common stock following the close of the transaction).
Cryoport Systems, Inc., which was originally formed in 1999 as a California limited liability company, and subsequently reorganized
into a California corporation on December 11, 2000, remains the operating company under Cryoport, Inc. Our principal executive
offices are located at 112 Westwood Place, Suite 350, Brentwood, TN 37027. The telephone number of our principal executive office
is (949) 470-2300, and our main corporate website is www.cryoport.com. The information on or that can be accessed through our website
is not part of this Form 10-K.
The Company
became public via a reverse merger with a shell company in May 2005. Over time the Company has transitioned from being a development
company to a fully operational public company, providing a platform of temperature-controlled logistics solutions to the life sciences
industry globally.
Information about our Executive Officers
The following
are our executive officers as of the filing date of this Form 10-K:
Jerrell W. Shelton.
Mr. Shelton became a member of our board of directors in October 2012 and was appointed President and Chief Executive Officer of
the Company in November 2012. He was appointed Chairman of the Board in October 2015. He served on the Board of
Directors and standing committees of Solera Holdings, Inc. from April 2007 through November 2011. From June 2004 to
May 2006, Mr. Shelton was the Chairman and CEO of Wellness, Inc., a provider of advanced, integrated hospital and clinical environments. Prior
to that, he served as Visiting Executive to IBM Research and Head of IBM’s WebFountain. From October 1998 to October
1999, Mr. Shelton was Chairman, President and CEO of NDC Holdings II, Inc. Between October 1996 and July 1998, he was
President and CEO of Continental Graphics Holdings, Inc. And from October 1991 to July 1996, Mr. Shelton served as President
and CEO of Thomson Business Information Group. Mr. Shelton has a B.S. in Business Administration from the University
of Tennessee and an M.B.A. from Harvard University. Mr. Shelton’s extensive leadership, management, strategic
planning and financial expertise through his various leadership and directorship roles in public, private and global companies,
makes him well-qualified to serve as a member of the board of directors.
Robert S. Stefanovich.
Mr. Stefanovich became Chief Financial Officer and Treasurer for the Company in June 2011. In 2019, he was also given the title
Senior Vice President. From 2011 to 2019, Mr. Stefanovich served as the Secretary of the Company. From June 15, 2012 to November
4, 2012, Mr. Stefanovich served as the Principal Executive Officer of the Company. From November 2007 through March 2011, Mr. Stefanovich
served as Chief Financial Officer of Novalar Pharmaceuticals, Inc., a venture-backed specialty pharmaceutical company. Prior to
that, he held several senior positions, including interim Chief Financial Officer of Xcorporeal, Inc., a publicly traded medical
device company, Executive Vice President and Chief Financial Officer of Artemis International Solutions Corporation, a publicly
traded software company, Chief Financial Officer and Secretary of Aethlon Medical Inc., a publicly traded medical device company
and Vice President of Administration at SAIC, a Fortune 500 company. Mr. Stefanovich also served as a member of the Software Advisory
Group and an Audit Manager with Price Waterhouse LLP’s (now PricewaterhouseCoopers) hi-tech practice in San Jose, CA and
Frankfurt, Germany. He currently also serves as a board member of Project InVision International, a provider of business performance
improvement solutions. He received his Master of Business Administration and Engineering from University of Darmstadt, Germany.
Available Information
Our main corporate
website address is www.cryoport.com. The information on or that can be accessed through our website is not part of this
Form 10-K. We electronically file with the Securities and Exchange Commission (SEC) our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and amendments to the reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act. We make available free of charge on or through our website copies of these reports as soon
as reasonably practicable after we electronically file these reports with, or furnish them to, the SEC. Information on the operation
of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet
site that contains reports, proxy and information statements and other information regarding issuers that file electronically with
the SEC at www.sec.gov.
ITEM 1A. RISK FACTORS
Risks Related to Our Financial Condition
We have incurred significant losses to date
and may continue to incur losses.
We have incurred net losses in each fiscal
year since we commenced operations. The following table represents net losses incurred for each of our last two reporting periods:
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Net Loss
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Year Ended December 31, 2019
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$
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18,331,500
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Year Ended December 31, 2018
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$
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9,556,000
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As of December 31, 2019,
we had an accumulated deficit of $159.3 million. In order to achieve and sustain revenue growth in the future, we must significantly
expand our market presence and revenues from existing and new customers. We may continue to incur losses in the future and may
never generate revenues sufficient to become profitable or to sustain profitability. Continuing losses may impair our ability to
raise the additional capital required to continue and expand our operations.
We may need to raise additional
capital in the future, and if we are unable to secure adequate funds on terms acceptable to us, we could be unable to execute our
business plan.
To remain competitive,
we must continue to make investments in the development and broadening of our platform of solutions, the expansion of our sales
and marketing activities, and the expansion of our global logistics operations infrastructure as we increase sales domestically
and internationally. If cash on hand, short-term investment and cash generated from our operations is insufficient to fund such
growth, we could be required to raise additional funds through the issuance of equity or debt securities in the public or private
markets, or through a collaborative arrangement. Additional financing opportunities may not be available to us, or if available,
may not be on favorable terms. The availability of financing opportunities will depend, in part, on market conditions, and the
outlook for our business. Any future issuance of equity securities or securities convertible into equity securities could result
in substantial dilution to our stockholders, and the securities issued in such a financing could have rights, preferences or privileges
senior to those of our common stock. In addition, if we raise additional funds through debt financing, we could be subject to debt
covenants that place limitations on our operations. We may not be able to raise additional capital on reasonable terms, or at all,
or we could use capital more rapidly than anticipated. If we cannot raise the required capital when needed, we may not be able
to satisfy the demands of existing and prospective customers, we could lose revenue and market share and we may have to curtail
our capital expenditures. The following factors, among others, could affect our ability to obtain additional financing on favorable
terms, or at all:
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our results of operations;
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general economic conditions and conditions in the markets we serve;
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the perception of our business in the capital markets;
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our financial condition; and
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our business prospects.
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If we are unable to obtain sufficient capital
in the future, we could have to curtail our capital expenditures. Any curtailment of our capital expenditures could result in a
reduction in net revenue, reduced quality of our products, increased manufacturing costs for our products, harm to our reputation,
or reduced manufacturing efficiencies and could have a material adverse effect on our business, financial condition, and results
of operations.
Risks Related to Our Business
We will have
difficulty increasing our revenues if we experience delays, difficulties or unanticipated costs in establishing the sales, marketing
and distribution capabilities necessary to successfully commercialize our solutions.
We plan to
further enhance our sales, marketing and distribution capabilities in the Americas, EMEA, and APAC. It will be expensive and time-consuming
for us to develop our global marketing and sales network and thus we intend to further broaden our strategic alliances with domestic
and international providers of shipping services and other solutions providers to the life sciences industry to incorporate use
of our platform of solutions in their service offerings. We may not be able to provide adequate incentive to our sales force or
to establish and maintain favorable distribution and marketing collaborations with others to promote our solutions. In addition,
any third party with whom we have established a marketing and distribution relationship may not devote sufficient time to the marketing
and sales of our solutions, thereby exposing us to potential expenses in exiting such distribution agreements. We, and any of our
alliance partners, must also market our services in compliance with federal, state, local and international laws relating to the
provision of incentives and inducements. Violation of these laws can result in substantial penalties. Therefore, if we are unable
to successfully motivate and expand our marketing and sales force and further develop our sales and marketing capabilities, or
if our alliance partners fail to promote our solutions, we will have difficulty increasing our revenues and the revenue may not
off-set the additional expense of expansion.
Our ability to
grow and compete in our industry will be hampered if we are unable to retain the continued service of our key professionals or
to identify, hire and retain additional qualified professionals.
Our success in implementing
our business strategy depends largely on the skills, experience and performance of key members of our executive management team
and others in key management positions. The collective efforts of each of these persons working as a team will be critical to us
as we continue to develop our technologies, tests and engineering and development and sales programs. As a result of the difficulty
in locating qualified new management, the loss or incapacity of existing members of our executive management team could adversely
affect our operations. If we were to lose one or more of these key employees, we could experience difficulties in finding qualified
successors, competing effectively, developing our technologies and implementing our business strategy. We do not maintain “key
person” insurance on any of our employees.
In addition, a critical
factor to our business is our ability to attract and retain qualified professionals including key employees and consultants. We
are continually at risk of losing current professionals or being unable to hire additional professionals as needed. If we are unable
to attract new qualified employees, our ability to grow will be adversely affected. If we are unable to retain current employees
or strategic consultants, our financial condition and ability to maintain operations may be adversely affected.
Sustainable future
revenue growth is dependent on new solutions and services.
Our future revenue stream
depends to a large degree on our ability to bring new solutions and services to market on a timely basis. We must continue to make
significant investments in engineering and development in order to continue to develop new solutions and services, enhance existing
solutions and services, and achieve market acceptance of such solutions and services. We may incur problems in introducing new
solutions and services.
The adoption cycle
of our target customers tends to be very lengthy, which may adversely affect our ability to increase revenues quickly.
We offer our solutions
to companies in the life sciences industry. These companies operate within a heavily regulated environment and as such, changing
vendors and distribution practices typically require a number of steps, which may include the audit of our facilities, review of
our procedures, qualifying us as a vendor, and performing test shipments. This process can take several months or longer to complete,
involving multiple levels of approval, prior to a company fully adopting our platform of Cryoport Express® Solutions.
The logistics management of many companies is decentralized adding to the time need to effect adaptation of our solutions. In addition,
any such adoption may be on a gradual basis such that the customer progressively ramps up use of our Cryoport Express®
Solutions following adoption. The slow adoption process continues to adversely affect our ability to increase revenues.
Our solutions
and services may contain errors or defects, which could result in damage to our reputation, lost revenues, diverted development
resources and increased service costs and litigation.
Our solutions and services
must meet stringent requirements and we must develop our services and solutions quickly to keep pace with the rapidly changing
market. Solutions as sophisticated as ours could contain undetected errors or defects, especially when first introduced or when
new equipment or versions of our software are released. If our solutions are not free from errors or defects, we may incur an injury
to our reputation, lost revenues, diverted development resources, increased customer service and support costs, and litigation.
The costs incurred in correcting any product errors or defects may be substantial and could adversely affect our business, results
of operations and financial condition.
If we were sued
for product liability, we could face substantial liabilities that exceed our resources.
The marketing, sale
and use of our products could lead to the filing of product liability claims were someone to allege that our products failed to
perform as designed. A product liability claim could result in substantial damages and be costly and time-consuming for us to defend.
Although we believe
that our existing insurance is adequate, our insurers may fail to defend us or our insurance may not fully protect us from the
financial impact of defending against product liability claims. Any product liability claim brought against us, with or without
merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. Additionally, any product
liability lawsuit could damage our reputation, or cause current clinical partners and collaborators to terminate existing agreements
and potential clinical partners to seek other partners, cause customers to terminate their relationship with us and potential customers
to seek alternative solutions, any of which could adversely impact our results of operations.
If we experience
delays in procurement of components used in our Cryoport Express® Solutions manufactured by third parties, then
we may experience customer dissatisfaction and our reputation could suffer.
If we fail to procure
sufficient components used in our Cryoport Express® Solutions from our third-party manufacturers, we may be unable
to deliver our solutions to our customers on a timely basis, which could lead to customer dissatisfaction and could harm our reputation
and ability to compete. We currently acquire various component parts for our solutions from various independent manufacturers,
some of which are sole sourced. We would likely experience significant delays or cessation in producing some of these components
if a labor strike, natural disaster, public health crisis or other supply disruption were to occur at any of our main suppliers.
If we are unable to procure a component from one of our manufacturers, we may be required to enter into arrangements with one or
more alternative manufacturing companies, which may cause delays in producing components or result in significant increase in costs.
To date, we have not experienced any material delay that has adversely impacted our operations. As our business develops it becomes
more likely that such problems could arise.
The recent coronavirus
(COVID-19) outbreak could adversely affect our financial condition and results of operation.
In December 2019, a
novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China. The impact of the outbreak of COVID-19 on
the businesses and the economy in China and the rest of the world is unknown. If the impact is significant, the outbreak could
impact our ability to implement logistic centers, develop business, conduct operations, and obtain components used in our solutions
in APAC, or any region that is significantly impacted by the outbreak. The extent to which COVID-19 outbreak will impact business
and the economy is highly uncertain and cannot be predicted. Accordingly, we cannot predict the extent to which our financial condition
and results of operation will be affected.
We expect to base
our equipment and inventory purchasing decisions on our forecasts of customers’ demand, and if our forecasts are inaccurate,
our operating results could be materially harmed.
As our customer base
increases, we expect the need to purchase additional equipment and inventory. Our forecasts will be based on multiple assumptions,
each of which may cause our estimates to be inaccurate, affecting our ability to provide products to our customers. When demand
for our products increases significantly, we may not be able to meet demand on a timely basis, and we may need to expend a significant
amount of time working with our customers to allocate limited supply and maintain positive customer relations, or we may incur
additional costs in order to rush the manufacture and delivery of additional products. If we underestimate customers’ demand,
we may forego revenue opportunities, lose market share and damage our customer relationships. Conversely, if we overestimate customer
demand, we may purchase more equipment and inventory than we are able to use or sell at any given time or at all. As a result of
our failure properly to estimate demand for our products, we could have excess or obsolete equipment and/or inventory, resulting
in a decline in the value of our equipment and/or inventory, which would increase our costs of revenues and reduce our liquidity.
Our failure to accurately manage our equipment purchases and inventory relative to demand would adversely affect our operating
results.
If we experience
delays or interruption in shipping due to factors outside of our control, such disruption could lead to customer dissatisfaction
and harm our reputation.
We rely on third-party shipment and carrier
services to transport our shippers containing biological material. These third-party operations could be subject to natural disasters,
adverse weather conditions, other business disruptions, and carrier error, which could cause delays in the delivery of our shippers,
which in turn could cause serious harm to the biological material being shipped. As a result, any prolonged delay in shipment,
whether due to technical difficulties, power failures, break-ins, destruction or damage to carrier facilities as a result of a
natural disaster, fire, or any other reason, could result in damage to the contents of the shipper. If we are unable to deliver
our shippers in a timely matter and without damage, this could also harm our operating results and our reputation, even if we are
not at fault.
Our solutions and services may expose
us to liability in excess of our current insurance coverage.
Our platform of solutions
and services involve significant risks of liability, which may substantially exceed the revenues we derive from them. We cannot
predict the magnitude of these potential liabilities. We currently maintain general liability insurance, with coverage in the amount
of $1 million per occurrence, subject to a $2 million annual limitation, and product liability insurance with a $1 million annual
coverage limitation. Claims may be made against us that exceed these limits.
Our liability policy
is an “occurrence” based policy. Thus, our policy is complete when we purchased it and following cancellation of the
policy it continues to provide coverage for future claims based on conduct that took place during the policy term. Our insurance
coverage, however, may not protect us against all liability because our policies typically have various exceptions to the claims
covered and also require us to assume some costs of the claim even though a portion of the claim may be covered. In addition, if
we expand into new markets, we may not be aware of the need for, or be able to obtain insurance coverage for such activities or,
if insurance is obtained, the dollar amount of any liabilities incurred could exceed our insurance coverage. A partially or completely
uninsured claim, if successful and of significant magnitude, could have a material adverse effect on our business, financial condition
and results of operations.
If we use biological
and hazardous materials in a manner that causes injury, we could be liable for damages.
Our customers may ship
potentially harmful biological materials in our dewars. We cannot eliminate the risk of accidental contamination or injury to employees
or third parties from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could
be held liable for any resulting damages, and any liability could exceed our resources or any applicable insurance coverage we
may have. Additionally, we are subject to, on an ongoing basis, federal, state and local laws and regulations governing the use,
storage, handling and disposal of these materials and specified waste products. In the event of an accident, we could be held liable
for damages.
We operate in
a competitive industry and if we cannot compete effectively, we will lose business.
We expect to continue
to experience significant and increasing levels of competition in the future. While there are technological and marketing barriers
to entry, we cannot guarantee that these barriers will be sufficient to defend our market share against current and future competitors.
