10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 14, 2008
U.S. SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
(Mark One)
|
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
|
For
the quarterly period ended September 30, 2008
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
For
the transition period from ____________ to ____________
Commission
File Number: 000-51578
CryoPort,
Inc.
(Exact
name of small business issuer as specified in its charter)
|
Nevada
|
88-0313393
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(IRS Employer Identification
No.)
|
|
20382
BARENTS SEA CIRCLE, LAKE FOREST, CA
|
92630
|
|
(Address
of principal executive offices)
|
(Zipcode)
|
Registrant’s
telephone number, including area code: (949)
470-2300
Indicate by check mark whether the
registrant is a large accelerated filer, and accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” as defined in Rule 12b-2 of the Exchange
Act.
|
Large accelerated
filer o
|
Accelerated filer
o
|
Non-accelerated
filer o
|
Smaller reporting
company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No þ
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act of 1934 during the past 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 þ No ¨
As of
November 10, 2008 the Company had 41,304,425 shares of its $0.001 par value
common stock issued and outstanding.
TABLE OF
CONTENTS
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Page
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||
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PART
I.
|
FINANCIAL
INFORMATION
|
2
|
|
ITEM
1.
|
Financial
Statements
|
2
|
|
Consolidated
Balance Sheets at September 30, 2008 (Unaudited) and March 31,
2008
|
2
|
|
|
Unaudited
Consolidated Statements of Operations for the three and six months ended
September 30, 2008 and 2007
|
3
|
|
|
Unaudited
Consolidated Statements of Cash Flows for the six months ended September
30, 2008 and 2007
|
4
|
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
6
|
|
|
ITEM
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
32
|
|
ITEM
4T.
|
Controls
and Procedures
|
44
|
|
PART
II
|
OTHER
INFORMATION
|
45
|
|
ITEM
1.
|
Legal
Proceedings
|
45
|
|
ITEM
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
45
|
|
ITEM
3.
|
Defaults
Upon Senior Securities
|
46
|
|
ITEM
4.
|
Submission
of Matters to a Vote of Security Holders
|
46
|
|
ITEM
5.
|
Other
Information
|
46
|
|
ITEM
6.
|
Exhibits
|
47
|
|
SIGNATURES
|
48
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|
Page
1
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
CRYOPORT,
INC.
CONSOLIDATED
BALANCE SHEETS
|
September
30,
|
March
31,
|
|||||||
|
2008
|
2008
|
|||||||
|
ASSETS
|
(Unaudited)
|
|||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$
|
1,219,046
|
$
|
2,231,031
|
||||
|
Restricted
cash
|
208,196
|
203,670
|
||||||
|
Accounts
receivable, net
|
4,473
|
21,411
|
||||||
|
Inventories
|
421,345
|
121,952
|
||||||
|
Prepaid
expenses and other current assets
|
126,404
|
153,016
|
||||||
|
Total
current assets
|
1,979,464
|
2,731,080
|
||||||
|
Fixed
assets, net
|
216,341
|
193,852
|
||||||
|
Intangible
assets, net
|
1,107
|
474
|
||||||
|
Deferred
financing costs, net
|
93,317
|
325,769
|
||||||
|
Other
assets
|
147,860
|
209,714
|
||||||
|
$
|
2,438,089
|
$
|
3,460,889
|
|||||
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$
|
248,805
|
$
|
234,298
|
||||
|
Accrued
expenses
|
94,803
|
95,048
|
||||||
|
Accrued
warranty costs
|
24,368
|
29,993
|
||||||
|
Accrued
salaries and related
|
129,878
|
138,103
|
||||||
|
Current
portion of convertible notes payable and accrued interest, net of discount
of $907,027 at September 30, 2008 and $1,039,844 at March 31,
2008
|
2,588,587
|
902,486
|
||||||
|
Line
of credit and accrued interest
|
93,307
|
115,943
|
||||||
|
Current
portion of related party notes payable
|
150,000
|
150,000
|
||||||
|
Current
portion of note payable to officer
|
72,000
|
72,000
|
||||||
|
Current
portion of note payable
|
-
|
12,000
|
||||||
|
Total
current liabilities
|
3,401,748
|
1,749,871
|
||||||
|
Related
party notes payable and accrued interest, net of current
portion
|
1,558,822
|
1,582,084
|
||||||
|
Convertible
notes payable, net of current portion and discount of $3,073,318 at
September 30, 2008 and $2,482,513 at March 31, 2008
|
-
|
-
|
||||||
|
Note
payable to officer and accrued interest, net of current
portion
|
98,772
|
129,115
|
||||||
|
Total
liabilities
|
5,059,342
|
3,461,070
|
||||||
|
COMMITMENTS
AND CONTINGENCIES
|
||||||||
|
Stockholders’
deficit:
|
||||||||
|
Common
stock, $0.001 par value; 125,000,000 shares authorized; 41,199,425 at
September 30, 2008 and 40,928,225 at March 31, 2008 shares issued and
outstanding
|
41,198
|
40,929
|
||||||
|
Additional
paid-in capital
|
21,058,527
|
13,888,094
|
||||||
|
Accumulated
deficit
|
(23,720,978
|
)
|
(13,929,204
|
)
|
||||
|
Total
stockholders’ deficit
|
(2,621,253
|
)
|
(181
|
)
|
||||
|
$
|
2,438,089
|
$
|
3,460,889
|
|||||
See
accompanying notes to unaudited consolidated financial statements
Page
2
CRYOPORT,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
For
The
Three
Months Ended
September
30,
|
For
The
Six
Months Ended
September
30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Net
sales
|
$ | 5,982 | $ | 32,447 | $ | 19,406 | $ | 37,988 | ||||||||
|
Cost
of sales
|
134,953 | 82,709 | 253,331 | 151,016 | ||||||||||||
|
Gross
loss
|
(128,971 | ) | (50,262 | ) | (233,925 | ) | (113,028 | ) | ||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Selling,
general and administrative expenses
|
779,691 | 536,449 | 1,339,731 | 1,131,004 | ||||||||||||
|
Research
and development expenses
|
105,453 | 21,713 | 216,244 | 50,300 | ||||||||||||
|
Total
operating expenses
|
885,144 | 558,162 | 1,555,975 | 1,181,304 | ||||||||||||
|
Loss
from operations
|
(1,014,115 | ) | (608,424 | ) | (1,789,900 | ) | (1,294,332 | ) | ||||||||
|
Other
income (expense):
|
||||||||||||||||
|
Interest
income
|
11,194 | - | 24,008 | - | ||||||||||||
|
Interest
expense
|
(658,099 | ) | (20,646 | ) | (1,213,868 | ) | (78,646 | ) | ||||||||
|
Gain
(loss) on extinguishment of debt
|
91,727 | - | (6,811,214 | ) | - | |||||||||||
|
Total
other expense, net
|
(555,178 | ) | (20,646 | ) | (8,001,074 | ) | (78,646 | ) | ||||||||
|
Loss
before income taxes
|
(1,569,293 | ) | (629,070 | ) | (9,790,974 | ) | (1,372,978 | ) | ||||||||
|
Income
taxes
|
- | - | 800 | 1,600 | ||||||||||||
|
Net
loss
|
$ | (1,569,293 | ) | $ | (629,070 | ) | $ | (9,791,774 | ) | $ | (1,374,578 | ) | ||||
|
Net
loss available to common stockholders per common share:
|
||||||||||||||||
|
Basic
and diluted loss per common share
|
$ | (0.04 | ) | $ | (0.02 | ) | $ | (0.24 | ) | $ | (0.04 | ) | ||||
|
Basic
and diluted weighted average common shares outstanding
|
41,167,472
|
39,721,581
|
41,093,181
|
38,807,022
|
||||||||||||
See
accompanying notes to unaudited consolidated financial statements
Page
3
CRYOPORT,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
For
The Six Months Ended
September
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$
|
(9,791,774
|
)
|
$
|
(1,374,578
|
)
|
||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Depreciation
and amortization
|
30,554
|
12,430
|
||||||
|
Amortization
of deferred financing costs
|
27,929
|
4,699
|
||||||
|
Amortization
of debt discount
|
958,586
|
29,638
|
||||||
|
Stock
issued to consultants
|
105,670
|
382,500
|
||||||
|
Fair
value of warrants issued to employees and directors
|
337,356
|
286,084
|
||||||
|
Loss
on extinguishment of debt
|
6,811,214
|
-
|
||||||
|
Interest
earned on restricted cash
|
(4,526
|
)
|
-
|
|||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
16,938
|
(18,348
|
)
|
|||||
|
Inventories
|
(299,393
|
)
|
6,763
|
|||||
|
Prepaid
expenses and other assets
|
88,466
|
(79,468
|
)
|
|||||
|
Accounts
payable
|
14,535
|
(611
|
)
|
|||||
|
Accrued
expenses
|
(245
|
)
|
8,182
|
|||||
|
Accrued
warranty costs
|
(5,625
|
)
|
3,000
|
|||||
|
Accrued
salaries and related
|
(8,225
|
)
|
(34,150
|
)
|
||||
|
Accrued
interest
|
134,518
|
42,562
|
||||||
|
Net
cash used in operating activities
|
(1,584,022
|
)
|
(731,297
|
)
|
||||
|
Cash
flows from investing activities:
|
||||||||
|
Payment
of trademark costs
|
(633
|
)
|
-
|
|||||
|
Purchases
of fixed assets
|
(53,043
|
)
|
(119,651
|
)
|
||||
|
Net
cash used in investing activities
|
(53,676
|
)
|
(119,651
|
)
|
||||
|
Cash
flows from financing activities:
|
||||||||
|
Net
proceeds from borrowings under convertible notes
|
1,062,500
|
-
|
||||||
|
Repayment
of convertible notes
|
(117,720
|
)
|
-
|
|||||
|
Repayment
of borrowings on line of credit
|
(22,500
|
)
|
-
|
|||||
|
Payment
of financing costs
|
(191,875
|
)
|
-
|
|||||
|
Repayment
of note payable
|
(12,000
|
)
|
(5,000
|
)
|
||||
|
Repayments
of related party notes payable
|
(60,000
|
)
|
(37,500
|
)
|
||||
|
Repayments
of note payable to officer
|
(36,000
|
)
|
(18,000
|
)
|
||||
|
Proceeds
from issuance of common stock, net
|
-
|
699,866
|
||||||
|
Proceeds
from exercise of options and warrants
|
3,308
|
107,500
|
||||||
|
Net
cash provided by financing activities
|
625,713
|
746,866
|
||||||
|
Net
change in cash and cash equivalents
|
(1,011,985
|
)
|
(104,082
|
)
|
||||
|
Cash
and cash equivalents, beginning of period
|
2,231,031
|
264,392
|
||||||
|
Cash
and cash equivalents, end of period
|
$
|
1,219,046
|
$
|
160,310
|
||||
See accompanying notes to unaudited
consolidated financial statements
Page
4
CRYOPORT,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
For
The Six Months Ended
September
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash
paid during the period for:
|
||||||||
|
Interest
|
$
|
92,757
|
$
|
-
|
||||
|
Income
taxes
|
$
|
800
|
$
|
1,600
|
||||
|
Supplemental
disclosure of non-cash activities:
|
||||||||
|
Value
of warrants issued to lessor
|
$
|
-
|
$
|
15,486
|
||||
|
Purchase
of fixed assets with warrants
|
$
|
-
|
$
|
10,000
|
||||
|
Warrants
issued as deferred financing costs in connection with convertible debt
financing
|
$
|
117,530
|
$
|
-
|
||||
|
Debt
discount in connection with convertible debt financing
|
$
|
1,250,000
|
$
|
-
|
||||
|
Conversion
of debt and accrued interest to common stock
|
$
|
5,446
|
$
|
128,857
|
||||
|
Cashless
exercise of warrants
|
$
|
150
|
$
|
-
|
||||
|
Cancellation
of shares issued for debt principal reduction
|
$
|
117,720
|
$
|
-
|
||||
|
Estimated
fair value of warrants issued in connection of debt
modification
|
$
|
5,858,344
|
$
|
-
|
||||
See accompanying notes to unaudited
consolidated financial statements
Page
5
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 1 - MANAGEMENT’S
REPRESENTATION
The
accompanying unaudited consolidated financial statements have been prepared by
CryoPort, Inc. (the “Company”) in accordance with accounting principles
generally accepted in the United States of America for interim financial
information, and pursuant to the instructions to Form 10-Q and Article 8 of
Regulation S-X promulgated by the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statement presentation. However, the Company believes that
the disclosures are adequate to make the information presented not misleading.
In the opinion of management, all adjustments (consisting primarily of normal
recurring accruals) considered necessary for a fair presentation have been
included.
Operating
results for the six months ended September 30, 2008 are not necessarily
indicative of the results that may be expected for the year ending March 31,
2009. It is suggested that the unaudited consolidated financial statements be
read in conjunction with the audited consolidated financial statements and
related notes thereto included in the Company’s Annual Report on Form 10-K for
the fiscal year ended March 31, 2008.
NOTE 2 - ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Cryoport,
Inc. (the “Company”) was originally incorporated under the name G.T.5-Limited
(“GT5”) on May 25, 1990 as a Nevada Corporation. Upon completion of a
Share Exchange Agreement, on March 15, 2005 the Company changed its name to
Cryoport, Inc. and acquired all of the issued and outstanding shares of Cryoport
Systems, Inc. in exchange for 24,108,105 shares of its 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, originally formed in 1999 as a California limited liability
company and reorganized into a California corporation on December 11, 2000,
remains the operating company under Cryoport, Inc.
The
principal focus of the Company is to capitalize on servicing the transportation
needs of the growing global “biotechnology revolution” and provide a newly
developed line of one time use dry cryogenic shippers for the transport of
biological materials. These materials include live cell pharmaceutical products;
e.g., cancer vaccines, diagnostic materials, reproductive tissues, infectious
substances and other items that require continuous exposure to cryogenic
temperature (less than -150°C). The
Company has historically manufactured and sold a line of reusable cryogenic dry
shippers. These reusable cryogenic dry shippers primarily serve as
the vehicles for the development of the cryogenic technology that support the
development of the one time use dry cryogenic shippers, the CryoPort Express®
One-Way Shipper, but also are essential components of the infrastructure that
supports testing and research activities of the pharmaceutical and biotechnology
industries. The Company’s mission is to provide cost effective
packaging systems for biological materials requiring, or benefiting from, a
cryogenic temperature environment over an extended period of time.
Page
6
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 2 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Going
Concern
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. The
Company has not generated significant revenues from operations and has no
assurance of any future revenues. The Company generated revenues from
operations of only $19,406, incurred a net loss of $9,791,774 including a
$6,811,214 loss on debt extinguishment, and used cash of $1,584,022
in its operating activities during the six months ended September 30,
2008. In addition, the Company has a working capital
deficit of $1,422,284 as of September 30, 2008. These factors raise
substantial doubt about the Company’s ability to continue as a going
concern.
On
October 1, 2007, the Company received net proceeds of $3,436,551 from the
issuance of convertible debentures (see Note 8). On May 30, 2008, the
Company received net proceeds of $870,625 from an additional convertible
debenture financing (see Note 8). As a result of the recent
financings, the Company had an aggregate cash and cash equivalents and
restricted cash balance of approximately $1,130,000 as of November 10, 2008
which will be used to fund the sales and marketing efforts as well as provide
the working capital required for the Company’s launch of the CryoPort Express®
One-Way Shipper and is expected to provide the Company with the means for
eventual achievement of sustained profitable operations and the ability to
continue as a going concern.
Basis of
Presentation
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America.
Principles of
Consolidation
The
consolidated financial statements include the accounts of CryoPort, Inc. and its
wholly owned subsidiary, CryoPort Systems, Inc. All intercompany accounts and
transactions have been eliminated.