Our principal competitive considerations in our market include:
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financial resources to allocate to proper marketing
and an appropriate sales effort
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acceptance of our solutions model
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acceptance of our solutions including per use fee structures
and other charges for services
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keeping up technologically with ongoing development of enhanced
features and benefits
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reductions in the delivery costs of competitors’
solutions
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the ability to develop and maintain and expand strategic
alliances
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establishing our brand name
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our ability to deliver our solutions to our customers when requested
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our timing of introductions of new solutions, and services
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financial resources to support working capital needs and required
capital investments in infrastructure
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In addition, there may
be other companies which are currently developing competitive products and services or which may in the future develop technologies
and products that are comparable, superior or less costly than our own. For example, some cryogenic equipment manufacturers with
greater resources currently have solutions for storing and transporting cryogenic liquid and gasses and may develop storage solutions
that compete with our products. Additionally, some specialty couriers with greater resources currently provide dry ice transportation
and may develop other products in the future, both of which compete with our products. A competitor that has greater resources
than us may be able to develop and expand their networks and product offerings more quickly, devote greater resources to the marketing
and sale of their solutions and adopt more aggressive pricing policies. We may not be able to successfully compete with a competitor
that has greater resources and such competition may adversely affect our business.
We may acquire
other businesses, products or technologies in order to remain competitive in our market and our business could be adversely affected
as a result of any of these future acquisitions.
As part of our business
strategy, we may acquire complementary businesses, products or technologies. Any acquisition involves a number of risks, many of
which could harm our business, including:
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inability to successfully complete transactions with
a suitable acquisition candidate
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diversion of financial and management resources from
existing operations;
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the risk that the price we pay or other resources that we devote may exceed
the value we realize, or the value we could have realized if we had allocated the purchase price or other resources to another
opportunity;
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potential loss of key employees, customers and strategic alliances from either
our current business or the target company’s business;
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assumption of unanticipated problems or latent liabilities,
such as problems with the quality of the acquired products;
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inability to generate sufficient revenue to offset acquisition
costs;
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dilutive effect on our stock as a result of any equity-based
acquisitions; and
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in the event of international acquisitions, risks associated with accounting
and business practices that are different from applicable U.S. practices and requirements.
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Acquisitions also frequently
result in the recording of goodwill and other intangible assets that are subject to potential impairments, which could harm our
financial results. As a result, if we fail to properly evaluate acquisitions, we may not achieve the anticipated benefits of any
such acquisitions, and we may incur costs in excess of what we anticipate. The failure to successfully evaluate and execute acquisitions
or otherwise adequately address these risks could materially harm our business and financial results.
To finance any acquisitions,
we may choose to issue shares of our common stock or convertible debt as consideration, which could dilute the ownership of our
stockholders. If the price of our common stock is low or volatile, we may not be able to acquire other companies for stock. In
addition, newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we raise
additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants
or other restrictions on our business that could impair our operating flexibility and would also require us to incur interest expense.
Additional funds may not be available on terms that are favorable to us, or at all.
The integration
and operation of acquired businesses, including Cryogene, may disrupt our business and create additional expenses, and we may not
achieve the anticipated benefits of the acquisitions.
Integration of an acquired
business involves numerous risks, including assimilation of operations of the acquired business, such as Cryogene, and difficulties
in the convergence of systems and processes, the diversion of management’s attention from other business concerns, risks
of entering markets in which we have had no or only limited direct experience, assumption of unknown or unquantifiable liabilities,
difficulties in completing strategic initiatives already underway in the acquired company, and unfamiliarity with partners of the
acquired company, each of which could have a material adverse effect on our business, results of operations and financial condition.
In particular, the integration of a company the size of Cryogene into our business may be more difficult and time consuming than
anticipated, and we may be unable to achieve the expected synergies and operating efficiencies within the expected time frames
or at all. We cannot assure that these risks or other unforeseen factors will not offset the intended benefits of the acquisitions,
in whole or in part.
If we successfully
develop products and/or services, but those products and/or services do not achieve and maintain market acceptance, our business
will not be profitable.
The degree of acceptance
of our platform of Cryoport Express® Solutions or any future products or services by our current target markets,
and any other markets to which we attempt to sell our products and services, and our profitability and growth will depend on a
number of factors including, among others:
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our
shippers’ ability to perform and preserve the integrity of the materials shipped
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relative
convenience and ease of use of our shipper and/or Cryoportal®
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availability
of alternative products or new technologies that make our solutions offering less desirable or competitive
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pricing
and cost effectiveness
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effectiveness
of our or our collaborators’ sales and marketing strategy
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the
adoption cycles of our targeted customers
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In addition, even if
our products and services achieve market acceptance, we may not be able to maintain that market acceptance over time if new products
or services are introduced that are more favorably received than our products and services, are more cost effective, or render
our products obsolete. Although we are not aware of any other treatments or methods currently being developed that would directly
compete with the methods we employ, there can be no assurance that future developments in technology will not make our technology
non-competitive or obsolete, or significantly reduce our operating margins or the demand for our offerings, or otherwise negatively
impact our ability to be profitable.
We may be adversely
affected by the occurrence of natural disasters or other events at Cryogene’s biostorage facility that disrupt our business
operations.
Cryogene operates
a 21,476 square foot state-of-the-art biostorage facility located in Houston, Texas, specializing in the secure storage of biological
specimens, materials and samples. If natural disasters or similar events, like hurricanes, fires or explosions or large-scale accidents
or power outages, were to occur that prevented us from using all or a significant portion of Cryogene’s biostorage facility,
that damaged critical infrastructure, or that otherwise disrupted operations at such facility, this could affect our ability to
maintain ongoing operations and cause us to incur significant expenses. Insurance coverage may not be adequate to fully cover losses
in any particular case. Accordingly, the occurrence of natural disasters or other events at Cryogene’s biostorage facility
could materially and adversely affect our business, financial condition and results of operations.
We may face
claims for liability related to the damage of customer specimens, materials and samples attributed to the failure of Cryogene’s
storage systems or services, exposing us to significant financial or reputational harm.
Cryogene specializes
in the secure storage of biological specimens, materials and samples covering the full range of temperatures from cryogenic through
controlled room temperature. Any damage to these specimens, materials and samples may be attributed to a failure of Cryogene’s
storage systems or services, which could lead to claims for damages made by customers and could also harm our relationship with
customers and damage our reputation in the life sciences industry, resulting in material harm to our business.
Intellectual Property Risks Associated
with Our Business
Our success depends,
in part, on our ability to obtain patent protection for our solutions, preserve our trade secrets, and operate without infringing
the proprietary rights of others.
Our policy is to seek
to protect our proprietary position by, among other methods, filing United States patent applications related to our technology,
inventions and improvements that are important to the development of our business. Our patents or patent applications may be challenged,
invalidated or circumvented in the future or the rights granted may not provide a competitive advantage. We intend to vigorously
protect and defend our intellectual property. Costly and time-consuming litigation brought by us may be necessary to enforce our
patents and to protect our trade secrets and know-how, or to determine the enforceability, scope and validity of the proprietary
rights of others.
We also rely upon trade
secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. In the past
our employees, consultants, advisors and suppliers have not always executed confidentiality agreements and inventions assignment
and work for hire agreements in connection with their employment, consulting, or advisory relationships. Consequently, we may not
have adequate remedies available to us to protect our intellectual property should one of these parties attempt to use our trade
secrets or refuse to assign any rights he or she may have in any intellectual property he or she developed for us. Additionally,
our competitors may independently develop substantially equivalent proprietary information and techniques or otherwise gain access
to our proprietary technology, or we may not be able to meaningfully protect our rights in unpatented proprietary technology.
While we are not
aware of any third party that is infringing any of our patents or trademarks nor do we believe that we are infringing on the
patents or trademarks of any other person or organization, we cannot guarantee that our current and potential competitors and
other third parties have not filed (or in the future will not file) patent applications for (or have not received or in the
future will not receive) patents or obtain additional proprietary rights that will prevent, limit or interfere with our
ability to make, use or sell our solutions either in the United States or internationally. Additionally, we may face
assertions of claims by holders of patents alleging that we are infringing upon their patent rights, which claims may be
without merit, but may nonetheless result in our incurring substantial costs of defense.
We are dependent
on third parties for the continued development and maintenance of our Cryoportal™ software.
Our proprietary Cryoportal™
is a logistics platform software used by our customers, business partners and client care team to automate the entry of orders,
prepare customs documentation and facilitate status and location monitoring of shipped orders while in transit. The continued development
of the Cryoportal™ platform is in part contracted to outside software development companies. If these companies become unable
or unwilling to continue work on scheduled projects, and an alternative software development company cannot be secured, we may
not be able to implement needed enhancements to the system. Failure to proceed with enhancements to the system would adversely
affect our ability to generate new business and serve existing customers, resulting in a reduction in revenue.
Our customers
could also become the target of litigation relating to the patent and other intellectual property rights of others.
Any litigation relating
to the intellectual property rights of others could trigger technical support and indemnification obligations in licenses or customer
agreements that we may enter into. These obligations could result in substantial expenses, including the payment by us of costs
and damages relating to claims of intellectual property infringement. In addition to the time and expense required for us to provide
support or indemnification to our customers, any such litigation could disrupt the businesses of our customers, which in turn could
hurt our relationships with such customers and cause the sale of our products to decrease. No assurance can be given that claims
for indemnification will not be made, or that if made, such claims would not have a material adverse effect on our business, operating
results or financial conditions.
We rely upon certain
critical information systems, including our Cryoportal® software platform, for the operation of our business and the failure
of any critical information system could adversely impact our reputation and future revenues and we may be required to increase
our spending on data and system security.
We rely upon certain
critical information systems, including our Cryoportal® software platform which is used by our customers and
business partners to automate the entry of orders, prepare customs documentation and facilitate status and location monitoring
of shipped orders while in transit. In addition, the provision of service to our customers and the operation of our networks and
systems involve the storage and transmission of significant amounts of proprietary information and sensitive or confidential data,
including personal information of customers, employees and others. Our technology infrastructure and critical information systems
are subject to damage or interruption from a number of potential sources, including unauthorized intrusions, cyber-attacks, software
viruses or other malware, natural disasters, power failures, employee error or malfeasances and other events. Despite our best
efforts, no cybersecurity or emergency recovery process is failsafe, and if our safeguards fail or our technology infrastructure
or critical information systems are compromised, the safety and efficiency of our operations could be materially harmed, our reputation
could suffer, and we could face additional costs, liabilities, costly legal challenges. Additionally, an actual or alleged failure
to comply with applicable United States or foreign data protection regulations or other data protection standards may expose us
to litigation, fines, sanctions or other penalties. We do not have cyber security insurance and we may incur significant costs
in the event of a successful cyber-attack against us. The cost and operational consequences of implementing, maintaining and enhancing
further data or system protection measures could increase significantly to overcome increasingly intense, complex and sophisticated
global cyber threats.
Regulatory Risks
Relating to Our Business
Complying with
certain regulations that apply to shipments using our solutions can limit our activities and increase our cost of operations.
Shipments using
our solutions and services are subject to various regulations in the various countries in which we operate. For example,
shipments using our solutions may be required to comply with the shipping requirements promulgated by the Centers for Disease
Control (“CDC”), the Occupational Safety and Health Organization (“OSHA”), the DOT as well as rules
established by the IATA and the ICAO. Additionally, our data logger may be subject to regulation and certification by the
FDA, the FCC, and the FAA. Department of Transportation (“DOT”) as well as rules established by the IATA and the
ICAO. Additionally, our data logger may be subject to regulation and certification by the Food and Drug Administration
(“FDA”), Federal Communications Commission (“FCC”), and the Federal Aviation Administration
(“FAA”). We will need to ensure that our solutions and services comply with relevant rules and regulations to
make our solutions and services marketable, and in some cases compliance is difficult to determine. Significant changes in
such regulations could require costly changes to our solutions and services or prevent use of our shippers for an extended
period of time while we seek to comply with changed regulations. If we are unable to comply with any of these rules or
regulations or fail to obtain any required approvals, our ability to market our solutions and services may be adversely
affected. In addition, even if we are able to comply with these rules and regulations, compliance can result in increased
costs. In either event, our financial results and condition may be adversely affected. We depend on our business partners and
unrelated and frequently unknown third-party agents in foreign countries to act on our behalf to complete the importation
process and to make delivery of our shippers to the final user. The failure of these third parties to perform their duties
could result in damage to the contents of the shipper resulting in customer dissatisfaction or liability to us, even if we
are not at fault.
If we become subject
to additional regulatory requirements, our solutions may become subject to increased expenses.
Our solutions are currently
not subject to FDA or other regulatory approvals. However, there can be no assurance that our solutions will not be regulated by
the FDA, or foreign regulatory authorities, as applicable, in the future. Any such requirements may subject us to additional expenses.
Risks Relating to Ownership of Our Common
Stock and Other Securities
Certain of our existing stockholders
own and have the right to acquire a substantial number of shares of common stock.
As of March 1, 2020,
our directors, executive officers and beneficial owners of 5% or more of our outstanding common stock beneficially owned 11,982,323
shares of common stock (without regard to beneficial ownership limitations contained in certain warrants) assuming their exercise
of all outstanding warrants and options that are exercisable within 60 days of March 1, 2020 or approximately 31.8% of our outstanding
common stock. As such, the concentration of beneficial ownership of our common stock may have the effect of delaying or preventing
a change in control of Cryoport and may adversely affect the voting or other rights of other holders of our common stock.
The sale of substantial shares of our
common stock may depress our stock price.
As of March 1, 2020,
there were 37,644,867 shares of our common stock outstanding. Substantially all of these shares of common stock are eligible for
trading in the public market. The market price of our common stock may decline if our stockholders sell a large number of shares
of our common stock in the public market, or the market perceives that such sales may occur. We could also issue up to an additional
10,030,592 shares of our common stock including 900,637 shares to be issued upon the exercise of outstanding warrants and
9,129,955 shares upon exercise of outstanding options or reserved for future issuance under our stock incentive plans.
Our stock price
has been and will likely continue to be volatile.
The market price of
our common stock has been highly volatile and could fluctuate widely in price in response to various factors, many of which are
beyond our control, including, but not limited to:
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· technological innovations or new solutions and services by us or our competitors
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· additions or departures of key personnel
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· sales of our common stock
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· our ability to execute our business plan
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· our operating results being below expectations
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· loss of any strategic relationship
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· industry developments
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· economic and other external factors
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· period-to-period fluctuations in our financial results
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In addition, the securities
markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance
of companies. These market fluctuations may also materially and adversely affect the market price of our common stock and warrants.
We are at risk
of securities class action litigation.
In the past, securities
class action litigation has often been brought against a company following a decline in the market price of its securities. This
risk is especially relevant for us because our stock price and those of other biotechnology and life sciences companies have experienced
significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion
of management’s attention and resources, which could harm our business. We do maintain insurance, but the coverage may not
be sufficient and may not be available in all instances.
If equity research
analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common
stock and warrants, the price of our common stock and warrants could decline.
The trading market for
our common stock and warrants relies in part on the research and reports that equity research analysts publish about us and our
business. We do not control these analysts. The price of our common stock and warrants could decline if one or more equity analyst
downgrades our stock or if analysts downgrade our stock or issue other unfavorable commentary or cease publishing reports about
us or our business.
We have not paid
dividends on our common stock in the past and do not expect to pay dividends in the foreseeable future. Any return on investment
may be limited to the value of our common stock.
We have never paid cash
dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends on
our common stock will depend on our earnings, financial condition and other business and economic factors affecting us at such
time as the Board of Directors may consider the payment of any such dividends. If we do not pay dividends, our common stock may
be less valuable because a return on your investment will only occur if the price of our common stock appreciates.
We may need additional
capital, and the sale of additional shares of common stock or other equity securities could result in additional dilution to our
stockholders.
Our current cash and
cash equivalents and anticipated cash flow from operations may be insufficient to meet our cash needs in the long term. We may
require additional cash resources to fund our operations and may require additional funds in the future due to changed business
conditions or other future developments, including any investments or acquisitions we may decide to pursue. The sale of additional
equity securities, or debt securities convertible into equity securities, could result in additional dilution to our stockholders.
The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants
that would restrict our operations.
Our Articles of Incorporation allows
our Board of Directors to issue up to 2,500,000 shares of “blank check” preferred stock.
Our Articles of Incorporation
allows our board of directors to issue up to 2,500,000 shares of “blank check” preferred stock, without action by our
stockholders. We have designated 800,000 shares as Class A Preferred Stock and 585,000 shares as Class B Preferred Stock, none
of which are currently issued and outstanding. Accordingly, our board of directors will have discretion to issue up to 1,115,000
shares on terms determined by them. Without limiting the foregoing, (i) such shares of preferred stock could have liquidation rights
that are senior to the liquidation preference applicable to our common stock and Preferred Stock, (ii) such shares of preferred
stock could have voting or conversion rights, which could adversely affect the voting power of the holders of our common stock
and Preferred Stock and (iii) the ownership interest of holders of our common stock will be diluted following the issuance of any
such shares of preferred stock. In addition, the issuance of such shares of blank check preferred stock could have the effect of
discouraging, delaying or preventing a change of control of our Company.