Page
7
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 2 - ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Use of
Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
estimated amounts. The Company’s significant estimates include allowances for
doubtful accounts and sales returns, recoverability of long-lived assets,
allowances for inventory obsolescence, accrued warranty costs, deferred tax
assets and their accompanying valuations, product liability reserves and the
valuations of common stock, warrants and stock options issued for products or
services.
Cash and Cash
Equivalents
The
Company considers highly liquid investments with original maturities of 90 days
or less to be cash equivalents.
Concentrations of Credit
Risk
Cash
and cash equivalents
The
Company maintains its cash and cash equivalent accounts in financial
institutions. Accounts at these institutions are insured by the Federal Deposit
Insurance Corporation (“FDIC”) up to $100,000. At September 30, 2008, the
Company had $1,380,873 of cash balances, including restricted cash, which were
in excess of the FDIC insurance limit. The Company performs ongoing evaluations
of these institutions to limit its concentration risk exposure.
Restricted
cash
The
Company has invested cash in a one year restricted certificate of deposit
bearing interest at 4.38% which serves as collateral for borrowings under a line
of credit agreement (see Note 6). At September 30, 2008, the balance in the
certificate of deposit was $208,196.
Page
8
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 2 - ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Customers
The
Company grants credit to customers within the United States of America and to a
limited number of international customers, and does not require collateral.
Sales to other international customers are secured by advance payments, letters
of credit, or cash against documents. 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, totaling
approximately $3,100 as of September 30, 2008, are provided based on past
experience and a specific analysis of the accounts which management believes are
sufficient. Although the Company expects to collect amounts due, actual
collections may differ from the estimated amounts.
The
Company has foreign sales primarily in Europe and Canada. Foreign sales are
primarily under exclusive distribution agreements with international
distributors. During the six month periods ended September 30, 2008 and 2007,
the Company had foreign sales of approximately $6,500 and $2,000, respectively,
which constituted approximately 33% and 6%, respectively, of net
sales.
The
majority of the Company’s customers are in the bio-tech, bio-pharmaceutical and
life science industries. Consequently, there is a concentration of receivables
within these industries, which is subject to normal credit risk.
Fair Value of Financial
Instruments
The
Company’s financial instruments consist of cash and cash equivalents, restricted
cash, accounts receivable, related-party notes payable, note payable to officer,
line of credit, convertible notes payable, accounts payable and accrued
expenses. The carrying value for all such instruments, except the related party
notes payable, approximates fair value at September 30, 2008. The difference
between the fair value and recorded values of the related party notes payable is
not significant.
Inventories
Inventories
are stated at the lower of standard cost or current estimated market value. Cost
is determined using the first-in, first-out method. The Company periodically
reviews its inventories and records a provision for excess and obsolete
inventories based primarily on the Company’s estimated forecast of product
demand and production requirements. Once established, write-downs of inventories
are considered permanent adjustments to the cost basis of the obsolete or excess
inventories. Work in process and finished goods include material, labor and
applied overhead.
Page
9
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 2 - ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Fixed
Assets
Depreciation
and amortization of fixed assets are provided using the straight-line method
over the following useful lives:
|
Furniture
and fixtures
|
7
years
|
|
|
Machinery
and equipment
|
5-7
years
|
|
|
Leasehold
improvements
|
Lesser
of lease term or estimated useful
life
|
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 applicable to assets retired are
removed from the accounts, and the gain or loss on disposition is recognized in
current operations.
Intangible
Assets
Patents
and trademarks are amortized, using the straight-line method, over their
estimated useful life of five years.
Long-Lived
Assets
The
Company’s management assesses the recoverability of its long-lived assets upon
the occurrence of a triggering event by determining whether the depreciation and
amortization of long-lived assets over their remaining lives can be recovered
through projected undiscounted future cash flows. The amount of long-lived asset
impairment, if any, is measured based on fair value and is charged to operations
in the period in which long-lived asset impairment is determined by management.
At September 30, 2008, the Company’s management believes there is no impairment
of its long-lived assets. There can be no assurance however, that market
conditions will not change or demand for the Company’s products will continue,
which could result in impairment of its long-lived assets in the
future.
Deferred Financing
Costs
Deferred
financing costs represent costs incurred in connection with the issuance of the
convertible notes payable. Deferred financing costs are being
amortized over the term of the financing instrument on a straight-line basis,
which approximates the effective interest method. During the six
month periods ended September 30, 2008 and 2007, the Company capitalized
deferred financing costs of $107,673 and $0, respectively, and amortized
deferred financing costs of $27,929 and $4,699, respectively, to interest
expense.
Page
10
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 2 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Accrued Warranty
Costs
Estimated
costs of the standard warranty, included with products at no additional cost to
the customer for a period up to one year, are recorded as accrued warranty costs
at the time of product sale. Costs related to servicing the extended warranty
plan are expensed as incurred.
The
following represents the activity in the warranty accrual account during the six
month periods ended September 30:
|
2008
|
2007
|
|||||||
|
Beginning
warranty accrual
|
$ | 29,993 | $ | 55,407 | ||||
|
Increase
in accrual (charged to cost of sales)
|
750 | 4,125 | ||||||
|
Charges
to accrual (product replacements)
|
(6,375 | ) | (1,125 | ) | ||||
|
Ending
warranty accrual
|
$ | 24,368 | $ | 58,407 | ||||
Revenue
Recognition
Revenue
is recognized in accordance with Staff Accounting Bulletin (“SAB”) No. 101,
Revenue Recognition in
Financial Statements, as revised by SAB No. 104. The Company recognizes
revenue when products are shipped to a customer and the risks and rewards of
ownership and title have passed based on the terms of the sale. The Company
records a provision for sales returns and claims based upon historical
experience. Actual returns and claims in any future period may differ from the
Company’s estimates.
Accounting for Shipping and
Handling Revenue, Fees and Costs
The
Company classifies amounts billed for shipping and handling as revenue in
accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-10, Accounting for Shipping and Handling
Fees and Costs. Shipping and handling fees and costs are included in cost
of sales.
Page
11
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 2 - ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Advertising
Costs
The
Company expenses the cost of advertising when incurred as a component of
selling, general and administrative expenses. During the six month periods ended
September 30, 2008 and 2007, the Company expensed approximately $37,000 and
$9,000, respectively, in advertising costs.
Research and Development
Expenses
The
Company expenses internal research and development costs as incurred.
Third-party research and development costs are expensed when the contracted work
has been performed.
Stock-Based
Compensation
The
Company accounts for equity issuances to employees and directors in accordance
to Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment,
(“SFAS 123(R)”) which establishes standards for the accounting of transactions
in which an entity exchanges its equity instruments for goods or services,
primarily focusing on accounting for transactions where an entity obtains
employee services in share-based payment transactions. SFAS 123(R) requires a
public entity to measure the cost of employee services received in exchange for
an award of equity instruments, including stock options, based on the grant-date
fair value of the award and to recognize it as compensation expense over the
period the employee is required to provide service in exchange for the award,
usually the vesting period.
As
stock-based compensation expense recognized in the consolidated statements of
operations for the six month periods ended September 30, 2008 and 2007 is based
on awards ultimately expected to vest, it has been reduced for estimated
forfeitures, if any. SFAS 123(R) requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The estimated average forfeiture rate
for the six month periods ended September 30, 2008 and 2007 was zero as the
Company has not had a significant history of forfeitures and does not expect
forfeitures in the future.
Plan
Description
The
Company’s stock option plan provides for grants of incentive stock options and
nonqualified options to employees, directors and consultants of the Company to
purchase the Company’s shares at the fair value, as determined by management and
the board of directors, of such shares on the grant date. The options generally
vest over a five-year period beginning on the grant date and have a ten-year
term. As of September 30, 2008, the Company is authorized to issue up to
5,000,000 shares under this plan and has 2,511,387 shares available for future
issuances.
Page
12
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 2 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Summary
of Assumptions and Activity
The fair
value of stock-based awards to employees and directors is calculated using the
Black-Scholes option pricing model, even though this model was developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which differ significantly from the Company’s stock
options. The Black-Scholes model also requires subjective assumptions, including
future stock price volatility and expected time to exercise, which greatly
affect the calculated values. The expected term of options granted is derived
from historical data on employee exercises and post-vesting employment
termination behavior. The risk-free rate selected to value any particular grant
is based on the U.S Treasury rate that corresponds to the pricing term of the
grant effective as of the date of the grant. The expected volatility is based on
the historical volatility of the Company’s stock price. These factors could
change in the future, affecting the determination of stock-based compensation
expense in future periods.
|
September
30,
|
September
30,
|
|||||
|
2008
|
2007
|
|||||
|
Stock
options and warrants:
|
||||||
|
Expected
term
|
5
years
|
5
years
|
||||
|
Expected
volatility
|
211%
|
293%
|
||||
|
Risk-free
interest rate
|
2.88%
|
4.75%
|
||||
|
Expected
dividends
|
N/A
|
N/A
|
||||
A summary
of employee and director options and warrant activity for the six month period
ended September 30, 2008 is presented below:
|
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average Remaining Contractual Term (Yrs.)
|
Aggregate
Intrinsic
Value
|
|||||||
|
Outstanding
at March
31, 2008
|
4,556,163
|
$
|
0.64
|
|||||||
|
Granted
|
88,600
|
$
|
0.92
|
|||||||
|
Exercised
|
(239,693
|
)
|
$
|
0.04
|
||||||
|
Forfeited
|
-
|
$
|
-
|
|||||||
|
Outstanding and
expected to vest at
September 30, 2008
|
4,405,070
|
$
|
0.68
|
6.69
|
$
|
498,397
|
||||
|
Exercisable
at
September 30, 2008
|
4,305,070
|
$
|
0.67
|
6.75
|
$
|
498,397
|
||||
Page
13
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 2 - ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
There
were 88,600 warrants and no stock options granted to employees and directors
during the six months ended September 30, 2008 and 266,000 warrants and no stock
options granted to employees and directors during the six months ended September
30, 2007. In connection with the warrants granted during the six
months ended September 30, 2008 and 2007, the Company recorded total charges of
$337,356 and $199,314, respectively, in accordance with the provisions of SFAS
123(R), which have been included in selling, general and administrative expenses
for the six months ended September 30, 2008 and 2007 in the accompanying
consolidated statements of operations. No employee or director
warrants or stock options expired during the six months ended September 30, 2008
and 2007. The Company issues new shares from its authorized shares
upon exercise of warrants or options.
There was
no vesting of prior warrants or stock options issued to employees and directors
during the six months ended September 30, 2008 and 2007. As of
September 30, 2008, there was $105,965 of unrecognized compensation cost related
to employee and director stock based compensation arrangements, which is
expected to be recognized over the next two years.
The total
intrinsic value of stock options and warrants exercised during the six months
ended September 30, 2008 was $203,012.
Issuance of Stock for
Non-Cash Consideration
All
issuances of the Company's stock for non-cash consideration have been assigned a
per share amount equaling either the market value of the shares issued or the
value of consideration received, whichever is more readily determinable. The
majority of the non-cash consideration received pertains to services rendered by
consultants and others and has been valued at the market value of the shares on
the dates issued. In certain instances, the Company has discounted the values
assigned to the issued shares for illiquidity and/or restrictions on
resale.
Page
14
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 2 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
The
Company's accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of EITF 96-18,
Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services and EITF 00-18, Accounting Recognition for Certain
Transactions Involving Equity Instruments Granted to Other Than
Employees. The measurement date for the fair value of the equity
instruments issued is determined at the earlier of (i) the date at which a
commitment for performance by the consultant or vendor is reached or (ii) the
date at which the consultant or vendor's performance is complete. In the case of
equity instruments issued to consultants, the fair value of the equity
instrument is recognized over the term of the consulting agreement. In
accordance with EITF 00-18, an asset acquired in exchange for the issuance of
fully vested, nonforfeitable equity instruments should not be presented or
classified as an offset to equity on the grantor's balance sheet once the equity
instrument is granted for accounting purposes. Accordingly, the Company records
the fair value of the fully vested non-forfeitable common stock issued for
future consulting services as prepaid services in its consolidated balance
sheet.
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes.
Under the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. 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. Under SFAS No. 109, 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. The Company is a subchapter "C"
corporation and files a federal income tax return. The Company files separate
state income tax returns for California and Nevada.
Basic and Diluted Loss Per
Share
The
Company has adopted SFAS No. 128, Earnings Per Share (see Note
10).
Basic
loss per common share is computed based on the weighted average number of shares
outstanding during the period. Diluted loss per share is computed by dividing
net loss by the weighted average shares outstanding assuming all dilutive
potential common shares were issued. Basic and diluted loss per share are the
same as the effect of stock options and warrants on loss per share are
anti-dilutive and thus not included in the diluted loss per share calculation.
The impact under the treasury stock method of dilutive stock options and
warrants and the if-converted method of convertible debt would have resulted in
weighted average common shares outstanding of 58,459,328 and 44,177,869 for the
six month periods ended September 30, 2008 and 2007, respectively.
Page
15
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 2 - ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Convertible
Debentures
If the
conversion feature of conventional convertible debt provides for a rate of
conversion that is below market value, this feature is characterized as a
beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a
debt discount pursuant to EITF Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingency Adjustable
Conversion Ratio, (“EITF 98-05”) and EITF Issue No. 00-27, Application of EITF Issue No. 98-5
to Certain Convertible Instruments (“EITF 00-27”). In those
circumstances, the convertible debt will be recorded net of the discount related
to the BCF. The Company amortizes the discount to interest expense over the life
of the debt using the straight-line interest method which approximates the
effective amortization method (see Note 8).
Recent Accounting
Pronouncements
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 establishes a framework for
measuring fair value and expands disclosure about fair value
measurements. Specifically, this standard establishes that fair value
is a market-based measurement, not an entity specific measurement. As
such, the value measurement should be determined based on assumptions the market
participants would use in pricing an asset or liability. The expanded
disclosures include disclosure of the inputs used to measure fair value and the
effect of certain of the measurements on earnings for the
period. SFAS No. 157 was effective for fiscal years beginning after
November 15, 2007. FASB Staff Position No. FAS 157-2 (“FSP 157-2”),
Effective Date of FASB
Statement No. 157 was issued in February 2008. FSP 157-2
delays the effective date of SFAS No. 157, for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at
fair value at least once a year, to fiscal years beginning after November 15,
2008, and for interim periods within those fiscal years. The adoption of
this pronouncement did not have material effect on the Company’s consolidated
financial statements.
On
February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities - Including an Amendment of FASB Statement No.
115. SFAS No. 159 permits an entity to choose to measure many financial
instruments and certain other items at fair value. This option is available to
all entities, including not-for-profit organizations. Most of the provisions in
SFAS No. 159 are elective; however, the amendment to SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, applies to all entities with
available-for-sale and trading securities. Some requirements apply differently
to entities that do not report net income. The fair value option established by
SFAS No. 159 permits all entities to choose to measure eligible items at fair
value at specified election dates. A business entity will report unrealized
gains and losses on items for which the fair value option has been elected in
earnings (or another performance indicator if the business entity does not
report earnings) at each subsequent reporting date. SFAS No. 159 is effective as
of the beginning of an entity’s first fiscal year that begins after November 15,
2007. The adoption of this pronouncement did not have material effect on
the Company’s consolidated financial statements.