Provisions in
our bylaws and Nevada law might discourage, delay or prevent a change of control of our Company or changes in our management and,
as a result, may depress the trading price of our common stock.
Provisions of our bylaws
and Nevada law may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider
favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. The relevant
bylaw provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions
include advance notice requirements for stockholder proposals and nominations, and the ability of our Board of Directors to make,
alter or repeal our bylaws.
Absent approval
of our Board of Directors, our bylaws may only be amended or repealed by the affirmative vote of the holders of at least a majority
of our outstanding shares of capital stock entitled to vote.
In addition, Section 78.438
of the Nevada Revised Statutes prohibits a publicly-held Nevada corporation from engaging in a business combination with an interested
stockholder (generally defined as a person which together with its affiliates owns, or within the last three years has owned, 10%
of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder)
unless the business combination is approved in a prescribed manner.
The existence of the
foregoing provisions and other potential anti-takeover measures could limit the price that investors might be willing to pay in
the future for shares of our common stock. They could also deter potential acquirers of our Company, thereby reducing the likelihood
that you could receive a premium for your common stock in an acquisition.
Even though we
are not incorporated in California, we may become subject to a number of provisions of the California General Corporation Law.
Section 2115(b)
of the California Corporations Code imposes certain requirements of California corporate law on corporations organized outside
California that, in general, are doing more than 50% of their business in California and have more than 50% of their outstanding
voting securities held of record by persons residing in California. While we are not currently subject to Section 2115(b),
we may become subject to it in the future.
The following summarizes
some of the principal differences which would apply if we become subject to Section 2115(b).
Under both Nevada and
California law, cumulative voting for the election of directors is permitted. However, under Nevada law cumulative voting must
be expressly authorized in the Articles of Incorporation and our Amended and Restated Articles of Incorporation do not authorize
cumulative voting. If we become subject to Section 2115(b), we may be required to permit cumulative voting if any stockholder
properly requests to cumulate his or her votes.
Under Nevada law, directors
may be removed by the stockholders only by the vote of two-thirds of the voting power of the issued and outstanding stock entitled
to vote. However, California law permits the removal of directors by the vote of only a majority of the outstanding shares entitled
to vote. If we become subject to Section 2115(b), the removal of a director may be accomplished by a majority vote, rather
than a vote of two-thirds, of the stockholders entitled to vote.
Under California law,
the corporation must take certain steps to be allowed to provide for greater indemnification of its officers and directors than
is provided in the California Corporation Code. If we become subject to Section 2115(b), our ability to indemnify our officers
and directors, to the extent permitted in our Articles of Incorporation, Bylaws and under Nevada law, may be limited by California
law.
Nevada law permits distributions
to stockholders as long as, after the distribution, (i) the corporation would be able to pay its debts as they become due
and (ii) the corporation’s total assets are at least equal to its liabilities and preferential dissolution obligations.
Under California law, distributions may be made to stockholders as long as the corporation would be able to pay its debts as they
mature and either (i) the corporation’s retained earnings equal or exceed the amount of the proposed distributions,
or (ii) after the distributions, the corporation’s tangible assets are at least 125% of its liabilities and the corporation’s
current assets are at least equal to its current liabilities (or, 125% of its current liabilities if the corporation’s average
operating income for the two most recently completed fiscal years was less than the average of the interest expense of the corporation
for those fiscal years). If we become subject to Section 2115(b), we will have to satisfy more stringent financial requirements
to be able to pay dividends to our stockholders. Additionally, stockholders may be liable to the corporation if we pay dividends
in violation of California law.
California law permits
a corporation to provide “supermajority vote” provisions in its Articles of Incorporation, which would require specific
actions to obtain greater than a majority of the votes, but not more than 66 2/3 percent. Nevada law does
not permit supermajority vote provisions. If we become subject to Section 2115(b), it is possible that our stockholders would
vote to amend our Articles of Incorporation and require a supermajority vote for us to take specific actions.
Under California law,
in a disposition of substantially of all the corporation’s assets, if the acquiring party is in control of or under common
control with the disposing corporation, the principal terms of the sale must be approved by 90 percent of the stockholders. Although
Nevada law does contain certain rules governing interested stockholder business combinations, it does not require similar stockholder
approval. If we become subject to Section 2115(b), we may have to obtain the vote of a greater percentage of the stockholders
to approve a sale of our assets to a party that is in control of, or under common control with, us.
California law places
certain additional approval rights in connection with a merger if all of the shares of each class or series of a corporation are
not treated equally or if the surviving or parent party to a merger represents more than 50 percent of the voting power of the
other corporation prior to the merger. Nevada law does not require such approval. If we become subject to Section 2115(b),
we may have to obtain the vote of a greater percentage of the stockholders to approve a merger that treats shares of a class or
series differently or where a surviving or parent party to the merger represents more than 50% of the voting power of the other
corporation prior to the merger.
California law requires
the vote of each class to approve a reorganization or a conversion of a corporation into another entity. Nevada law does not require
a separate vote for each class. If we become subject to Section 2115(b), we may have to obtain the approval of each class
if we desire to reorganize or convert into another type of entity.
California law provides
greater dissenters’ rights to stockholders than Nevada law. If we become subject to Section 2115(b), more stockholders
may be entitled to dissenters’ rights, which may limit our ability to merge with another entity or reorganize.
If we fail to maintain an effective
system of internal control over financial reporting, we may not be able to accurately report our financial results, and current
and potential stockholders may lose confidence in our financial reporting.
We are required by the
SEC to establish and maintain adequate internal control over financial reporting that provides reasonable assurance regarding the
reliability of our financial reporting and the preparation of financial statements in accordance with generally accepted accounting
principles. We are likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose
any changes and material weaknesses in those internal controls. In addition, our independent registered public accounting firm
is required to report on whether it believes we maintained, in all material respects, effective internal control over financial
reporting as of the end of the year. In future years, if we fail to timely complete this assessment, or if our independent registered
public accounting firm cannot timely attest, there may be a loss of public confidence in our internal controls, the market price
of our stock could decline, and we could be subject to regulatory sanctions or investigations by NASDAQ, the SEC or other regulatory
authorities, which would require additional financial and management resources. In addition, any failure to implement required
new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to
fail to timely meet our regulatory reporting obligations.
As described in Item 9A
of this Form 10-K, no material weaknesses were identified and we determined that our internal control over financial reporting
was effective as of December 31, 2019.
However, any failure
to maintain such internal controls, to timely complete our evaluation of our internal controls, assessment, or to obtain our independent
registered public accounting firm’s timely attestation on the effectiveness of our internal controls in the future could
adversely impact our ability to report our financial results on a timely and accurate basis. If our financial statements are not
accurate, investors may not have a complete understanding of our operations. Likewise, if our financial statements are not filed
on a timely basis as required by the SEC and NASDAQ, we could face severe consequences from those authorities. In either case,
there could result a material adverse effect on our business. Inferior internal controls could also cause investors to lose confidence
in our reported financial information, which could have a negative effect on the trading price of our stock.
Our publicly-filed
SEC reports are reviewed by the SEC from time to time and any significant changes required as a result of any such review may result
in material liability to us and have a material adverse impact on the trading price of our common stock.
The reports of publicly-traded
companies are subject to review by the SEC from time to time for the purpose of assisting companies in complying with applicable
disclosure requirements and to enhance the overall effectiveness of companies’ public filings, and reviews of such reports
are now required at least every three years under the Sarbanes-Oxley Act of 2002. SEC reviews may be initiated at any time, and
we could be required to modify or reformulate information contained in prior filings as a result of an SEC review. Any modification
or reformulation of information contained in such reports could be significant and could result in material liability to us and
have a material adverse impact on the trading price of our common stock.
The requirements of being a U.S. public
company may strain our resources and divert management’s attention.
As a U.S. public company,
we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and
Consumer Protection Act, certain listing requirements, and other applicable securities rules and regulations. Compliance with these
rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming,
or costly, and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual
and current reports with respect to our business and operating results. As a result of disclosure of information in this prospectus
and in filings required of a public company, our business and financial condition is more visible, which we believe may result
in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business
and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims,
and the time and resources necessary to resolve them, could divert resources of our management and harm our business and operating
results.
We are a “smaller reporting company,”
and we cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies will make our common
stock less attractive to investors.
We are a
“smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act. As a smaller reporting company, we
intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not
smaller reporting companies. These exemptions include reduced disclosure obligations regarding executive compensation in our
periodic reports and proxy statements. We may continue to rely on such exemptions for so long as we remain a smaller
reporting company under applicable SEC rules and regulations. Accordingly, we cannot predict if investors will find our
common stock less attractive because we rely on these exemptions. If some investors find our common stock less attractive as
a result of our reduced disclosures, there may be less active trading in our common stock and our stock price may be more
volatile.
ITEM 1B. Unresolved Staff Comments
Not applicable.
ITEM 2. Properties
We do not own real
property. We lease a 4,190 square foot corporate facility in Brentwood, Tennessee where our principal executive offices are located.
We also lease directly or through a subsidiary 27,600 square feet of corporate, research and development, and logistics facilities
in Irvine, California; 8,100 square feet of logistics facilities in Livingston, New Jersey; 7,600 square feet of logistics facilities
in Hoofddorp, the Netherlands; 21,476 square feet of corporate and biostorage facilities in Houston, Texas. In addition, we signed
lease agreements for additional space within the same business park as our current biostorage facilities in Houston, Texas, totaling
19,572 square feet. This space will be built out during 2020 to establish our first Global Supply Chain Center and expand Cryogene’s
biostorage footprint.
In addition to the
global logistics services provided through our global logistics centers in Irvine, California, Livingston, New Jersey and Hoofddorp,
the Netherlands we have contracted with a third party to run our logistics center covering APAC, located in Singapore. These global
logistics centers are used for our Global Logistics Solutions segment and provide warehousing, shipping, receiving, refurbishing
and recycling services for our shipping containers as well as other services offered as part of our Cryoport Express®
Logistics Solutions and enable us to provide our services on a global basis.
Global Bioservices
are currently primarily provided through our biostorage facilities in Houston, Texas.
We believe that these facilities
are adequate, suitable and of sufficient capacity to support our immediate needs.
ITEM 3. Legal Proceedings
In the ordinary course of business, we
are at times subject to various legal proceedings and disputes, including product liability claims. We currently are not aware
of any such legal proceedings or claim that we believe will have, individually or in the aggregate, a material adverse effect on
our business, operating results or cash flows. It is our practice to accrue for open claims based on our historical experience
and available insurance coverage.
ITEM 4. Mine Safety Disclosures
Not applicable
See accompanying notes to consolidated
financial statements.
Notes to Consolidated Financial Statements
Note 1. Nature of the Business
Cryoport, Inc. (“Cryoport”)
is the market-leading provider of temperature-controlled supply chain solutions to the life sciences industry through its platform
of purpose-built proprietary packaging, information technology, specialized cold chain logistics expertise, and biostorage services.
The Company provides leading edge solutions to the biopharma, reproductive medicine and animal health markets to ship, store and
deliver biologic materials, such as immunotherapies, stem cells, CAR-T cell therapies, vaccines and reproductive cells for clients
worldwide. Cryoport actively supports pharmaceutical and biotechnology companies, points-of-care, contract research organizations,
central laboratories, contract manufacturers, university researchers and other entities service the life sciences industry.
On May 14, 2019, the
Company acquired substantially all of the assets of Cryogene Partners, a Texas general partnership doing business as Cryogene Labs
(“Cryogene”). Cryogene operates a temperature-controlled biostorage solutions business in Houston, Texas (see Note
13). As a result of the Cryogene acquisition, the Company operates in two reportable segments: Global Logistics Solutions and Global
Bioservices. See Note 11 for segment information.
The Company is a Nevada
corporation and its common stock is traded on the NASDAQ Capital Market exchange under the
ticker symbol “CYRX.”
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP”).
Principles of Consolidation
The accompanying consolidated
financial statements include the accounts of Cryoport, Inc. and its wholly owned subsidiaries, Cryoport Systems, Inc., Cryoport
Netherlands B.V., Cryoport UK Limited and Cryogene, Inc. (collectively, the “Company”). All intercompany accounts and
transactions have been eliminated.
Cash and Cash Equivalents
Our cash and cash equivalents
represent demand deposits, and money market funds which are readily convertible into cash, have maturities of 90 days or less when
purchased and are considered highly liquid and easily tradeable.
Short-Term Investments
Our investments in equity
securities consist of mutual funds with readily determinable fair values which are carried at fair value with changes in fair value
recognized in earnings.
Investments in debt
securities are classified as available-for-sale and are carried at fair value, with unrealized gains and losses, net of tax, reported
as accumulated other comprehensive income (loss) and included as a separate component of stockholders’ equity.
Gains and losses are
recognized when realized. When we have determined that an other than temporary decline in fair value has occurred, the amount related
to a credit loss is recognized in earnings. Gains and losses are determined using the specific identification method.
Short-term investments
are classified as current assets even though maturities may extend beyond one year because they represent investments of cash available
for operations.
Use of Estimates
The preparation
of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from estimated amounts. The Company’s key estimates include the allowance for doubtful accounts,
fair value of short-term investments, fair value of assets acquired and liabilities assumed in business combinations,
recoverability of goodwill and long-lived assets, allowance for inventory obsolescence, deferred taxes and their accompanying
valuations, and valuation of equity-based instruments.
Fair Value of Financial Instruments
The Company’s
financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued
expenses, finance lease obligations and the convertible note. The carrying value for all such instruments, except finance lease
obligations and the convertible note, approximates fair value at December 31, 2019 and 2018 due to their short-term nature. The
carrying value of finance lease liabilities approximates fair value because the interest rate approximates market rates available
to us for similar obligations with the same maturities. The convertible note approximates its fair value at December 31, 2018.
The convertible note was converted into shares of common stock of the Company in December 2019 (see Note 10).
Concentrations of Credit Risk
Financial instruments
that potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents and short-term investments.
From time to time, we maintain cash, cash equivalent and short-term investment balances in excess of amounts insured by the Federal
Deposit Insurance Corporation (“FDIC”) and the Securities Investor Protection Corporation (“SIPC”). Primarily
all of our cash, cash equivalents and short-term investments at December 31, 2019 were in excess of amounts insured by the FDIC
and SIPC. The Company performs ongoing evaluations of these institutions to limit its concentration risk exposure. We manage such
risks in our portfolio by investing in highly liquid, highly-rated instruments, and limit investing in long-term maturity instruments.
Our investment policy
requires that purchased instruments in marketable securities may only be in highly-rated instruments, which are primarily U.S.
Treasury bills or treasury-backed securities, and also limits our investment in securities of any single issuer.
Customers
The Company grants
credit to customers within the U.S. and to a limited number of international customers and does not require collateral. Revenues
from international customers are generally secured by advance payments except for a limited number of established foreign customers.
The Company generally requires advance or credit card payments for initial revenues from new customers. The Company’s ability
to collect receivables is affected by economic fluctuations in the geographic areas and industries served by the Company. Reserves
for uncollectible amounts are provided based on past experience and a specific analysis of the accounts, which management believes
is sufficient. Accounts receivable at December 31, 2019, and 2018 are net of reserves for doubtful accounts of $140,000 and $100,000,
respectively. Although the Company expects to collect amounts due, actual collections may differ from the estimated amounts. The
Company maintains reserves for bad debt and such losses, in the aggregate, historically have been in line with estimates.
The Company’s
customers are in the biotechnology, pharmaceutical, animal health, reproductive medicine and other life science industries. Consequently,
there is a concentration of accounts receivable within these industries, which is subject to normal credit risk. As of December
31, 2019, there were two customers that accounted for 31.0% and 20.7%, respectively, of net accounts receivable. As of December
31, 2018, there were two customers that accounted for 29.0% and 23.4%, respectively, of net accounts receivable. There was no other
single customer that owed us more than 10% of net accounts receivable at December 31, 2019 and 2018.
The Company has revenue
from foreign customers primarily in Europe, Japan, Canada, India and Australia. During the years ended December 31, 2019 and 2018,
the Company had revenues from foreign customers of approximately $5.1 million and $1.7 million, respectively, which constituted
approximately 15.1% and 9.0%, respectively, of total revenues. There were two customers that accounted for 24.1% and 12.8% of revenues
during the year ended December 31, 2019 and there was one customer that accounted for 18.2% of revenues during the year ended December
31, 2018. No other single customer generated over 10% of revenues during the years ended December 31, 2019 and 2018.