Page
16
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 2 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS
141(R)”). SFAS 141(R) replaces SFAS No. 141, “Business Combinations”, and
is effective for the Company for business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. SFAS 141(R) requires the new acquiring entity to
recognize all assets acquired and liabilities assumed in the transactions,
expense all direct transaction costs and account for the estimated fair value of
contingent consideration. This standard establishes an acquisition-date
fair value for acquired assets and liabilities and fully discloses to investors
the financial effect the acquisition will have. The adoption of this
pronouncement is not expected to have a material effect on the Company’s
consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”). SFAS 160 requires all
entities to report minority interests in subsidiaries as equity in the financial
statements, and requires that transactions between entities and noncontrolling
interests be treated as equity. SFAS 160 is effective for the Company as
of the beginning of fiscal year 2009. The adoption of this pronouncement
is not expected to have a material effect on the Company’s consolidated
financial statements.
NOTE 3 -
INVENTORIES
Inventories
at September 30, 2008 and March 31, 2008 consist of the following:
|
September
30,
|
March
31,
|
|||||||
|
2008
|
2008
|
|||||||
|
Raw
materials
|
$
|
268,252
|
$
|
61,342
|
||||
|
Work
in process
|
8,959
|
5,827
|
||||||
|
Finished
goods
|
144,134
|
54,783
|
||||||
|
$
|
421,345
|
$
|
121,952
|
|||||
Page
17
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 4 – FIXED ASSETS
Fixed
assets consist of the following at September 30, 2008 and March 31,
2008:
|
September
30,
|
March
31,
|
|||||||
|
2008
|
2008
|
|||||||
|
Furniture
and fixtures
|
$
|
23,253
|
$
|
23,253
|
||||
|
Machinery
and equipment
|
635,213
|
586,465
|
||||||
|
Leasehold
improvements
|
19,426
|
15,131
|
||||||
|
677,892
|
624,849
|
|||||||
|
Less
accumulated depreciation and amortization
|
(461,551
|
)
|
(430,997
|
)
|
||||
|
$
|
216,341
|
$
|
193,852
|
|||||
Depreciation
and amortization expense for fixed assets for the six months ended September 30,
2008 and 2007 was $30,554 and $10,097, respectively.
NOTE 5 - COMMITMENTS AND
CONTINGENCIES
Operating
Leases
On July
2, 2007, the Company entered into a new lease agreement with Viking Investors -
Barents Sea, LLC for a building with approximately 11,881 square feet of
manufacturing and office space located at 20382 Barents Sea Circle, Lake Forest,
CA, 92630. The lease agreement is for a period of two years with renewal options
for three, one-year periods, beginning September 1, 2007. The lease requires
base lease payments of approximately $12,000 per month. In connection with the
lease agreement, the Company issued 10,000 warrants to the lessor at an exercise
price of $1.55 per share for a period of two years, valued at $15,486 as
calculated using the Black Scholes option pricing model. The assumptions used
under the Black-Scholes pricing model included: a risk free rate of 4.75%;
volatility of 293%; an expected exercise term of 5 years; and no annual dividend
rate. The Company has capitalized and is amortizing the value of the
warrants over the life of the lease and the remaining unamortized value of the
warrants has been recorded in other long-term assets. As of September 30, 2008
and March 31, 2008, the unamortized balance of the value of the warrants issued
to the lessor was $6,522 and $10,074, respectively, and is included in other
assets in the accompanying consolidated balance sheets.
Page
18
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 5 - COMMITMENTS AND CONTINGENCIES, continued
Litigation
The
Company becomes 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. In the opinion of management, there are no legal
matters involving the Company that would have a material adverse effect upon the
Company’s condition or results of operations.
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 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 lease, the Company has
indemnified its lessor for certain claims arising from the use of the facility.
The duration of the guarantees and indemnities varies, and is generally tied to
the life of the agreement. These 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.
NOTE 6 - LINE OF
CREDIT
On
November 5, 2007, the Company secured financing for a $200,000 one-year
revolving line of credit (the “Line”) secured by a $200,000 Certificate of
Deposit with Bank of the West. All borrowings under the revolving line of credit
bear variable interest based on the prime rate less 1% per annum (totaling
4.0% as of September 30, 2008). The Company utilizes the funds advanced from the
Line for capital equipment purchases to support the launch of the Company’s
newly developed product, the CryoPort Express® One-Way Shipper. As of September
30, 2008, the outstanding balance of the Line was $93,307, including accrued
interest expense of $307. During the six months ended September 30, 2008, the
Company made payments against the Line of $22,500 and recorded interest expense
of $2,118 related to the Line. No funds were drawn against the Line
during the six months ended September 30, 2008. On November 6, 2008,
the Company secured a one-year renewal of the Line for a reduced amount of
$100,000 which is secured by a $100,000 Certificate of Deposit with Bank of the
West (see Note 12).
Page
19
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 7 - NOTES PAYABLE
As of
September 30, 2008 and March 31, 2008, the Company had aggregate principal
balances of $1,189,500 and $1,249,500, respectively, in outstanding unsecured
indebtedness owed to five related parties, including four former members of the
board of directors, representing working capital advances made to the Company
from February 2001 through March 2005. These notes bear interest at the rate of
6% per annum and provide for aggregate monthly principal payments which began
April 1, 2006 of $2,500, and which increased by an aggregate of $2,500 every six
months to a maximum of $10,000 per month. As of September 30, 2008,
the aggregate principal payments totaled $10,000 per month. Any
remaining unpaid principal and accrued interest is due at maturity on various
dates through March 1, 2015.
Related-party
interest expense under these notes was $36,738 and $39,777 for the six months
ended September 30, 2008 and 2007, respectively. Accrued interest, which is
included in related party notes payable in the accompanying consolidated balance
sheets, related to these notes amounted to $519,322 and $482,584 as of September
30, 2008 and March 31, 2008, respectively. As of September 30, 2008, the Company
had not made the required payments under the related-party notes which were due
on July 1, August 1, and September 1, 2008. However, pursuant to the note
agreements, the Company has a 120-day grace period to pay missed payments before
the notes are in default. On October 31, 2008, the Company paid the July 1 note
payments due on these related-party notes. Management expects to continue to pay
all payments due prior to the expiration of the 120-day grace
periods.
In August
2006, Peter Berry, the Company’s Chief Executive Officer, agreed to convert his
deferred salaries to a long-term note payable. Under the terms of this note, the
Company began to make monthly payments of $3,000 to Mr. Berry in January 2007.
In January 2008, these monthly payments increased to $6,000 and will remain at
that amount until the loan is fully paid in December 2010. Interest of 6% per
annum on the outstanding principal balance of the note began to accrue on
January 1, 2008. As of September 30, 2008 and March 31, 2008, the
total amount of deferred salaries and accrued interest under this arrangement
was $170,772 and $201,115, respectively, of which $98,772 and $129,115,
respectively, is recorded as a long-term liability in the accompanying
consolidated balance sheets. Interest expense related to this note
was $5,657 for the six months ended September 30, 2008. Accrued
interest related to this note payable amounted to $8,822 and $3,165 at September
30, 2008 and March 31, 2008, respectively, and is included in the note payable
to officer in the accompanying consolidated balance sheets.
The
Company had a non-interest bearing note payable to a third party for $77,304,
which was due in April 2003. The Company made the final payments of $5,000 in
April 2008 and $7,000 in May 2008. As of September 30, 2008 and March 31, 2008,
the remaining unpaid balance on this note was $0 and $12,000,
respectively.
Page
20
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 8 - CONVERTIBLE NOTES PAYABLE
On
October 1, 2007, the Company issued to four accredited investors Original Issue
Discount 8% Senior Secured Convertible Debentures (the “October Debentures”)
having a principal face amount of $4,707,705 and generating gross proceeds of
$4,001,551. After accounting for commissions, legal and other fees, the
net proceeds to the Company totaled $3,436,551.
In
accordance with the Convertible Debenture Agreement as amended on February 19,
2008, the principal amount under the October Debentures is payable to the
investors in 24 monthly redemption payments which commenced on March 31,
2008. The Company may elect to make principal redemptions in shares
of common stock. If the Company elects to make principal
redemptions in common stock, the conversion rate will be the lesser of (a) the
Conversion Price (as defined below), or (b) 85% of the lesser of (i) the average
of the volume weighted average price for the ten consecutive trading days ending
immediately prior to the applicable date a principal redemption is due or (ii)
the average of such price for the ten consecutive trading days ending
immediately prior to the date the applicable shares are issued and delivered if
such delivery is after the principal redemption due date.
At any
time, holders may convert the October Debentures into shares of common stock at
a fixed conversion price of $0.84, subject to adjustment in the event the
Company issues common stock (or securities convertible into or exercisable for
common stock) at a price below the conversion price as such price may be in
effect at various times (the “Conversion Price”). As of September 30,
2008, no adjustment has been made to the fixed conversion price. On
January 31, 2008, $100,000 of the principal balance of the October Debentures
was converted by an investor. Using the conversion rate of $0.84 per
share per the terms of the Convertible Debenture Agreement, 119,047 shares of
registered common stock were issued to the investor.
Quarterly
interest payments for these convertible debentures are payable in cash and
commenced on January 1, 2008. The Company may elect to make interest
payments in shares of common stock provided, generally, that it is not in
default under the Debentures and it has met certain equity conditions prior to
the due date of the interest payments. If the Company elects to
make interest payments in common stock, the conversion rate will be the lesser
of (a) the Conversion Price (as defined below), or (b) 85% of the lesser of (i)
the average of the volume weighted average price for the ten consecutive trading
days ending immediately prior to the applicable date an interest payment is due
or (ii) the average of such price for the ten consecutive trading days ending
immediately prior to the date the applicable shares are issued and delivered if
such delivery is after the interest payment date. As of September 30, 2008 and
March 31, 2008, the Company had zero and $5,446, respectively, of accrued
interest on the October Debentures included in the accompanying consolidated
balance sheets and recorded a total of $147,313 in interest expense related to
the face rate of interest in the accompanying consolidated statement of
operations for the six month period ended September 30, 2008.
Page
21
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 8 - CONVERTIBLE NOTES
PAYABLE, continued
The
October Debentures rank senior to all of the Company’s current and future
indebtedness and are secured by substantially all of the Company’s
assets.
In
connection with the financing transaction, the Company issued to the investors
five-year warrants to purchase 5,604,411 shares of common stock at $0.92 per
share and two-year warrants to purchase 1,401,103 shares of common stock at
$0.90 per share and 1,401,103 shares of common stock at $1.60 per share
(collectively, the “October Warrants”). Valuation of the October Warrants as
calculated using the Black Scholes option pricing model equaled $7,838,791 on
the date of grant.
Under
EITF Issue No. 00-27, the value of the October Warrants issued to the investors
was calculated relative to the total amount of the debt offering. The relative
fair value of the October Warrants issued to the investors was determined to be
$2,941,267, or 62.5% of the total offering. The relative fair value of the
October Warrants, along with the effective beneficial conversion feature of the
debt ($3,557,761) and the face value discount given to the investors ($706,154),
totaled in excess of the face amount of the October Debentures. As such, the
Company recorded a debt discount equal to the face value of the October
Debentures of $4,707,705.
Financing
fees of $565,000, including placement agent fees of $440,000 and legal and other
fees of $125,000, were paid in cash from the gross proceeds of the October
Debentures. Joseph Stevens and Company (“Joseph Stevens”) acted as sole
placement agent in connection with the financing transaction. Also in connection
with the financing transaction, the Company issued Joseph Stevens three-year
warrants to purchase 560,364 shares of the Company’s common stock exerciseable
at $0.84 per share. The value of the warrants issued to Joseph Stevens as
calculated using the Black Scholes option pricing model was
$525,071. The total financing fees of $1,090,071 related to the
financing transaction were allocated to the equity and debt components of the
financing. The Company recorded 62.5% of the financing fees ($681,294) as costs
related to the issuance of the equity instruments, and as such has netted those
amounts against additional paid-in capital as of the date of the financing. The
remaining 37.5% ($408,777) was recorded as deferred financing
costs. Prior to the amendment of the October Debentures on April 30,
2008 discussed below, the Company recorded interest expense of $13,573 related
to the amortization of these deferred financing costs during the six months
ended September 30, 2008. In connection with the amendment of the
October Debentures on April 30, 2008, the unamortized balance of the deferred
financing costs was written off (see below).
Page
22
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 8 - CONVERTIBLE NOTES
PAYABLE, continued
In
connection with the October Debentures, the Company also entered into a
registration rights agreement with the investors that required the Company to
register the shares issuable upon conversion of the principal amounts of the
October Debentures and exercise of the October Warrants. Pursuant to
the registration rights agreement, on November 9, 2007 the Company filed a
Registration Statement on Form SB-2. On January 25, 2008, the
registration statement, as amended, became effective with the Securities and
Exchange Commission. Per the terms of the registration rights
agreement, following the effective date of the registration statement, the
Company may force conversion of the October Debentures if the market price of
the common stock is at least $2.52 for 30 consecutive days. The Company
may also prepay the October Debentures in cash at 120% of the then outstanding
principal balance.
On March
31, 2008, the Company issued 224,176 shares of registered common stock for
principal redemptions totaling $188,308 and 110,501 shares of common stock for
March 2008 interest payments totaling $92,821 to the holders of the October
Debentures using the conversion rate of $0.84. In April 2008, the
Company was notified by the holders that the qualifying equity conditions had
not been fully satisfied with relation to the conversion of the principal and
interest payments made by the Company on March 31, 2008. As a result,
in April 2008 the Company rescinded and cancelled 140,143 shares of registered
common stock for principal redemptions totaling $117,720 and submitted the cash
payments in the same amounts to those holders. Pursuant to a one-time
waiver agreement with one of the Debenture holders, the remaining $70,588 of the
March 31 principal redemption was adjusted to reflect a one-time conversion rate
of $0.70 and, in April 2008 the Company issued the holder 16,807 additional
registered shares in consideration. Also in consideration of
the one-time waiver with the October Debenture holders, the full amount of the
March 31, 2008 interest payments were adjusted to reflect a one-time conversion
price of $0.70 and in April 2008 the Company issued the October Debenture
holders 22,099 additional common stock shares. The additional
interest expense for the October Debentures of $5,446 related to the one-time
conversion rate adjustments of the March 31, 2008 principal and interest
payments from $0.84 to $0.70 was included in accrued interest for the October
Debentures as of March 31, 2008.
On April
30, 2008, the Convertible Debenture Agreement was amended to reflect changes to
the monthly redemption of principal and changes to the October Warrants issued
with the original October Debentures. Under the terms of the April
30, 2008 Amendment (the “April Amendment”), the monthly principal redemptions
were suspended until August 1, 2008 and the remaining principal due on the
October Debentures will be paid thereafter on the first date of each month in
equal installments through March 27, 2010, the expiration date. Further, the
April Amendment changes the exercise price of the October Warrants issued under
the terms of the Securities Purchase Agreement and related Agreements from
$0.90, $0.92 and $1.60 to $0.60 each. The number of shares to be purchased under
each of the October Warrants was also adjusted under the terms of the April
Amendment so that the original dollar amounts to be raised by the Company
through the exercise of each of the October Warrants remained the
same.
Page
23
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 8 - CONVERTIBLE NOTES
PAYABLE, continued
Changes
to the exercise prices and number of warrants related to the October Debentures
as a result of the April Amendment were made according to the following
schedule:
|
5
Year
Warrants
|
2
Year
Warrants
|
2
Year
Warrants
|
Combined
|
|
|
As
Originally Issued:
|
||||
|
No.
of warrants
|
5,604,401
|
1,401,103
|
1,401,103
|
8,406,617
|
|
Exercise
price
|
$0.92
|
$0.90
|
$1.60
|
|
|
As
Modified:
|
||||
|
No.
of warrants
|
8,593,430
|
2,101,655
|
3,736,275
|
14,431,360
|
|
Exercise
price
|
$0.60
|
$0.60
|
$0.60
|
The April
Amendment to the October Debentures has been accounted for by the Company as an
extinguishment of debt in accordance with EITF Issue No. 96-19, Debtor’s Accounting for a
Modification or Exchange of Debt Instruments, and EITF Issue No.