Inventories
The
Company’s inventories consist of packaging materials and accessories that are sold to customers. Inventories are stated
at the lower of cost and net realizable value. Cost is determined using the standard cost method which approximates the
first-in, first-out method. Inventories are reviewed periodically for slow-moving or obsolete status. The Company writes down
the carrying value of its inventories to reflect situations in which the cost of inventories is not expected to be recovered.
Once established, write-downs of inventories are considered permanent adjustments to the cost basis of the obsolete or excess
inventories. Raw materials and finished goods include material costs less reserves for obsolete or excess inventories. The
Company evaluates the current level of inventories considering historical trends and other factors, such as selling prices
and costs of completion, disposal and transportation, and based on the evaluation, records adjustments to reflect inventories
at net realizable value. These adjustments are estimates, which could vary significantly from actual results if future
economic conditions, customer demand, competition or other relevant factors differ from expectations. These estimates require
us to make assessments about future demand for the Company’s products in order to categorize the status of such
inventories items as slow-moving, obsolete or in excess-of-need. These estimates are subject to the ongoing accuracy of the
Company’s forecasts of market conditions, industry trends, competition and other factors.
Property and Equipment
The Company provides
engineered shipping packages (“Cryoport Express® Shippers”) to its customers and charges a fee in exchange
for the use of the Cryoport Express® Shipper. The Company retains the title to the Cryoport Express®
Shippers and provides its customers the use of the Cryoport Express® Shipper for a specific shipping cycle. At the
culmination of the customer’s shipping cycle, the Cryoport Express® Shipper is returned to the Company. As
a result, the Company classifies the Cryoport Express® Shippers as property and equipment for the per-use Cryoport
Express® Shipper program.
Property and equipment
are recorded at cost. Cryoport Express® Shippers, which include SmartPakTM Condition Monitoring Systems
and/or data loggers, comprise 20% and 34% of the Company’s net property and equipment balance at December 31, 2019 and December
31, 2018, respectively, and are depreciated using the straight-line method over their estimated useful lives of three years. Mechanical
and liquid nitrogen freezers acquired in the Cryogene acquisition comprise 25% of the Company’s net property and equipment
balance at December 31, 2019, and are depreciated using the straight-line method over their estimated useful lives of seven to
twelve years. Equipment and furniture are depreciated using the straight-line method over their estimated useful lives (generally
three to fifteen years) and leasehold improvements are amortized using the straight-line method over the estimated useful life
of the asset or the lease term, whichever is shorter.
Betterments, renewals
and extraordinary repairs that extend the lives of the assets are capitalized; other repairs and maintenance charges are expensed
as incurred. The cost and related accumulated depreciation and amortization applicable to assets retired are removed from the accounts,
and the gain or loss on disposition is recognized in the consolidated statements of operations.
Capitalized Software
Capitalized software,
which is included in property and equipment, net, consists of costs to develop internal use software, which the Company uses to
provide various services to customers. The costs are capitalized from the time that the preliminary project stage is completed
and considered probable that the software will be used to perform the function intended, until the time the software is placed
in service for its intended use. Once this software is ready for use, these costs are amortized on a straight-line basis over the
estimated useful life of the software, which is generally seven years. Capitalized software is reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be recoverable. If an impairment indicator is present,
a recoverability analysis is performed based on estimated undiscounted cash flows to be generated from the software in the future.
If the analysis indicates that the carrying value is not recoverable from future cash flows, the software cost is written down
to the estimated fair value and an impairment is recognized. These estimates are subject to revision as market conditions and the
Company’s assessments change.
Leases
The Company determines
if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets represent the Company’s
right to use an underlying asset during the lease term, and operating lease liabilities represent the Company’s obligation
to make lease payments arising from the lease. Operating leases are included in ROU assets, current operating lease liabilities,
and long-term operating lease liabilities on our consolidated balance sheets. Finance leases are included in property and equipment,
current finance lease liabilities, and long-term finance lease liabilities on our consolidated balance sheets.
Lease ROU assets and
lease liabilities are initially recognized based on the present value of the future minimum lease payments over the lease term
at commencement date calculated using our incremental borrowing rate applicable to the lease asset, unless the implicit rate is
readily determinable. ROU assets also include any lease payments made at or before lease commencement and exclude any lease incentives
received. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise
that option. Leases with a term of 12 months or less are not recognized on the consolidated balance sheet. The Company’s
leases do not contain any residual value guarantees. Lease expense for minimum lease payments is recognized on a straight-line
basis over the lease term.
The Company accounts
for lease and non-lease components as a single lease component for all its leases.
Goodwill
The Company evaluates
goodwill on an annual basis in the fourth quarter or more frequently if management believes indicators of impairment exist. Such
indicators could include, but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2)
unanticipated competition, or (3) an adverse action or assessment by a regulator. The Company first assesses qualitative factors
to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including
goodwill. If management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying
amount, management conducts a two-step quantitative goodwill impairment test. The first step of the impairment test involves comparing
the fair value of the applicable reporting unit with its carrying value. If the carrying amount of a reporting unit exceeds the
reporting unit’s fair value, management performs the second step of the goodwill impairment test. The second step of the
goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying
value of that goodwill. The amount, by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized
as an impairment loss. No triggering events indicating goodwill impairment occurred during the year ended December 31, 2019.
Intangible Assets
Intangible assets
are comprised of patents, trademarks, software development costs and the intangible assets acquired in the Cryogene acquisition
which include a non-compete agreement, technology, customer relationships and trade name/trademark. The Company capitalizes costs
of obtaining patents and trademarks, which are amortized, using the straight-line method over their estimated useful life of five
years once the patent or trademark has been issued. The Company capitalizes certain costs related to software developed for internal
use. Software development costs incurred during the preliminary or maintenance project stages are expensed as incurred, while costs
incurred during the application development stage are capitalized and amortized using the straight-line method over the estimated
useful life of the software, which is five years. Capitalized costs include purchased materials and costs of services. The non-compete
agreement, technology, customer relationships and Cryogene trade name/trademark acquired in the Cryogene acquisition are amortized
using the straight-line method over the estimated useful lives (see Note 13).
The
Company evaluates the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that
an intangible asset's carrying amount may not be recoverable. Such circumstances could include, but are not limited to: (1) a significant
decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or
(3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. The Company
measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum
of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be
recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value.
The estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows.
The evaluation of asset impairment requires the Company to make assumptions about future cash flows over the life of the asset
being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts.
There was no impairment of intangible assets during the year ended December 31, 2019.
Other Long-lived Assets
If indicators of impairment
exist, we assess the recoverability of the affected long-lived assets by determining whether the carrying value of such assets
can be recovered through undiscounted future operating cash flows. If impairment is indicated, we measure the amount of such impairment
by comparing the fair value to the carrying value. We believe the future cash flows to be received from the long-lived assets will
exceed the assets’ carrying value, and accordingly, we have not recognized any impairment losses through December 31, 2019.
Deferred Financing Costs
Deferred financing
costs represent costs incurred in connection with the issuance of debt instruments and equity financings. Deferred financing costs
related to the issuance of debt are amortized over the term of the financing instrument using the effective interest method and
are presented in the consolidated balance sheets as an offset against the related debt. Offering costs from equity financings are
netted against the gross proceeds received from the equity financings.
Income Taxes
The Company accounts
for income taxes under the provision of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 740, “Income Taxes”, or ASC 740. As of December 31, 2019 and 2018, there were no unrecognized
tax benefits included in the accompanying consolidated balance sheets that would, if recognized, affect the effective tax rate.
Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date. A valuation allowance is provided for certain deferred
tax assets if it is more likely than not that the Company will not realize tax assets through future operations. Based on the weight
of available evidence, the Company’s management has determined that it is more likely than not that the net deferred tax
assets will not be realized. Therefore, the Company has recorded a full valuation allowance against the net deferred tax assets.
Additionally, the
Company maintains a deferred tax liability related to indefinite-lived assets that have been netted against deferred tax assets
that also allow for indefinite carryforward periods subject to limitations. The remaining taxable temporary difference cannot serve
as a source for future taxable income to realize deferred tax assets, as the net deferred tax liability will not reverse until
the assets are sold or impaired for financial reporting purposes. The Company’s provision for income taxes primarily consists
of state minimum and franchise taxes.
The Company’s
policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual
for interest or penalties on its consolidated balance sheets at December 31, 2019 and 2018 and has not recognized interest and/or
penalties in the consolidated statements of operations for the years ended December 31, 2019 and 2018. The Company is subject to
taxation in the U.S., various state jurisdictions and in the Netherlands. As of December 31, 2019, the Company is no longer subject
to U.S. federal examinations for years before 2016 and for California franchise and income tax examinations for years before 2015.
However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where net operating losses
were generated and carried forward, and make adjustments up to the amount of the net operating loss carry forward amount. The Company
is not currently under examination by U.S. federal or state jurisdictions.
Revenue Recognition
Revenues are recognized
when control is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in
exchange for those goods and services. Revenue recognition is evaluated through the following five steps: (i) identification of
the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination
of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition
of revenue when or as a performance obligation is satisfied.
Performance Obligations
At contract inception,
an assessment of the goods and services promised in the contracts with customers is performed and a performance obligation is identified
for each distinct promise to transfer to the customer a good or service (or bundle of goods or services). To identify the performance
obligations, the Company considers all of the goods or services promised in the contract regardless of whether they are explicitly
stated or are implied by customary business practices. Revenue is recognized when our performance obligation has been met. For
shipment transactions, the Company considers control to have transferred upon delivery because the Company has a present right
to payment at that time, the Company has transferred use of the asset, and the customer is able to direct the use of, and obtain
substantially all of the remaining benefits from, the asset.
For arrangements under
which the Company provides biological specimen storage services and logistics support and management to the customer, the Company
satisfies its performance obligations as those services are performed whereby the customer simultaneously receives and consumes
the benefits of such services under the agreement.
Revenue generated from
short-term logistics and engineering consulting services provided to customers is recognized when the Company satisfies the contractually
defined performance obligations.
Our performance obligations
on our orders and under the terms of agreements with customers are generally satisfied within one year from a given reporting date
and, therefore, we omit disclosure of the transaction price allocated to remaining performance obligations on open orders.
Shipping and handling
activities related to contracts with customers are accounted for as costs to fulfill our promise to transfer the associated products
pursuant to the accounting policy election allowed under Topic 606 and are not considered a separate performance obligation to
our customers. Accordingly, the Company records amounts billed for shipping and handling as a component of revenue. Shipping and
handling fees and costs are included in cost of revenues in the accompanying consolidated statements of operations.
Revenues are recognized
net of any taxes collected from customers, which are subsequently remitted to governmental agencies.
Payment Terms
Pursuant to the Company’s
contracts with its customers, amounts billed for services or products delivered by the Company are generally due and payable in
full within 15 to 60 days from the date of the invoice (except for any amounts disputed by the customer in good faith). Accordingly,
the Company determined that its contracts with customers do not include extended payment terms or a significant financing component.
Variable Consideration
Variable consideration
is estimated at the most likely amount that is expected to be earned. Estimated amounts are included in the transaction price to
the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated
with the variable consideration is resolved. Estimates of variable consideration and determination of whether to include estimated
amounts in the transaction price are based largely on an assessment of the anticipated performance and all information (historical,
current and forecasted) that is reasonably available.
Revenues are recorded
net of variable consideration, such as discounts and allowances.
Warranties
The Company’s
products and services are provided on an “as is” basis and no warranties are included in the contracts with customers.
Also, the Company does not offer separately priced extended warranty or product maintenance contracts.
Incremental Direct Costs
The Company expenses
incremental direct costs of obtaining a contract (sales commissions) when incurred because the amortization period is generally
12 months or less. The Company does not incur costs to fulfill a customer contract that meet the requirements for capitalization.
Contract Assets
Typically, we invoice
the customer and recognize revenue once we have satisfied our performance obligation. Accordingly, our contract assets comprise
accounts receivable, which are recognized when payment is unconditional and only the passage of time is required before payment
is due. Generally, we do not have material amounts of other contract assets since revenue is recognized as control of goods is
transferred or as services are performed.
Contract Liabilities (Deferred Revenue)
Contract liabilities
are recorded when cash payments are received in advance of the Company’s performance. Deferred revenue was $367,900 and $66,300
at December 31, 2019 and 2018, respectively. During the year ended December 31, 2019, the Company recognized revenues of $66,300
from the related contract liabilities outstanding as the services were performed.
Nature of Goods and Services
The Global Logistics
Solutions segment provides Cryoport Express® Shippers to its customers and charges a fee in exchange for the use
of the Cryoport Express® Shipper under long-term master service agreements with customers. The Company’s arrangements
convey to the customers the right to use the Cryoport Express® Shippers over a period of time. The Company retains
title to the Cryoport Express® Shippers and provides its customers the use of the Cryoport Express®
Shipper for a specified shipping cycle. At the culmination of the customer’s shipping cycle, the Cryoport Express®
Shipper is returned to the Company.
The Global Bioservices
segment provides comprehensive and integrated temperature-controlled biostorage solutions to customers in the life sciences industry
and charges a fee under long-term master service agreements with customers. These services include (1) biological specimen cryopreservation
storage and maintenance, (2) archiving, monitoring, tracking, receipt and delivery of samples, (3) transport of frozen biological
specimens to and from customer locations, and (4) management of incoming and outgoing biological specimens.
The vast majority
of our revenues are covered under long-term master service agreements. We have determined that individual Statements of Work
or Scope of Work (“SOW”), whose terms and conditions taken with a Master Services Agreement (“MSA”),
create the Topic 606 contracts which are generally short-term in nature (e.g., 15-day shipping cycle) for the Global
Logistics Solutions segment and up to 12 months for the Global Bioservices segment. Our agreements (including SOWs)
generally do not have multiple performance obligations and, therefore, do not require an allocation of a single price amongst
multiple goods or services. Prices under these agreements are generally fixed. The Global Logistics Solutions
segment recognizes revenue for the use of the Cryoport Express® Shipper at the
time of the delivery of the Cryoport Express® Shipper to the end user of the enclosed materials, and at the
time that collectability is probable. The Global Bioservices segment recognizes revenue as services are rendered over time
and at the time that collectability is probable.
The Company also provides
logistics support and management to some customers, which may include onsite logistics personnel. Revenue is recognized for these
services as services are rendered over time and at the time that collectability is probable.
The Company also provides
short-term logistics and engineering consulting services to some customers, with fees tied to the completion of contractually
defined services. We recognize revenue from these services over time as the customer simultaneously receives and consumes the benefit
of these services as they are performed.
Revenue Disaggregation
The Company operates
in two reportable segments and evaluates financial performance on a Company-wide basis. We consider sales disaggregated by end-market
to depict how the nature, amount, timing and uncertainty of revenues and cash flows are impacted by changes in economic factors.
The following table disaggregates our revenues by major source for the years ended December 31, 2019 and 2018:
|
|
December 31,
|
|
(000’s omitted)
|
|
2019
|
|
|
2018
|
|
Global Logistics Solutions:
|
|
|
|
|
|
|
|
|
Biopharmaceutical
|
|
$
|
27,003
|
|
|
$
|
16,477
|
|
Reproductive Medicine
|
|
|
2,914
|
|
|
|
2,173
|
|
Animal Health
|
|
|
996
|
|
|
|
976
|
|
Total Global Logistics Solutions
|
|
|
30,913
|
|
|
|
19,626
|
|
Global Bioservices
|
|
|
3,029
|
|
|
|
—
|
|
Total revenues
|
|
$
|
33,942
|
|
|
$
|
19,626
|
|
Our geographical revenues,
by origin, for the years ended December 31, 2019 and 2018, were as follows:
|
|
December 31,
|
|
(000’s omitted)
|
|
2019
|
|
|
2018
|
|
Americas
|
|
$
|
28,801
|
|
|
$
|
17,877
|
|
Europe, the Middle East and Africa (EMEA)
|
|
|
4,523
|
|
|
|
1,365
|
|
Asia Pacific (APAC)
|
|
|
618
|
|
|
|
384
|
|
Total revenues
|
|
$
|
33,942
|
|
|
$
|
19,626
|
|
Engineering and Development Expenses
Expenditures relating to engineering and
development are expensed in the period incurred to engineering and development expense in the consolidated statements of operations.