06-6, Debtor's Accounting For
a Modification or Exchange of Convertible Debt
Instruments. The Company determined that the net present value
of the cash flows under the terms of the April Amendment was more than 10
percent different from the present value of the remaining cash flows under the
terms of the original October Debentures agreement. Due to the
substantial difference, the Company determined an extinguishment of debt had
occurred with the April Amendment. Accordingly, the Company recorded
the amended October Debentures at their fair value of $1,805,668 at the date of
extinguishment. The difference between the fair value of the amended
October Debentures and the carrying value of the original October Debentures at
the date of debt extinguishment amounting to $730,400 was recorded as part of
the loss on debt extinguishment for the six months ended September 30,
2008.
The
increase in value of the October Warrants arising from the change in conversion
price and the additional number of warrants issued of $5,858,344 has been
accounted for as a payment to the debt holders in connection with the debt
extinguishment and included in the loss on debt extinguishment for the six
months ended September 30, 2008. As a result of the April Amendment,
unamortized deferred financing costs of $312,197 arising from the original
issuance of the October Debentures were written off and were included in the
loss on debt extinguishment for the six months ended September 30,
2008. There were no debt issuance costs incurred in connection with
the April Amendment.
On August
29, 2008, the Company entered into an “Amendment to Debentures, Agreement and
Waiver” (the “August Amendment”) with BridgePointe Master Fund, Ltd. and the
Enable Funds (the “2007 Debenture Holders”), to amend the October 2007
Convertible Debenture previously amended on April 30, 2008. The August Amendment
waives quarterly interest payments that would otherwise have been due on October
1, 2008 and January 1, 2009 and defers the monthly redemption dates from July
31, 2008 through November 30, 2008 to commence upon December 31,
2008, and terminating upon full redemption of the October
Debenture. In consideration for entering into the August Amendment,
the outstanding principal amount of the October Debentures was
increased to an amount equal to 115% of the sum of (i) the outstanding principal
amount of as of August 29, 2008, the date of the August Amendment, plus (ii) an
amount equal to the additional amount of interest that would have accrued on the
September 2007 Debenture from July 1, 2008 through December 31, 2008. There were
no changes to the warrants related to the October Debentures as a result of the
August Amendment. Based on the terms of the August Amendment, the
principal balances of the October Debentures increased by $866,202 to
$5,285,599.
Page
24
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 8 - CONVERTIBLE NOTES
PAYABLE, continued
The
August Amendment to the October Debentures has been accounted for by the Company
as an extinguishment of debt in accordance with EITF Issue No. 96-19 and EITF
Issue No. 06-6. The Company determined that the net present value of
the cash flows under the terms of the August Amendment was more than 10 percent
different from the present value of the remaining cash flows under the terms of
the October Debentures agreement as previously amended in April
2008. Due to the substantial difference, the Company determined an
extinguishment of debt had occurred with the August
Amendment. Accordingly, the Company recorded the amended October
Debentures at their fair value of $2,203,086 at the date of
extinguishment. The difference between the fair value of the amended
October Debentures and the carrying value of the original October Debentures at
the date of debt extinguishment amounting to $91,727 was recorded as a gain on
debt extinguishment for the three months ended September 30, 2008.
A debt
discount of $3,082,511 was recorded in connection with the August Amendment to
the October Debentures which includes $117,851 related to the interest that
would have accrued from September to December 2008. This portion of
the debt discount is being amortized through December 2008, while the remaining
$2,964,660 of the debt discount is being amortized through the maturity dates of
the October Debentures. As of September 30, 2008 and March 31, 2008,
the unamortized balance of the debt discount was $2,897,013 and $3,522,357,
respectively. During the six months ended September 30, 2008, the
Company recorded additional interest expense of $791,948 related to the
amortization of the debt discount associated with the amended October
Debentures.
As of
September 30, 2008 and March 31, 2008, the principal balance of the October
Debentures totaled $5,285,599 and $4,419,397, respectively, of which the current
portion of $2,973,149 and $1,936,884 is included in the Company’s current
liabilities in the accompanying consolidated balance sheets at September 30,
2008 and March 31, 2008, respectively. During the six months ended September 30,
2008 the Company recorded interest expense of $147,313 related to the face rate
on the October Debentures.
On June
9, 2008, the Company completed the transactions contemplated under a certain
Securities Purchase Agreement with an accredited investor providing for the
issuance of the Company’s Original Issue Discount 8% Secured Convertible
Debentures (the “May Debenture”) having a principal face amount of
$1,250,000. The Company realized gross proceeds of $1,062,500 after
giving effect to a 15% discount. After accounting for commissions and
legal and other fees, the net proceeds to the Company totaled
$870,625.
The
principal amount under the May Debenture is payable in 23 monthly payments of
$54,348 beginning January 31, 2009. Interest payments are payable in
cash quarterly commencing on January 1, 2008. The Company may elect to make
principal and interest payments in shares of common stock provided, generally,
that the Company is not in default under the May Debenture, it has met certain
equity conditions prior to the due dates and there is then in effect a
registration statement with respect to the shares issuable upon conversion of
the May Debenture. If the Company elects to make principal or
interest payments in common stock, the conversion rate will be the lesser of (a)
the Conversion Price (as defined below), or (b) 85% of the lesser of (i) the
average of the volume weighted average price for the ten consecutive trading
days ending immediately prior to the applicable date an interest payment is due
or (ii) the average of such price for the ten consecutive trading days ending
immediately prior to the date the applicable shares are issued and delivered if
such delivery is after the interest payment date. For the six months
ended September 30, 2008, the Company recorded interest expense of $33,333
related to the face rate of interest, all of which is included in accrued
interest at September 30, 2008.
At any
time, the holder may convert the May Debenture into shares of common stock at a
fixed conversion price of $0.84, subject to adjustment in the event the Company
issues common stock (or securities convertible into or exercisable for common
stock) at a price below the conversion price as such price may be in effect at
various times (the “Conversion Price”). As of September 30, 2008, no
adjustment has been made to the fixed conversion price.
Page
25
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 8 - CONVERTIBLE NOTES
PAYABLE, continued
Following
the effective date of the registration statement described below, the Company
may force conversion of the May Debenture if the market price of the common
stock is at least $2.52 for 30 consecutive days. The Company may also prepay the
May Debenture in cash at 120% of the then outstanding principal
balance.
The May
Debenture ranks senior to all current and future indebtedness of the Company,
with the exception of the October Debentures that were issued by the Company in
October 2007 which rank senior to the May Debenture. The May
Debenture is secured by substantially all of the assets of the
Company. As part of the transaction, the Company entered into a
waiver and subordination agreement with the holders of the October
Debentures.
In
connection with the financing transaction, the Company issued to the investor
five-year warrants to purchase 1,488,095 shares of the Company’s common stock at
$0.92 per share and five-year warrants to purchase 1,488,095 shares of common
stock at $1.35 per share (collectively, the “May Warrants”).
Under
EITF Issue No. 00-27, the value of the May Warrants issued to the investors was
calculated relative to the total amount of the debt offering. The relative fair
value of the May Warrants issued to the investors was determined to be $815,471,
or 65.2% of the total offering. The relative fair value of the May Warrants,
along with the effective beneficial conversion feature of the debt ($434,529)
and the face value discount given to the investors ($187,500), totaled in excess
of the face amount of the May Debenture. As such, the Company recorded a debt
discount equal to the face value of the May Debenture of $1,250,000. The debt
discount is being amortized by the Company through the maturity date of the May
Debenture. As of September 30, 2008, the unamortized balance of the debt
discount was $1,083,332. During the six months ended September 30, 2008, the
Company recorded additional interest expense of $166,668 related to the
amortization of the debt discount.
The
Company also entered into a registration rights agreement with the investors
that requires the Company to register the shares issuable upon conversion of the
May Debenture and exercise of the May Warrants within 45 days after the closing
date of the transaction. Pursuant to the registration rights agreement, on July
14, 2008 the Company filed a Registration Statement on Form S-1, which became
effective with the Securities and Exchange Commission on August 28, 2008.