Stock-Based Compensation
The Company accounts
for stock-based payments in accordance with stock-based payment accounting guidance which requires all stock-based payments to
be recognized based upon their fair values. The fair value of stock-based awards is estimated at the grant date using the Black-Scholes
Option Pricing Model (“Black-Scholes”) and the portion that is ultimately expected to vest is recognized as compensation
cost over the requisite service period. The determination of fair value using Black-Scholes is affected by the Company’s
stock price as well as assumptions regarding a number of complex and subjective variables, including expected stock price volatility,
risk-free interest rate, expected dividends and expected term. The Company accounts for forfeitures of unvested awards as they
occur.
The Company’s stock-based compensation
plans are discussed further in Note 15.
Equity Instruments Issued to Non-Employees for Acquiring
Goods or Services
Issuances of the Company’s
common stock for acquiring goods or services are measured at the estimated fair value of the consideration received or the estimated
fair value of the equity instruments issued, whichever is more reliably measurable. The measurement date for the estimated fair
value of the equity instruments issued to consultants or vendors is determined at the earlier of (i) the date at which a commitment
for performance to earn the equity instruments is reached (a “performance commitment” which would include a penalty
considered to be of a magnitude that is a sufficiently large disincentive for nonperformance) or (ii) the date at which performance
is complete. When it is appropriate for the Company to recognize the cost of a transaction during financial reporting periods prior
to the measurement date, for purposes of recognition of costs during those periods, the equity instrument is measured at the then-current
estimated fair values.
Basic and Diluted Net Loss Per Share
We calculate basic and
diluted net income (loss) per share using the weighted average number of common shares outstanding during the periods presented.
In periods of a net loss position, basic and diluted weighted average common shares are the same. For the diluted earnings per
share calculation, we adjust the weighted average number of common shares outstanding to include dilutive stock options, warrants
and shares associated with the conversion of convertible debt outstanding during the periods.
The following shows
the amounts used in computing net loss per share:
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net loss
|
|
$
|
(18,331,479
|
)
|
|
$
|
(9,555,601
|
)
|
Weighted average common shares outstanding - basic and diluted
|
|
|
33,394,285
|
|
|
|
28,210,648
|
|
Basic and diluted net loss per share
|
|
$
|
(0.55
|
)
|
|
$
|
(0.34
|
)
|
The following table
sets forth the number of shares excluded from the computation of diluted loss per share, as their inclusion would have been anti-dilutive:
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Stock Options
|
|
|
3,636,806
|
|
|
|
3,130,635
|
|
Warrants
|
|
|
753,211
|
|
|
|
1,329,594
|
|
Convertible Note
|
|
|
—
|
|
|
|
1,372,998
|
|
|
|
|
4,390,017
|
|
|
|
5,833,227
|
|
Segment Reporting
We currently operate in two reportable
segments and the chief operating decision maker is our Chief Executive Officer.
Foreign Currency Transactions
Management has determined
that the functional currency of its subsidiaries is the local currency. Assets and liabilities of the Netherlands and United Kingdom
subsidiaries are translated into U.S. dollars at the period-end exchange rates. Income and expenses are translated at an average
exchange rate for the period and the resulting translation gain (loss) adjustments are accumulated as a separate component of stockholders’
equity. The translation gain (loss) adjustment totaled $2,900 and $(20,400) for the years ended December 31, 2019 and 2018, respectively.
Foreign currency gains and losses from transactions denominated in other than respective local currencies are included in earnings.
Foreign currency gains and losses for all periods presented were not significant.
Comprehensive Loss
Comprehensive loss includes
all changes in equity (net assets) during a period from non-owner sources. For the years ended December 31, 2019 and 2018, the
components of comprehensive income (loss) consist of unrealized gains or losses on available-for-sale debt securities, reclassification
of realized gains or losses on available-for-sale debt securities to earnings and foreign currency translation gains or losses.
Off Balance Sheet Arrangements
We do not currently have any off
balance sheet arrangements.
Recently Adopted Accounting Pronouncements
In June 2018, the FASB
issued ASU 2018-07, “Compensation – Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting”
which simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the
scope of Topic 718, “Compensation-Stock Compensation”, to include share-based payment transactions for acquiring
goods and services from nonemployees. Some of the areas for simplification apply only to nonpublic entities. The amendments specify
that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed
in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not
apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with
selling goods or services to customers as part of a contract accounted for under Topic 606, “Revenue from Contracts with
Customers”. The Company adopted ASU 2018-07 effective January 1, 2019, and the adoption of the standard did not have a material
impact on the Company’s consolidated financial statements.
In February 2016, the
FASB issued ASU 2016-02, “Leases”, as amended by ASU No. 2018-11, “Leases: Targeted Improvements”, (ASC
842), which provides for a comprehensive change to lease accounting. The new guidance amends the existing accounting standards
for leases to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease
liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities
by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective
of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
We adopted the standard
effective January 1, 2019 using the modified retrospective approach with the effective date as the date of initial application.
Consequently, prior period balances and disclosures have not been restated. Also, the Company has implemented additional internal
controls to enable future preparation of financial information in accordance with ASC 842.
The standard had a
material impact on our consolidated balance sheets, which resulted in the recognition of ROU assets of $1.8 million, lease liabilities
of $2.1 million and a reduction in deferred rent liabilities of $309,600 for operating leases, while our accounting for finance
leases remained substantially unchanged. However, the adoption of the new standard did not materially impact our consolidated results
of operations and cash flows. Also, the adoption of ASC 842 did not have an impact on the Company’s beginning accumulated
deficit balance.
ASC 842 provides a
number of optional practical expedients in transition. For leases that commenced prior to January 1, 2019, the Company elected:
(1) the “package of practical expedients”, which permits it not to reassess under the new standard its prior conclusions
about lease identification, lease classification, and initial direct costs, and (2) the use-of-hindsight in determining the lease
term and in assessing impairment of ROU assets. In addition, ASC 842 provides practical expedients for an entity’s ongoing
accounting that the Company has elected, comprised of the following: (1) the election for classes of underlying asset to not separate
non-lease components from lease components, and (2) the election for short-term lease recognition exemption for all leases that
qualify.
For additional information
regarding the Company’s leases, see Note 9.
Accounting Guidance Issued but Not
Adopted at December 31, 2019
In January 2020, the
FASB issued ASU 2020-01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures
(Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.”
The new guidance clarifies the interaction of accounting for the transition into and out of the equity method and the accounting
for measuring certain purchased options and forward contracts to acquire investments. ASU 2020-01 is effective for fiscal years
beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted, including
adoption in an interim period. We are currently evaluating the impact of adopting this guidance.
In December 2019, the
FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” as part of
its initiative to reduce complexity in the accounting standards. The amendments in ASU 2019-12 eliminate certain exceptions related
to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition
of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies other aspects of the accounting
for income taxes. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2020. Early adoption is permitted, including adoption in any interim period. We are currently evaluating the impact of adopting
this guidance.
In August 2018,
the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement," which is part of the FASB disclosure framework project to improve
the effectiveness of disclosures in the notes to the financial statements. The amendments in the new guidance remove, modify,
and add certain disclosure requirements related to fair value measurements covered in Topic 820, "Fair Value
Measurement." The new standard is effective for fiscal years beginning after December 15, 2019. Early adoption is
permitted for either the entire standard or only the requirements that modify or eliminate the disclosure requirements, with
certain requirements applied prospectively, and all other requirements applied retrospectively to all periods presented. We will
adopt this guidance on January 1, 2020. We are currently evaluating the impact of adopting this guidance.
In January 2017, the
FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”,
which is intended to simplify the subsequent accounting for goodwill acquired in a business combination. Prior guidance required
utilizing a two-step process to review goodwill for impairment. A second step was required if there was an indication that an impairment
may exist, and the second step required calculating the potential impairment by comparing the implied fair value of the reporting
unit's goodwill (as if purchase accounting were performed on the testing date) with the carrying amount of the goodwill. The new
guidance eliminates the second step from the goodwill impairment test. Under the new guidance, an entity should perform its annual,
or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and then recognize
an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value (although the loss
should not exceed the total amount of goodwill allocated to the reporting unit). The guidance requires prospective adoption and
will be effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019.
We will adopt this guidance on January 1, 2020. We are currently evaluating the impact of adopting
this guidance.
In June 2016, the FASB
issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." This ASU replaces the incurred loss impairment
methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader
range of reasonable and supportable information for credit loss estimates on certain types of financial instruments, including
trade receivables. In addition, new disclosures are required. The ASU, as subsequently amended, is effective for fiscal years beginning
after December 15, 2022 for smaller reporting companies,
as defined by the SEC. As a smaller reporting company, we are currently evaluating the impact of adopting this guidance. The Company
currently believes the main impact of the new standard will relate to the Company’s assessment of its allowance for doubtful
accounts on trade receivables.
Note 3. Cash, Cash Equivalents and Short-Term Investments
Cash, cash equivalents and short-term investments
consisted of the following as of December 31, 2019 and 2018:
|
|
Carrying Value
|
|
|
|
2019
|
|
|
2018
|
|
Cash
|
|
$
|
3,546,893
|
|
|
$
|
37,223,698
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market mutual fund
|
|
|
43,687,877
|
|
|
|
103,427
|
|
Total cash and cash equivalents
|
|
|
47,234,770
|
|
|
|
37,327,125
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
U.S. Treasury notes and bills
|
|
|
21,094,100
|
|
|
|
7,925,975
|
|
Mutual funds
|
|
|
25,966,686
|
|
|
|
2,004,993
|
|
Total short-term investments
|
|
|
47,060,786
|
|
|
|
9,930,968
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
94,295,556
|
|
|
$
|
47,258,093
|
|
Available-for-sale investments
The amortized cost, gross unrealized gains,
gross unrealized losses and fair value of available-for-sale investments by type of security at December 31, 2019 were as follows:
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
U.S. Treasury notes
|
|
|
21,121,659
|
|
|
|
26,552
|
|
|
|
(54,111
|
)
|
|
|
21,094,100
|
|
Total available-for-sale investments
|
|
$
|
21,121,659
|
|
|
$
|
26,552
|
|
|
$
|
(54,111
|
)
|
|
$
|
21,094,100
|
|
There were no individual securities that
have been in a continuous loss position of 12 months or greater as of December 31, 2019 .
The following table summarizes the fair
value of available-for-sale investments based on stated contractual maturities as of December 31, 2019:
|
|
Amortized Cost
|
|
|
Fair Value
|
|
Due within one year
|
|
$
|
12,043,525
|
|
|
$
|
12,046,700
|
|
Due between one and two years
|
|
|
9,078,134
|
|
|
|
9,047,400
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,121,659
|
|
|
$
|
21,094,100
|
|
The amortized cost, gross unrealized gains,
gross unrealized losses and fair value of available-for-sale investments by type of security at December 31, 2018 were as follows:
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
U.S. Treasury bills
|
|
$
|
2,948,777
|
|
|
$
|
19,523
|
|
|
$
|
—
|
|
|
$
|
2,968,300
|
|
U.S. Treasury notes
|
|
|
4,953,616
|
|
|
|
4,059
|
|
|
|
—
|
|
|
|
4,957,675
|
|
Total available-for-sale investments
|
|
$
|
7,902,393
|
|
|
$
|
23,582
|
|
|
$
|
—
|
|
|
$
|
7,925,975
|
|
The following table summarizes the fair
value of available-for-sale investments based on stated contractual maturities as of December 31, 2018:
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
Due within one year
|
|
$
|
5,913,327
|
|
|
$
|
5,936,515
|
|
Due between one and two years
|
|
|
1,989,066
|
|
|
|
1,989,460
|
|
Total
|
|
$
|
7,902,393
|
|
|
$
|
7,925,975
|
|
As of December 31, 2018,
there were no available-for-sale investments in an unrealized loss position.
The primary objective
of our investment portfolio is to enhance overall returns in an efficient manner while maintaining safety of principal, prudent
levels of liquidity and acceptable levels of risk. Our investment policy limits interest-bearing security investments to certain
types of debt and money market instruments issued by institutions with primarily investment-grade credit ratings, and it places
restrictions on maturities and concentration by asset class and issuer.
We review our available-for-sale
investments for other-than-temporary declines in fair value below our cost basis each quarter and whenever events or changes in
circumstances indicate that the cost basis of an asset may not be recoverable. The evaluation is based on a number of factors,
including the length of time and the extent to which the fair value has been below our cost basis, as well as adverse conditions
related specifically to the security such as any changes to the credit rating of the security and the intent to sell or whether
we will more likely than not be required to sell the security before recovery of its amortized cost basis. Based on our evaluation,
we determined that our unrealized losses were not other-than-temporary at December 31, 2019 .
Our assessment of whether a security is other-than-temporarily impaired could change in the future based on new developments or
changes in assumptions related to that particular security.
During the years ended
December 31, 2019 and 2018, we had $81,700 and $0 realized gains on available-for-sale investments, respectively.
Equity Investments
We held investments
in equity securities with readily determinable fair values of $26.0 million and $2.0 million at December 31, 2019 and 2018, respectively.
These investments consist of mutual funds that invest primarily in tax free municipal bonds and treasury inflation protected securities.
Unrealized gains (losses)
during 2019 and 2018 related to equity securities held at December 31, 2019 and 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
Net gains (losses) recognized during the year on equity securities
|
|
$
|
(101,674
|
)
|
|
$
|
(16,233
|
)
|
Less: net gains (losses) recognized during the year on equity securities sold during the year
|
|
|
—
|
|
|
|
—
|
|
Unrealized gains (losses) recognized during the year on equity securities still held at December 31, 2019 and 2018
|
|
$
|
(101,674
|
)
|
|
$
|
16,233
|
|
Note 4. Fair Value Measurements
We measure fair value
based on the prices that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used
to measure fair value. These tiers include the following:
Level 1: Quoted
prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date. The fair
value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable
prices that are based on inputs not quoted on active markets, but corroborated by market data. These inputs include quoted prices
for similar assets or liabilities; quoted market prices in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Unobservable
inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3
inputs.
In determining
fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs
to the extent possible, as well as consider counterparty credit risk in the assessment of fair value.
We did not elect the
fair value option, as allowed, to account for financial assets and liabilities that were not previously carried at fair value.
Therefore, material financial assets and liabilities that are not carried at fair value, such as trade accounts receivable and
payable, are reported at their historical carrying values.
The carrying values
of our assets that are required to be measured at fair value on a recurring basis as of December 31, 2019 and 2018 approximate
fair value because of our ability to immediately convert these instruments into cash with minimal expected change in value which
are classified in the table below in one of the three categories of the fair value hierarchy described above:
|
|
Fair Value Measurements
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual fund
|
|
$
|
43,687,877
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
43,687,877
|
|
Marketable equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
25,966,686
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,966,686
|
|
Available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury notes
|
|
|
21,094,100
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,094,100
|
|
|
|
$
|
90,748,663
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
90,748,663
|
|
|
|
Fair Value Measurements
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual fund
|
|
$
|
103,427
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
103,427
|
|
Marketable equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
2,004,993
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,004,993
|
|
Available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury notes
|
|
|
4,957,675
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,957,675
|
|
U.S. Treasury bills
|
|
|
2,968,300
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,968,300
|
|
|
|
$
|
10,034,395
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,034,395
|
|
Our equity
securities and available-for-sale debt securities, including U.S. treasury notes and U.S. treasury bills, are valued using inputs
observable in active markets for identical securities and are therefore classified as Level I within the fair value hierarchy.
We did
not have any financial liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018.
Note 5. Inventories
Inventories consist
of the following:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Raw materials
|
|
$
|
356,713
|
|
|
$
|
123,528
|
|
Finished goods
|
|
|
117,248
|
|
|
|
96,986
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
473,961
|
|
|
$
|
220,514
|
|
Note 6. Property and Equipment
Property and equipment consist
of the following:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Cryogenic shippers and data loggers
|
|
$
|
4,295,719
|
|
|
$
|
2,719,973
|
|
Freezers
|
|
|
3,414,319
|
|
|
|
—
|
|
Furniture and fixtures
|
|
|
291,331
|
|
|
|
148,002
|
|
Capitalized software
|
|
|
545,445
|
|
|
|
545,445
|
|
Computers and software
|
|
|
645,855
|
|
|
|
573,843
|
|
Machinery and equipment
|
|
|
1,092,526
|
|
|
|
567,506
|
|
Trucks and autos
|
|
|
37,000
|
|
|
|
—
|
|
Leasehold improvements
|
|
|
2,246,118
|
|
|
|
1,051,712
|
|
Fixed assets in process
|
|
|
3,406,377
|
|
|
|
1,374,906
|
|
|
|
|
15,974,690
|
|
|
|
6,981,387
|
|
Less accumulated depreciation and amortization
|
|
|
(4,141,633
|
)
|
|
|
(2,623,889
|
)
|
|
|
$
|
11,833,057
|
|
|
$
|
4,357,498
|
|
Total depreciation and amortization expense
related to property and equipment amounted to $2.1 million and $857,900 for the years ended December 31, 2019 and 2018, respectively.
The Company leases equipment under finance
leases, entered in 2018, with a total cost of $71,000 and accumulated amortization of $22,800 and $6,800 as of December 31, 2019
and 2018, respectively.
Note 7. Goodwill and Intangible
Assets
Goodwill
During the year ended
December 31, 2019, the Company recorded $11.0 million of goodwill which is related to the acquisition of Cryogene. See Note 13
for further information on this acquisition transaction. As of December 31, 2019, the carrying value of goodwill is $11.0 million
which is allocated to the Global Bioservices reportable segment.
Intangible Assets
The following table presents
our intangible assets as of December 31, 2019:
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Weighted
Average
Amortization
Period (years)
|
|
Non-compete agreement
|
|
$
|
390,000
|
|
|
$
|
45,500
|
|
|
$
|
344,500
|
|
|
|
5
|
|
Technology
|
|
|
510,000
|
|
|
|
59,500
|
|
|
|
450,500
|
|
|
|
5
|
|
Customer relationships
|
|
|
3,900,000
|
|
|
|
189,583
|
|
|
|
3,710,417
|
|
|
|
12
|
|
Cryogene trade name/trademark
|
|
|
480,000
|
|
|
|
18,667
|
|
|
|
461,333
|
|
|
|
15
|
|
Cryoport patents and trademarks
|
|
|
258,203
|
|
|
|
47,375
|
|
|
|
210,828
|
|
|
|
—
|
|
Total
|
|
$
|
5,538,203
|
|
|
$
|
360,625
|
|
|
$
|
5,177,578
|
|
|
|
|
|
The following table presents
our intangible assets as of December 31, 2018:
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
Weighted
Average
Amortization
Period (years)
|
|
Cryoport patents and trademarks
|
|
$
|
184,595
|
|
|
$
|
47,375
|
|
|
$
|
137,220
|
|
|
|
—
|
|
Amortization expense
for intangible assets for the years ended December 31, 2019 and 2018 was $313,300 and $0, respectively.
Expected future amortization of intangible assets as
of December 31, 2019 is as follows:
Years Ending December 31,
|
|
Amount
|
|
2020
|
|
|
537,000
|
|
2021
|
|
|
537,000
|
|
2022
|
|
|
537,000
|
|
2023
|
|
|
537,000
|
|
2024
|
|
|
432,000
|
|
Thereafter
|
|
|
2,386,750
|
|
|
|
$
|
4,966,750
|
|
Note 8. Accrued Compensation and
Related Expenses
Accrued compensation
and related expenses consist of the following:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Accrued salaries and wages
|
|
$
|
1,385,887
|
|
|
$
|
900,797
|
|
Accrued paid time off
|
|
|
517,833
|
|
|
|
361,681
|
|
|
|
$
|
1,903,720
|
|
|
$
|
1,262,478
|
|
Note 9. Leases
The Company has operating
and finance leases for corporate offices and certain equipment. These leases have remaining lease terms of one year to approximately
nine years, some of which include options to extend the leases for multiple renewal periods of five years each. Under the terms
of the facilities leases, the Company is required to pay its proportionate share of property taxes, insurance and normal maintenance
costs. As of December 31, 2019 and 2018, assets recorded under finance leases were $71,000, and accumulated depreciation associated
with finance leases was $22,800 and $6,800, respectively.
The components of
lease cost were as follows:
|
|
Year Ended
|
|
|
|
December 31, 2019
|
|
Operating lease cost
|
|
$
|
757,561
|
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
10,150
|
|
Interest on finance lease liabilities
|
|
|
2,749
|
|
|
|
|
12,899
|
|
|
|
|
|
|
Total lease cost
|
|
$
|
770,460
|
|
Other
information related to leases was as follows:
|
|
Year Ended
|
|
Supplemental Cash Flows Information
|
|
December 31, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
759,868
|
|
Operating cash flows from finance leases
|
|
$
|
2,749
|
|
Financing cash flows from finance leases
|
|
$
|
23,191
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease liabilities:
|
|
|
|
|
Operating leases
|
|
$
|
3,164,950
|
|
Finance leases
|
|
$
|
—
|
|
|
|
|
|
|
Weighted-Average Remaining Lease Term
|
|
|
|
|
Operating leases
|
|
|
6.8 years
|
|
Finance leases
|
|
|
1.3 years
|
|
|
|
|
|
|
Weighted-Average Discount Rate
|
|
|
|
|
Operating leases
|
|
|
7.24
|
%
|
Finance leases
|
|
|
6.0
|
%
|
Future minimum lease payments under non-cancellable
leases that have commenced as of December 31, 2019 were as follows:
Years Ending December 31,
|
|
Operating Leases
|
|
|
Finance Leases
|
|
2020
|
|
|
989,746
|
|
|
|
25,940
|
|
2021
|
|
|
996,349
|
|
|
|
8,647
|
|
2022
|
|
|
1,006,151
|
|
|
|
—
|
|
2023
|
|
|
674,731
|
|
|
|
—
|
|
2024
|
|
|
615,157
|
|
|
|
—
|
|
Thereafter
|
|
|
1,839,429
|
|
|
|
—
|
|
Total future minimum lease payments
|
|
|
6,121,563
|
|
|
|
34,587
|
|
Less imputed interest
|
|
|
(1,354,426
|
)
|
|
|
(1,431
|
)
|
Total
|
|
$
|
4,767,137
|
|
|
$
|
33,156
|
|
Reported as of December 31, 2019
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
Current lease liabilities
|
|
$
|
665,901
|
|
|
$
|
24,617
|
|
Noncurrent lease liabilities
|
|
|
4,101,236
|
|
|
|
8,539
|
|
Total
|
|
$
|
4,767,137
|
|
|
$
|
33,156
|
|
In the fourth quarter
of 2019, the Company entered into an agreement to lease office space in Houston, Texas, which had not yet commenced as of December
31, 2019, with total minimum lease payments of $2.5 million over an initial term of 10 years. This lease commenced effective February
1, 2020.
Also, in the
fourth quarter of 2019, the Company entered into an agreement to lease office space in Houston, Texas with total minimum
lease payments of $944,400 over an initial term of nine years and one month. As of December 31, 2019, the lease had not yet
commenced. This lease is expected to commence in May 2020, but may commence earlier if the lessor makes the space available
for use earlier than scheduled.
In addition, in February
2020, the Company entered into an agreement to lease office space in Morris Plains, New Jersey with total minimum lease payments
of $2.0 million over an initial term of seven years and seven months. This lease is expected to commence in May 2020, but may commence
earlier if the lessor makes the space available for use earlier than scheduled.
Disclosures of future minimum
lease payments and lease expense related to periods prior to adoption of the new lease standard (ASC 842 )
Estimated annual future
minimum payments related to the Company’s leases were as follows at December 31, 2018:
Years Ending December 31,
|
|
Operating
Leases
|
|
|
Capital
Leases
|
|
2019
|
|
$
|
525,592
|
|
|
$
|
25,940
|
|
2020
|
|
|
537,742
|
|
|
|
25,940
|
|
2021
|
|
|
538,893
|
|
|
|
8,647
|
|
2022
|
|
|
542,790
|
|
|
|
-
|
|
2023
|
|
|
198,219
|
|
|
|
-
|
|
Thereafter
|
|
|
109,773
|
|
|
|
-
|
|
Total minimum lease payments
|
|
$
|
2,453,009
|
|
|
|
60,527
|
|
Amount representing interest at 6%
|
|
|
|
|
|
|
(4,180
|
)
|
Present value of future minimum capital lease obligations
|
|
|
|
|
|
|
56,347
|
|
Current portion
|
|
|
|
|
|
|
(23,191
|
)
|
|
|
|
|
|
|
$
|
33,156
|
|
Rent expense for the
year ended December 31, 2018 was approximately $422,600.
Note 10. Convertible Note
On December 14, 2018,
we entered into a Securities Purchase and Registration Rights Agreement (the “SPA”) with Petrichor Opportunities Fund
I LP (the “Investor”) in connection with (i) the issuance and sale of 1,000,000 shares of the Company’s common
stock, par value $0.001 per share (the “Investment Shares”), at a price equal to $10.00 per share and (ii) the issuance
of a $15,000,000 floating rate convertible note (the “Note”) of the Company, with such Note convertible on the terms
stated therein into shares of Common Stock (the “Note Shares”) (together, the “Transaction”). In connection
with the Transaction, the Company paid Petrichor Opportunities Fund I LP a commitment fee of $250,000 on the aggregate total purchase
price for the Transaction.
The Note was the senior
unsecured obligation of the Company. The original maturity of the Note was December 14, 2023. The Note accrued interest at a rate
equal to the greater of (a) three-month London Interbank Offered Rate (LIBOR) or (b) two percent, plus the applicable margin of
six percent on the outstanding balance of the Note, payable quarterly on the first business day of each calendar quarter.
Prior to the maturity,
a holder of the Note had the right to convert all or any portion of the Note, including any accrued but unpaid interest, into shares
of Common Stock at a conversion price of $13.11 per share (the “Conversion Price”), subject to certain adjustments
as set forth in the Note. The Company determined that the Note’s conversion option included a down round price protection
feature which triggers upon the occurrence of a future event. If, at any time on or prior to December 14, 2021, the volume-weighted
average price of the Common Stock exceeds $17.48 for 15 consecutive trading days and certain additional conditions are satisfied,
the Note automatically converts into shares of Common Stock at the Conversion Price, subject to certain conditions.
At any time after
June 14, 2019, the Company had the right to redeem all, but not less than all, of the outstanding Note for cash prior to the Maturity
Date, at a redemption premium on such amount as follows: (a) prior to December 14, 2019, 112%; (b) after December 14, 2019 but
on or prior to December 14, 2020, 109%; and (c) after December 14, 2020, 106% (the “Redemption Premium”).
Upon the occurrence
of certain events of default as set forth in the Note (other than events of default relating to bankruptcy, insolvency, reorganization
or liquidation proceedings) or a change of control, a holder of the Note may require the Company to redeem all or any portion of
its Note at the applicable Redemption Premium. If certain events of default relating to bankruptcy, insolvency, reorganization
or liquidation proceedings occur, all outstanding principal and accrued and unpaid interest (plus any accrued and unpaid late charges)
would automatically become due and payable at the applicable Redemption Premium.
The Note contained
certain covenants and restrictions, including, among others, that, for so long as the Note was outstanding, the Company would not
incur any indebtedness (other than permitted indebtedness under the Note), permit liens on its properties (other that permitted
liens under the Note), make payments on junior securities, make dividends or transfer certain assets or permit its unrestricted
cash to be less than a minimum amount.
Pursuant to the SPA,
the Company agreed to register the Investment Shares and the Note Shares by filing a registration statement with the SEC by the
45th calendar day after the closing date of the Transaction. The registration statement was filed on January 28, 2019 and was declared
effective by the SEC on February 14, 2019.
The issuance costs
for this Transaction, including the commitment fee paid to the Investor totaled approximately $480,000. As these costs were incurred
to raise both debt and equity, the total costs were allocated on a pro-rata basis to the debt and equity financings based on their
relative fair values. The pro-rata portion of these fees related to the Note were originally amortized over the five-year stated
life of the Note.
On July 9, 2019, the
Company entered into Amendment No. 1 to the Note. Pursuant to the amendment, the terms of the Note were amended such that (i) after
June 30, 2019, the interest rate on the Note was reduced to 6.00%; (ii) after June 30, 2019, accrued interest on the Note was converted
into common stock of the Company in connection with any conversion of the Note, provided that solely with respect to such accrued
but unpaid interest, the conversion price will be an amount equal to the average volume-weighted average price of the Company’s
common stock for the 15 consecutive trading days prior to the conversion date; (iii) the mandatory conversion date is December
14, 2019; (iv) the maximum percentage provisions relating to a mandatory conversion of the Note were removed; (v) the Note was
no longer required to be senior to any other indebtedness of the Company and its subsidiaries; and (vi) the limitation on the Company
and its subsidiaries from incurring indebtedness was removed. We accounted for Amendment No. 1 to the Note as a modification of
debt because the cash flows under the amended term loans were not substantially different than the cash flows under the original
term loans. Accordingly, a new effective interest that equates the revised cash flows to the carrying amount of the original debt
was computed and was being applied prospectively. We did not incur any fees to the Investor in connection with the amended term
loan. The unamortized debt discount was being amortized over the remaining term of the Note using the effective interest method.
On December 14, 2019,
the outstanding original principal under the Note of $15,000,000 and the accrued interest of $417,500 was converted into 1,172,305
shares of common stock of the Company as a result of a mandatory conversion under the terms of the Note. Pursuant to the terms
of the Note, the outstanding principal converted into common stock of the Company at a rate of $13.11 per share and the accrued
interest converted into common stock of the Company at a rate of approximately $14.837 per share, which was the average volume-weighted
average price of the Company’s common stock for the 15 consecutive trading days prior to the conversion date. During the
year ended December 31, 2019, the Company amortized $288,420 of the debt discount to interest expense.
Interest expense was
$1.1 million and $66,000 for the years ended December 31, 2019 and 2018, respectively. Included in accounts payable and other accrued
expenses in the accompanying consolidated balance sheets is $0 and $66,000 of accrued interest as of December 31, 2019 and 2018,
respectively.
Note 11. Segment Reporting
We currently operate
in two reportable segments: Global Logistics Solutions and Global Bioservices. The Global Logistics Solutions segment provides
temperature-controlled logistics solutions to the life sciences industry through its purpose-built proprietary packaging, information
technology and specialized cold chain logistics expertise. The Company provides leading edge logistics solutions to the biopharma,
reproductive medicine and animal health markets to ship, store and deliver biologic materials, such as immunotherapies, stem cells,
CAR-T cell therapies, vaccines and reproductive cells for clients worldwide. The Global Bioservices segment provides a comprehensive
temperature-controlled sample management solution to the life science industry, including specimen storage, sample processing,
collection, and retrieval. The spectrum of temperature-controlled solutions provided by the Company ranges from ambient, or controlled
room temperature (20°C to 25°C), refrigerated (2°C to 8°C), to frozen and cryogenic (below 0°C to as low as
−150°C). Our Chief Executive Officer is the chief operating decision maker for both segments.
The Company derives
the results of the segments directly from its internal management reporting system. The accounting policies of the operating segments
are substantially the same as those described in the summary of significant accounting policies. The Company evaluates segment
performance on the basis of revenues and profit or loss. Management uses these operating results, in part, to evaluate the performance
of, and to allocate resources to, each of the segments.
The
Company’s reportable segments are strategic business units that offer different products and services. They are managed
separately because each business requires different sales and marketing strategies and operational skillsets. The Global
Bioservices segment is currently comprised of the Cryogene business that was acquired in May 2019 (see Note 13), and the
management at the time of the acquisition was retained. Prior to this acquisition, the Company had a single reportable
segment: Global Logistics Solutions and therefore only the segment information for the year ended December 31, 2019 is
disclosed.
Reportable segment information is presented
in the following table:
|
|
Year Ended December 31, 2019
|
|
|
|
Global Logistics
Solutions
|
|
|
Global
Bioservices
|
|
|
Total
|
|
Revenues
|
|
$
|
30,913,345
|
|
|
$
|
3,028,555
|
|
|
$
|
33,941,900
|
|
Interest expense
|
|
|
(1,366,924
|
)
|
|
|
—
|
|
|
|
(1,366,924
|
)
|
Depreciation and amortization expense
|
|
|
(1,466,907
|
)
|
|
|
(948,315
|
)
|
|
|
(2,415,222
|
)
|
Segment operating profit or loss
|
|
|
(18,112,163
|
)
|
|
|
437,118
|
|
|
|
(17,675,045
|
)
|
Other significant items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
|
110,594,220
|
|
|
|
25,241,256
|
|
|
|
135,835,476
|
|
Goodwill
|
|
|
—
|
|
|
|
10,999,722
|
|
|
|
10,999,722
|
|
Expenditures for long-lived assets
|
|
|
(4,494,066
|
)
|
|
|
(1,102,416
|
)
|
|
|
(5,596,482
|
)
|
Revenues from one customer of the Company’s
Global Bioservices segment represents approximately 80.2% of that segment’s net revenues, however, it was less than 10%
of the Company’s consolidated net revenues for the year ended December 31, 2019.
Note 12. Commitments and Contingencies
Facility and Equipment Leases
We lease 27,600 square
feet of corporate, research and development, and logistics facilities in Irvine, California under an operating lease expiring February
2023, subject to our option to extend the lease for two additional five-year periods. The initial base rent is approximately $24,700
per month. We also lease 8,100 square feet of logistics facilities in Livingston, New Jersey under an operating lease expiring
December 2024, subject to our option to extend the lease for an additional five-year period. The initial base rent is approximately
$7,600 per month. In addition, we lease 7,600 square feet of logistics facilities in Hoofddorp, the Netherlands under an operating
lease expiring May 2023, subject to our option to extend the lease for two additional five-year periods. The initial base rent
is approximately $5,400 per month. We also lease a total of 21,476 square feet of corporate and logistics facilities in Houston,
Texas in two adjacent buildings under operating leases expiring in January 2024. The aggregate initial base rent is approximately
$22,000 per month. We also lease a 4,190 square foot corporate facility in Brentwood, Tennessee under an operating lease expiring
August 2024. The initial base rent is approximately $11,000 per month. These lease agreements contain certain scheduled annual
rent increases which are accounted for on a straight-line basis. In addition, we lease certain equipment which expires through
January 2024.
Employment Agreements
We have entered into
employment agreements with certain of our officers under which payment and benefits would become payable in the event of termination
by us for any reason other than cause, or upon a change in control of our Company, or by the employee for good reason.
Litigation
The
Company may become a party to product litigation in the normal course of business. The Company accrues for open claims based on
its historical experience and available insurance coverage. We record a loss contingency when it is
probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We also disclose material contingencies
when we believe a loss is not probable but reasonably possible. Accounting for contingencies requires us to use judgment related
to both the likelihood of a loss and the estimate of the amount or range of loss. The outcomes of our legal proceedings are inherently
unpredictable, subject to significant uncertainties, and could be material to our financial condition, results of operations, and
cash flows for a particular period.
Indemnities and Guarantees
The Company has made
certain indemnities and guarantees, under which it may be required to make payments to a guaranteed or indemnified party, in relation
to certain actions or transactions. The guarantees and indemnities do not provide for any limitation of the maximum potential future
payments the Company could be obligated to make. Historically, the Company has not been obligated nor incurred any payments for
these obligations and, therefore, no liabilities have been recorded for these indemnities and guarantees in the accompanying consolidated
balance sheets.
The Company indemnifies
its directors, officers, employees and agents, as permitted under the laws of the States of California and Nevada. In connection
with its facility and equipment leases, the Company has indemnified its lessors for certain claims arising from the use of the
facilities and equipment. The duration of the guarantees and indemnities varies and is generally tied to the life of the agreements.
Note 13. Acquisition of Cryogene Partners
On May 14, 2019, Cryogene,
Inc., a Texas corporation (“Buyer”) and a wholly owned subsidiary of the Company entered into an Asset Purchase Agreement
(the “Asset Purchase Agreement”) for the acquisition of the assets of Cryogene Partners, a Texas general partnership
doing business as Cryogene Labs (“Cryogene”). The closing of the transaction contemplated in the Asset Purchase Agreement
occurred simultaneously with the execution of the Asset Purchase Agreement on May 14, 2019.
Pursuant to the terms
and subject to the conditions of the Asset Purchase Agreement, the Company acquired substantially all of the assets of Cryogene,
including, without limitation, tangible personal property, intellectual property assets, and certain contracts related to Cryogene’s
temperature-controlled biostorage solutions business located in Houston, Texas (the foregoing, the “Purchased Assets”),
and assumed certain related liabilities.
The aggregate purchase
price for the Purchased Assets was $20.3 million in cash.
As a result of this
acquisition, the Company is expected to extend its integrated logistics solutions and services to provide comprehensive temperature-controlled
sample management solutions to the life sciences industry, including specimen storage, sample processing, collection, and retrieval.
Purchase Price Allocation
We funded this acquisition
through available cash and accounted for it as an acquisition of a business in accordance with FASB ASC Topic 805, “Business
Combinations”. Assets acquired and liabilities assumed in connection with the acquisition have been recorded at their fair
values. Fair values were determined by management based in part on an independent valuation performed by a third-party valuation
specialist. The Company has performed a valuation analysis of the fair value of Cryogene’s assets and liabilities. The following
table summarizes the allocation of the purchase price as of the acquisition date:
Total purchase price
|
|
$
|
20,316,707
|
|
|
|
|
|
|
Purchase price allocation:
|
|
|
|
|
Property and equipment, net
|
|
|
4,257,340
|
|
Intangible assets
|
|
|
5,280,000
|
|
Deferred revenue
|
|
|
(220,355
|
)
|
Goodwill
|
|
|
10,999,722
|
|
|
|
|
|
|
|
|
$
|
20,316,707
|
|
The following table
summarizes the fair value of intangible assets acquired at the date of acquisition and their estimated useful lives and amortization
expense based on their respective useful lives:
|
|
Estimated
|
|
|
Estimated
|
|
|
Amortization
|
|
|
Annual
Amortization
|
|
|
|
Fair Value
|
|
|
Useful Life
|
|
|
Method
|
|
|
Expense
|
|
Non-compete agreement
|
|
$
|
390,000
|
|
|
|
5
|
|
|
|
Straight-line
|
|
|
$
|
78,000
|
|
Technology
|
|
|
510,000
|
|
|
|
5
|
|
|
|
Straight-line
|
|
|
|
102,000
|
|
Customer relationships
|
|
|
3,900,000
|
|
|
|
12
|
|
|
|
Straight-line
|
|
|
|
325,000
|
|
Trade name/trademark
|
|
|
480,000
|
|
|
|
15
|
|
|
|
Straight-line
|
|
|
|
32,000
|
|
Total
|
|
$
|
5,280,000
|
|
|
|
|
|
|
|
|
|
|
$
|
537,000
|
|
Goodwill is calculated
as the excess of the purchase price over the fair value of net assets acquired and represents the future economic benefits arising
from other assets acquired that could not be individually identified and separately recognized. Among the factors that contributed
to a purchase price in excess of the fair value of the net tangible and intangible assets acquired were the acquisition of an
assembled workforce, the expected synergies, and other benefits that we believe will result from combining the operations of Cryogene
with our operations. Goodwill of approximately $11.0 million related to the acquisition has been recorded in the Global Bioservices
reportable segment. The goodwill recognized is expected to be deductible for income tax purposes.
Acquisition-related
transaction costs (included in general and administrative expenses) totaled approximately $266,400.
The operating results
of the Cryogene acquisition have been included in our consolidated financial statements from the acquisition date through December
31, 2019. Our results for the year ended December 31, 2019, include Cryogene sales of $3.0 million and net income of $437,100.
The following unaudited
pro forma information presents our combined results as if the Cryogene acquisition had occurred on January 1, 2018. The unaudited
pro forma financial information was prepared to give effect to events that are (1) directly attributable to the acquisition,
(2) factually supportable, and (3) expected to have a continuing impact on the combined company’s results. There
were no transactions between the Company and Cryogene during the periods presented that are required to be eliminated. The unaudited
pro forma condensed combined financial information does not reflect any cost savings, operating synergies, or revenue enhancements
that the combined companies may achieve as a result of the acquisition or the costs to integrate the operations or the costs necessary
to achieve cost savings, operating synergies, or revenue enhancements.
The following table
presents the unaudited, pro forma consolidated results of operations for the year ended December 31, 2018 as if the acquisition
of the assets of Cryogene had occurred as of January 1, 2018. The pro forma information provided below is compiled from the financial
statements of Cryogene Partners, which includes pro forma adjustments for intangible assets amortization expense and transaction
costs.
|
|
|
Year Ended
|
|
|
|
|
|
December 31, 2018
|
|
|
|
Revenues
|
|
$
|
|
23,567,347
|
|
|
|
Net loss
|
|
$
|
|
(9,448,747
|
)
|
|
|
Basic and diluted earnings per share
|
|
$
|
|
(0.33
|
)
|
|
The pro forma results
are not necessarily indicative of the consolidated results of operations that we would have reported had the acquisition been completed
as of January 1, 2018 and should not be taken as representative of our consolidated results of operations following the acquisition.
In addition, the unaudited proforma consolidated financial information is not intended to project the future results of operations
of the Company.
Note 14. Stockholders’ Equity
Authorized Stock
The Company has 100,000,000
authorized shares of common stock with a par value of $0.001 per share, and 2,500,000 undesignated or "blank check" preferred
stock, with a par value of $0.001, of which, 800,000 shares have been designated as Class A Convertible Preferred Stock and 585,000
shares have been designated as Class B Convertible Preferred Stock.
Common Stock Issuances For Services
During the year ended
December 31, 2019, 5,753 shares of common stock with a fair value of $91,000 were issued to three members of the board of directors
as compensation for services.
During the year ended
December 31, 2018, 6,228 shares of common stock with a fair value of $70,000 were issued to two members of the board of directors
as compensation for services.
Share Repurchase Program
In
October 2019, the Company’s Board of Directors authorized a share repurchase program (the “Repurchase Program”)
authorizing repurchase of common stock in the amount of up to $15.0 million from time to time, in amounts, at prices, and at such
times as management deems appropriate and will depend on a number of factors, including the market price of Cryoport’s common
stock, general market and economic conditions, and applicable legal requirements. The repurchase program will expire on December
31, 2020 and may be extended, suspended, modified or discontinued at any time. Any repurchases will be funded from cash on hand
and future cash flows from operations. The Company did not purchase any shares under this program in 2019.
June 2019 Public Offering
On June 24, 2019, the
Company completed an underwritten public offering (the “Offering”) of 4,312,500 shares of its common stock, par value
$0.001 per share (the “Public Offering Shares”). The Public Offering Shares were issued and sold pursuant to an underwriting
agreement (the “Underwriting Agreement”), dated June 19, 2019, by and among the Company, on the one hand, and Jefferies
LLC and SVB Leerink LLC, as representatives of certain underwriters (collectively, the “Underwriters”) at a public
offering price per share of $17.00. The Public Offering Shares include 562,500 shares issued and sold pursuant to the Underwriters’
exercise in full of their option to purchase additional shares of common stock pursuant to the Underwriting Agreement. The Company
received net proceeds of approximately $68.8 million from the Offering after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company.
August 2018 “At the Market” Equity Offering
Program
On August 24, 2018, we entered into a sales
agreement (the “Sales Agreement”) with Jefferies LLC (“Jefferies”) under which we can sell up to an aggregate
offering price of up to $35 million of the Company’s common stock (the “Shares”), from time to time through an
“at the market” equity offering program.
Under the Sales Agreement,
the Company will set the parameters for the sale of the Shares, including the number of Shares to be issued, the time period during
which sales are requested to be made, the limitation on the number of Shares that may be sold in any one trading day and any minimum
price below which sales may not be made. Subject to the terms and conditions of the Sales Agreement, Jefferies, who will act as
sales agent, may sell the Shares by methods deemed to be an “at the market offering” as defined in Rule 415(a)(4) promulgated
under the Securities Act of 1933, as amended, including sales made directly on the Nasdaq Capital Market, or on any other existing
trading market for the Shares, in negotiated transactions at market prices prevailing at the time of sale or at prices related
to such prevailing market prices and/or any other method permitted by law. Jefferies will use its commercially reasonable efforts
in conducting such sales activities consistent with its normal trading and sales practices, applicable state and federal laws,
rules and regulations and the rules of The Nasdaq Stock Market LLC. The Sales Agreement may be terminated by the Company upon ten
days’ written notice to Jefferies for any reason. Jefferies may terminate the Sales Agreement upon ten days’ written
notice to the Company for any reason or at any time under certain circumstances, including but not limited to the occurrence of
a material adverse change in the Company.
The Sales Agreement
provides that Jefferies will be entitled to compensation for its services of 3.0% of the gross sales price of all Shares sold under
the Sales Agreement. The Company has no obligation to sell any Shares under the Sales Agreement and may at any time suspend solicitation
and offers under the Sales Agreement.
During the year ended
December 31, 2018, the Company received net proceeds of $3.4 million through the sale of 248,839 shares of its common stock, after
deducting sales commissions and other offering expenses of $44,200, that were offset against the proceeds from this offering. The
Company did not sell any shares under this program in 2019.
February 2018 Tender Offer
On February 8, 2018,
we completed an exchange offer with respect to the Company’s outstanding warrants to purchase one share of common stock at
an exercise price of $3.57 per share (the “Original Warrants”). Through February 2, 2018, we offered holders of the
Original Warrants the opportunity to exchange such Original Warrants for an equal number of warrants to purchase one share of common
stock at an exercise price of $3.00 per share (the “New Warrants”), conditioned upon the immediate exercise of such
New Warrants.
Pursuant to the February
2018 Tender Offer, warrants to purchase 1,580,388 shares of the Company’s common stock were tendered by holders of warrants
and were amended and exercised in connection therewith, resulting in the issuance by the Company of an aggregate of 1,580,388 shares
of its common stock for aggregate gross proceeds of $4.7 million.
As a result of reducing
the exercise price of certain warrants in connection with the February 2018 Tender Offer, a warrant repricing expense of $899,400
was incurred which was determined using the Black-Scholes option pricing model and was calculated as the difference between the
fair value of the warrants prior to, and immediately after, the reduction in the exercise price on the date of repricing. Such
amount is included in warrant inducement and repricing expense in the consolidated statement of operations for the year ended December
31, 2018. In connection with this offering, the Company incurred $99,400 in offering costs that were offset against the proceeds
from this offering.
Common Stock Reserved for Future
Issuance
As of December 31,
2019, approximately 7.7 million shares of common stock were issuable upon exercise of stock options and warrants, as follows:
Exercise of stock options
|
|
|
6,679,581
|
|
Exercise of warrants
|
|
|
1,001,028
|
|
Total shares of common stock reserved for future issuances
|
|
|
7,680,609
|
|
Note 15. Stock-Based Compensation
Warrants
We typically issue
warrants to purchase shares of our common stock to investors as part of a financing transaction or in connection with services
rendered by placement agents and consultants. Our outstanding warrants expire on various dates through November 2021. A summary
of warrant activity is as follows:
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise
Price/Share
|
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic
Value (1)
|
|
Outstanding — December 31, 2017
|
|
|
5,141,112
|
|
|
$
|
4.09
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,062,739
|
)
|
|
|
3.58
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(28,839
|
)
|
|
|
31.78
|
|
|
|
|
|
|
|
|
|
Outstanding — December 31, 2018
|
|
|
2,049,534
|
|
|
$
|
4.03
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,027,546
|
)
|
|
|
3.95
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(20,960
|
)
|
|
|
17.78
|
|
|
|
|
|
|
|
|
|
Outstanding — December 31, 2019
|
|
|
1,001,028
|
|
|
$
|
3.83
|
|
|
|
0.5
|
|
|
$
|
12,644,200
|
|
Vested (exercisable) — December 31, 2019
|
|
|
1,001,028
|
|
|
$
|
3.83
|
|
|
|
0.5
|
|
|
$
|
12,644,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Aggregate intrinsic value represents the difference between the exercise price of the warrant and
the closing market price of the Company’s common stock on December 31, 2019, which was $16.46 per share.
|
The following table
summarizes information with respect to warrants outstanding and exercisable at December 31, 2019:
Exercise Price
|
|
|
|
Number
Outstanding
|
|
|
|
Weighted-
Average
Remaining
Contractual
Life (Years)
|
|
|
|
Weighted-
Average
Exercise Price
|
|
|
|
Number
Exercisable
|
|
|
|
Weighted-
Average
Exercise Price
|
|
$
|
3.57
|
|
|
|
894,439
|
|
|
|
0.5
|
|
|
$
|
3.57
|
|
|
|
894,439
|
|
|
$
|
3.57
|
|
$
|
6.00
|
|
|
|
106,589
|
|
|
|
0.2
|
|
|
$
|
6.00
|
|
|
|
106,589
|
|
|
$
|
6.00
|
|
|
|
|
|
|
1,001,028
|
|
|
|
|
|
|
|
|
|
|
|
1,001,028
|
|
|
|
|
|
During the year ended
December 31, 2019, the Company issued 985,626 shares of common stock in connection with the exercise of warrants for proceeds of
$3.4 million. In addition, during the year ended December 31, 2019, the Company issued 117,663 shares of common stock in connection
with the cashless exercise of warrants to purchase 159,583 shares of common stock.
During the year ended
December 31, 2018, the Company issued 1,179,784 shares of common stock in connection with the exercise of warrants for proceeds
of $4.5 million. In addition, during the year ended December 31, 2018, the Company issued 155,886 shares of common stock in connection
with the cashless exercise of warrants to purchase 302,567 shares of common stock.
The total intrinsic
value of warrants exercised during the years ended December 31, 2019 and 2018 was $12.4 million and $21.5 million, respectively.
Stock Options
We have five stock
incentive plans: the 2002 Stock Incentive Plan (the “2002 Plan”), the 2009 Stock Incentive Plan (the “2009 Plan”),
the 2011 Stock Incentive Plan (the “2011 Plan”), the 2015 Omnibus Equity Incentive Plan (the “2015 Plan”),
and the 2018 Omnibus Equity Incentive Plan (the “2018 Plan”), (collectively, the “Plans”). The 2002 Plan,
the 2009 Plan, the 2011 Plan and the 2015 Plan (the “Prior Plans”) have been superseded by the 2018 Plan. In May 2018,
the stockholders approved the 2018 Plan for issuance up to 3,730,179 shares. The Prior Plans will remain in effect until all awards
granted under such Prior Plans have been exercised, forfeited, cancelled, or have otherwise expired or terminated in accordance
with the terms of such awards, but no awards will be made pursuant to the Prior Plans after the effectiveness of the 2018 Plan.
As of December 31, 2019, the Company had 2,653,409 shares available for future awards under the 2018 Plan.
During the years ended
December 31, 2019 and 2018, we granted stock options at exercise prices equal to or greater than the quoted market price of our
common stock on the grant date. The fair value of each option grant was estimated on the date of grant using Black-Scholes with
the following assumptions:
|
|
|
December 31,
2019
|
|
|
|
December 31,
2018
|
|
Expected life (years)
|
|
|
5.2 – 6.2
|
|
|
|
5.3 – 7.0
|
|
Risk-free interest rate
|
|
|
1.42% - 2.57%
|
|
|
|
2.59% - 3.07%
|
|
Volatility
|
|
|
70.6% - 99.2%
|
|
|
|
97.7% - 110%
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
The expected option
life assumption is estimated based on the simplified method. Accordingly, the Company has utilized the average of the contractual
term of the options and the weighted average vesting period for all options to calculate the expected option term. The risk-free
interest rate assumption is based upon observed interest rates appropriate for the expected term of our employee stock options.
The expected volatility is based on the historical volatility of our stock commensurate with the expected life of the stock-based
award. We do not anticipate paying dividends on the common stock in the foreseeable future.
We recognize stock-based
compensation cost on a straight-line basis over the vesting period. Stock-based compensation expense is recognized only for those
awards that ultimately vest.
Total stock-based compensation expense
related to our share-based payment awards is comprised of the following:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cost of revenues
|
|
$
|
1,479,448
|
|
|
$
|
244,239
|
|
General and administrative
|
|
|
9,430,279
|
|
|
|
3,756,820
|
|
Sales and marketing
|
|
|
4,515,654
|
|
|
|
1,178,115
|
|
Engineering and development
|
|
|
1,098,125
|
|
|
|
299,451
|
|
|
|
$
|
16,523,506
|
|
|
$
|
5,478,625
|
|
For the year ended December
31, 2019, we recognized expense of $9.6 million due to the accelerated vesting under the terms of certain outstanding stock option
grants as a result of the Company meeting certain financial performance criteria defined in such grants. Of this amount, $383,800,
$5.0 million, $3.4 million, and $873,000 are included in cost of revenues, general and administrative, sales and marketing, and
engineering and development, respectively.
A summary of stock option activity is as follows:
|
|
|
Number of
Shares
|
|
|
|
Weighted-
Average
Exercise
Price/Share
|
|
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
|
|
Aggregate
Intrinsic
Value (1)
|
|
Outstanding — December 31, 2017
|
|
|
5,322,858
|
|
|
$
|
4.16
|
|
|
|
|
|
|
|
|
|
Granted (weighted-average fair value of $7.78 per share)
|
|
|
1,123,100
|
|
|
|
9.48
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(445,989
|
)
|
|
|
3.38
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(213,142
|
)
|
|
|
6.79
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(29,522
|
)
|
|
|
5.10
|
|
|
|
|
|
|
|
|
|
Outstanding — December 31, 2018
|
|
|
5,757,305
|
|
|
$
|
5.16
|
|
|
|
|
|
|
|
|
|
Granted (weighted-average fair value of $13.55 per share)
|
|
|
1,544,850
|
|
|
|
13.55
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(544,565
|
)
|
|
|
3.91
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(78,009
|
)
|
|
|
10.66
|
|
|
|
|
|
|
|
|
|
Outstanding — December 31, 2019
|
|
|
6,679,581
|
|
|
$
|
7.14
|
|
|
|
6.9
|
|
|
$
|
62,681,100
|
|
Vested (exercisable) — December 31, 2019
|
|
|
5,895,891
|
|
|
$
|
6.25
|
|
|
|
6.5
|
|
|
$
|
60,273,300
|
|
Expected to vest after December 31, 2019 (unexercisable)
|
|
|
783,690
|
|
|
$
|
13.78
|
|
|
|
9.3
|
|
|
$
|
2,409,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Aggregate intrinsic value represents the difference between the exercise price of the option and
the closing market price of the common stock on December 31, 2019, which was $16.46 per share.
|
The following table
summarizes information with respect to stock options outstanding and exercisable at December 31, 2019:
Exercise Price
|
|
Number
Outstanding
|
|
|
Weighted-
Average
Remaining
Contractual
Life (Years)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted-
Average
Exercise
Price
|
|
$1.08 – 3.07
|
|
|
1,059,176
|
|
|
|
5.8
|
|
$
|
2.27
|
|
|
|
1,059,176
|
|
$
|
2.27
|
|
$3.18 – 3.44
|
|
|
977,670
|
|
|
|
5.7
|
|
$
|
3.30
|
|
|
|
977,670
|
|
$
|
3.30
|
|
$4.56 – 4.92
|
|
|
768,358
|
|
|
|
5.4
|
|
$
|
4.77
|
|
|
|
768,358
|
|
$
|
4.77
|
|
$5.00 – 7.67
|
|
|
855,328
|
|
|
|
5.6
|
|
$
|
5.04
|
|
|
|
854,803
|
|
$
|
5.04
|
|
$7.80 – 8.65
|
|
|
1,180,040
|
|
|
|
7.2
|
|
$
|
8.32
|
|
|
|
1,109,650
|
|
$
|
8.30
|
|
$9.29 – 12.79
|
|
|
1,271,242
|
|
|
|
9.0
|
|
$
|
11.90
|
|
|
|
910,178
|
|
$
|
11.74
|
|
$13.37 – 22.68
|
|
|
567,767
|
|
|
|
9.4
|
|
$
|
16.05
|
|
|
|
216,056
|
|
$
|
15.56
|
|
|
|
|
6,679,581
|
|
|
|
|
|
|
|
|
|
|
5,895,891
|
|
|
|
|
As of December 31,
2019, there was unrecognized compensation expense of $6.7 million related to unvested stock options, which we expect to recognize
over a weighted average period of 2.0 years.
The total intrinsic
value of options exercised during the years ended December 31, 2019 and 2018 was $6.5 million and $3.7 million, respectively.
Note 16. Income Taxes
Income (loss) before provision for income taxes was attributed to the following jurisdictions for the years ended December 31, 2019 and 2018:
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
(000’s)
|
|
|
|
|
United States
|
|
$
|
(18,321
|
)
|
|
$
|
(9,233
|
)
|
Foreign
|
|
|
51
|
|
|
|
(303
|
)
|
|
|
$
|
(18,270
|
)
|
|
$
|
(9,536
|
)
|
The provision for income taxes consists of the following for the years ended December 31, 2019 and 2018:
|
|
Years
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Current:
|
|
|
|
(000’s)
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
41
|
|
|
|
20
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
Total current expense
|
|
|
41
|
|
|
|
20
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,125
|
)
|
|
|
(1,167
|
)
|
State
|
|
|
5
|
|
|
|
(399
|
)
|
Foreign
|
|
|
9
|
|
|
|
(60
|
)
|
Change in valuation allowance
|
|
|
2,132
|
|
|
|
1,626
|
|
Total deferred expense
|
|
|
21
|
|
|
|
—
|
|
Total provision for income taxes
|
|
$
|
62
|
|
|
$
|
20
|
|
Significant components of the Company’s
deferred tax assets and liabilities as of December 31, 2019 and 2018 are shown below:
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Deferred tax assets:
|
|
|
|
(000’s)
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
17,031
|
|
|
$
|
16,272
|
|
|
Research credits
|
|
|
—
|
|
|
|
167
|
|
|
Expenses recognized for granting of options and warrants
|
|
|
3,816
|
|
|
|
2,566
|
|
|
Accrued expenses and reserves
|
|
|
383
|
|
|
|
83
|
|
|
Lease liability
|
|
|
1,217
|
|
|
|
—
|
|
|
Total deferred tax assets
|
|
|
22,447
|
|
|
|
19,088
|
|
|
Valuation allowance
|
|
|
(21,220
|
)
|
|
|
(19,088
|
)
|
|
|
|
$
|
1,227
|
|
|
$
|
—
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
(110
|
)
|
|
$
|
—
|
|
|
Right-of-use assets
|
|
|
(1,138
|
)
|
|
|
—
|
|
|
Total deferred tax liability
|
|
|
(1,248
|
)
|
|
|
—
|
|
|
Net deferred tax liability
|
|
$
|
(21
|
)
|
|
$
|
—
|
|
The Company maintains
a deferred tax liability in the amount of $20,900 related to indefinite-lived assets that have been netted against deferred tax
assets that also allow for indefinite carryforward periods subject to limitations. The remaining taxable temporary difference cannot
serve as a source of future taxable income to realize deferred tax assets, as the net deferred tax liability will not reverse until
the assets are sold or impaired for financial reporting purposes.
The provision for income taxes differs
from that computed using the federal statutory rate applied to loss before provision for income taxes as follows:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
(000’s)
|
|
|
|
|
Computed tax benefit at federal statutory rate
|
|
$
|
(3,837
|
)
|
|
$
|
(2,002
|
)
|
State tax, net of federal benefit
|
|
|
(610
|
)
|
|
|
(348
|
)
|
Stock compensation
|
|
|
1,465
|
|
|
|
472
|
|
Interest expense
|
|
|
286
|
|
|
|
—
|
|
Warrant inducement and repricing costs
|
|
|
—
|
|
|
|
189
|
|
Permanent differences and other
|
|
|
(126
|
)
|
|
|
58
|
|
Contingencies
|
|
|
753
|
|
|
|
24
|
|
Valuation allowance
|
|
|
2,131
|
|
|
|
1,627
|
|
|
|
$
|
62
|
|
|
$
|
20
|
|
At December
31, 2019, the Company has federal and state net operating loss carryforwards of approximately $58,171,000 and $51,188,000, respectively,
which will begin to expire in 2020, unless previously utilized, and will expire in 2028 for state carryforwards. In addition, the
Company has federal net operating losses of $9,004,000 generated after 2017 that can be carried over indefinitely and may be used
to offset up to 80% of federal taxable income. At December 31, 2019, the Company has foreign net operating loss carryforwards of
approximately $250,300, which begin to expire in 2027. At December 31, 2019, the Company has federal and California research and
development tax credits of approximately $167,000 and $148,000, respectively. The federal research tax credit begins to expire
in 2026 unless previously utilized and the California research tax credit has not expiration date.
Utilization of the net operating loss (“NOL”) and research and development (“R&D”) carryforwards might be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups. Since the Company’s formation, the Company has raised capital through the issuance of capital stock on several occasions which, combined with the purchasing stockholders’ subsequent disposition of those shares, may have resulted in such an ownership change, or could result in an ownership change in the future upon subsequent disposition.
The Company
has not completed a study to assess whether an ownership change has occurred. If the Company has experienced an ownership change,
utilization of the NOL or R&D credit carryforwards would be subject to an annual limitation under Section 382 of the Code,
which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable
long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration
of a portion of the NOL or R&D credit carryforwards before utilization. Further, until a study is completed and any limitation
is known, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit. Due to the
existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact its effective
tax rate. Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from deferred
tax assets with a corresponding reduction of the valuation allowance.
A reconciliation
of the beginning and ending amounts of unrecognized tax positions are as follows (in thousands):
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Unrecognized tax positions, beginning of period
|
|
$
|
48
|
|
|
$
|
24
|
|
|
Gross increase – current period tax positions
|
|
|
239
|
|
|
|
27
|
|
|
Gross decrease – prior period tax positions
|
|
|
-
|
|
|
|
(2
|
)
|
|
Gross increase – prior period tax positions
|
|
|
676
|
|
|
|
(1
|
)
|
|
Expiration of statute of limitations
|
|
|
-
|
|
|
|
-
|
|
|
Unrecognized tax positions, end of period
|
|
$
|
963
|
|
|
$
|
48
|
|
If recognized,
none of the unrecognized tax positions would impact the Company's income tax benefit or effective tax rate as long as the Company's
deferred tax assets remain subject to a full valuation allowance. The Company does not expect any significant increases or decreases
to the Company's unrecognized tax positions within the next 12 months.
The Company’s
practice is to recognize interest and penalties related to income tax matters in income tax expense. The Company had no accrual
for interest and penalties on the Company’s consolidated balance sheets and has not recognized interest and penalties in
the consolidated statements of operations for the years ended December 31, 2019 and 2018.
Due to the
NOL carryforwards, the U.S. federal and state returns are open to examination by the Internal Revenue Service and state jurisdictions
for all years beginning with the year ended March 31, 2001.
Note 17. Subsequent Events
The Company has evaluated subsequent events
through the filing date of this Annual Report on Form 10-K and determined that no subsequent events have occurred that would require
recognition in the consolidated financial statements or disclosures in the notes thereto other than discussed in the accompanying
notes.
Note 18. Quarterly Financial Data (Unaudited)
A summary of quarterly financial data is as follows ($ in ‘000’s):
|
|
Quarter Ended
|
|
|
|
March
31
|
|
|
June
30
|
|
|
September 30
|
|
|
December
31
|
|
Year ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
6,653
|
|
|
$
|
8,464
|
|
|
$
|
9,583
|
|
|
$
|
9,242
|
|
Gross margin
|
|
$
|
3,454
|
|
|
$
|
4,338
|
|
|
$
|
4,627
|
|
|
$
|
4,932
|
|
Loss from operations
|
|
$
|
(2,141
|
)
|
|
$
|
(2,304
|
)
|
|
$
|
(12,352
|
)
|
|
$
|
(878
|
)
|
Net loss
|
|
$
|
(2,387
|
)
|
|
$
|
(2,528
|
)
|
|
$
|
(12,469
|
)
|
|
$
|
(948
|
)
|
Net loss per share - basic and diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
4,023
|
|
|
$
|
4,627
|
|
|
$
|
5,285
|
|
|
$
|
5,691
|
|
Gross margin
|
|
$
|
2,184
|
|
|
$
|
2,504
|
|
|
$
|
2,736
|
|
|
$
|
2,816
|
|
Loss from operations
|
|
$
|
(1,798
|
)
|
|
$
|
(2,465
|
)
|
|
$
|
(2,161
|
)
|
|
$
|
(2,220
|
)
|
Net loss
|
|
$
|
(2,683
|
)
|
|
$
|
(2,471
|
)
|
|
$
|
(2,144
|
)
|
|
$
|
(2,258
|
)
|
Net loss per share - basic and diluted
|
|
$
|
(0.10
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.08
|
)
|
Earnings per basic
and diluted shares are computed independently for each of the quarters presented based on basic and diluted shares outstanding
per quarter and, therefore, may not sum to the totals for the periods shown.
In the fourth quarter
of 2019, management identified an error in the Company's historical interim financial statements for the third quarter of fiscal
year 2019 relating to its stock-based compensation expense. Specifically, in the third quarter of 2019, the Company incorrectly
recorded $1,227,890 of accelerated stock-based compensation expense for nonemployee directors who were not eligible for the accelerated
vesting under their stock option awards. The error impacts only the previously issued historical interim financial statements for
the third quarter of fiscal year 2019. The Company corrected the error in the fourth quarter of 2019, which resulted in a reduction
of $765,099 of stock-based compensation expense included in general and administrative expense. The Company concluded the error
is not material to the third and fourth quarter of 2019.