As a result of a timely filing, the Company was not subject to any liquidated
damages as described in the registration rights agreement.
Financing
fees of $191,875 including placement agent fees of $116,875 and legal and other
fees of $75,000, were paid in cash from the gross proceeds of the May
Debenture. National Securities Corporation (“National Securities”)
acted as sole placement agent in connection with the financing transaction.
Also, in connection with the financing transaction, the Company issued National
Securities five-year warrants to purchase 148,810 shares of the Company’s common
stock exercisable at $0.84 per share. The value of the warrants issued to
National Securities as calculated using the Black Scholes option pricing model
was $117,530.
The total
financing fees of $309,405 related to the financing transaction have been
allocated to the equity and debt components of the financing. The Company has
recorded 65.2% of the financing fees ($201,732) as costs related to the issuance
of the equity instruments, and as such has netted those amounts against
additional paid-in capital as of the date of the financing. The remaining 34.8%
($107,673) has been recorded as deferred financing fees on the Company’s
consolidated balance sheet as of September 30, 2008. The deferred financing fees
are being amortized by the Company through the maturity date of the May
Debenture on a straight-line basis which approximates the effective interest
method. During the six months ended September 30, 2008, the Company recorded
additional interest expense of $14,356 related to the amortization of the
deferred financing fees.
All
securities were issued pursuant to an exemption from registration in reliance on
Regulation D promulgated under the Securities Act of 1933, as amended (the
“Securities Act”), and based on the investors’ representations that they are
“accredited” as defined in Rule 501 under the Securities Act.
Page
26
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 8 - CONVERTIBLE NOTES
PAYABLE, continued
As of
September 30, 2008, the principal balance of the May Debenture totaled
$1,250,000, of which the current portion of $489,132 is included in the
Company’s current liabilities in the accompanying consolidated balance sheet at
September 30, 2008. During the six months ended September 30, 2008, the Company
recorded interest expense of $33,333 related to the face rate on the May
Debentures.
In
October 2006, the Company entered into an Agency Agreement with a broker to
raise capital in a private placement offering of convertible debentures under
Regulation D. From February 2006 through January 2007, the Company received a
total of $120,000 under this private placement offering of convertible debenture
debt. Related to the issuance of the convertible debentures, the Company paid
commissions to the broker totaling $15,600, which were capitalized as deferred
financing costs. During the six months ended September 30, 2007, the Company
amortized $4,699 of deferred financing costs to interest expense.
Per the
terms of the convertible debenture agreements, the notes had a term of 180 days
from issuance and were redeemable by the Company with two days notice. The notes
bore interest at 15% per annum and were convertible into shares of the Company’s
common stock at a ratio of 6.67 shares for every dollar of debt converted. The
proceeds of the convertible notes were used in the ongoing operations of the
Company. During the six months ended September 30, 2007, the Company converted
the full $120,000 of principal balances and $8,857 of accrued interest relating
to these convertible debentures into 859,697 shares of common stock at a
conversion price of $0.15 per share. During the six months ended September 30,
2007, the Company recorded interest expense of $2,784 related to these
notes.
In
connection with the issuance of the convertible debt, the Company recorded a
debt discount totaling $106,167 related to the beneficial conversion feature of
the notes. The Company amortized the debt discount using the effective interest
method through the maturity dates of the notes. During the six months ended
September 30, 2007, the Company recorded additional interest expense of $29,638
related to the amortization of the debt discount.
NOTE 9 -
EQUITY
During
the six months ended September 30, 2008, the Company issued a total of 139,722
shares of restricted common stock in lieu of fees paid for services performed by
various consultants. Based on the underlying stock trading values as
of the agreement dates, these shares were issued at an average value of $0.72
per share for a total recorded cost of $105,670 which is included in
selling, general and administrative expenses for the six months ended September
30, 2008.
During
the six months ended September 30, 2008, the Company issued 82,693 shares of
common stock resulting from exercises of stock options and warrants at an
average price of $0.04 per share for proceeds of $3,308 and issued 150,022
shares of common stock from cashless exercises of a total of 157,000
warrants.
During
the six months ended September 30, 2008, the Company issued a total of 88,600
warrants to various board members, advisory board members, and employees to
purchase shares of the Company’s common stock at an average exercise price of
$0.92 per share. The exercise prices of these warrants are equal to
the fair values of the Company’s shares as of the dates of each
grant. The Company has determined the aggregate fair value of the
issued warrants, based on the Black-Scholes pricing model, to be approximately
$337,356 as of the dates of each grant. The fair market value of the
warrants has been recorded as consulting and compensation expense and is
included in selling, general and administrative expenses for the six months
ended September 30, 2008.
Page
27
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 9 - EQUITY,
continued
In
connection with the May Debenture financing transaction, the Company issued to
the investor five-year warrants to purchase 1,488,095 shares of the Company’s
common stock at $0.92 per share and five-year warrants to purchase 1,488,095
shares of common stock at $1.35 per share (see Note 8).
Also in
connection with the May 2008 debenture financing transaction the Company issued
National Securities Corporation five year warrants to purchase 148,810 shares of
the Company’s common stock at $0.84 per share (see Note 8).
In
October 2007, the Company engaged the firm of Carpe DM, Inc. to perform the
services as the Company’s investor relations and public relations representative
for a monthly fee of $7,500 per month. Pursuant to the terms of this 36 month
consulting agreement, the Company issued 150,000 S-8 registered shares at $0.80
per share and a total value of $120,000, and 250,000 fully vested and non
forfeitable warrants at an exercise price of $1.50 per share for a period of two
and one-half years, valued at $229,834 as calculated using the Black Scholes
option pricing model. On November 13, 2007, the Company filed the Form S-8 as
required by this agreement with the Securities and Exchange Commission. The
Company has recorded the combined value of $349,834 of the shares and warrants
issued as prepaid expense which is being amortized over the life of the services
agreement. As of September 30, 2008 and March 31, 2008, the unamortized balance
of the value of the shares and warrants issued to Carpe DM, Inc. was $233,230
and $291,532, respectively, and $58,302 has been amortized and included in
selling, general and administrative expenses as outside services expense for the
six months ended September 30, 2008.
During
the six months ended September 30, 2007, 156,250 warrants were exercised at an
average price of $0.69 per share for aggregate proceeds of
$107,500.
In
connection with Agency Agreements with a broker to raise funds in private
placement offerings of common stock under Regulation D, during the six months
ended September 30, 2007, the Company sold 3,652,710 shares of the Company’s
common stock to investors at an average price of $0.22 per share for proceeds of
$699,866 to the Company, net of issuance costs of $89,635.
In
October 2006, the Company entered into an Agency Agreement with a broker to
raise capital in a private placement offering of convertible debentures under
Regulation D. From February 2006 through January 2007, the Company received a
total of $120,000 under this private placement offering of convertible debenture
debt. Per the terms of the convertible debenture agreements, the notes had a
term of 180 days from issuance and are redeemable by the Company with two days
notice. During the six months ended September 30, 2007, the Company converted
the full $120,000 of principal balances and $8,857 of accrued interest relating
to these convertible debentures into 859,697 common stock shares at a conversion
price of $0.15 per share (see Note 8).
In June 2007, the Company issued a
total of 6,052,000 warrants to purchase shares of the Company’s common stock at
an average price of $0.35 per share to 68 individual investors in connection
with funds raised in private placement offerings. The warrants have exercise
periods ranging from 18 to 30 months originating from the related investment
dates. The expiration dates range from December 2007 to October
2009.
In July
2007, the Company issued warrants to purchase a total of 699,438 shares of the
Company’s common stock at an average exercise price of $0.29 per share to a
broker in connection with funds raised in previous private placement
offerings. These warrants have 5 year terms beginning from the
dates of the placement offerings and the expiration dates range from March 2011
to March 2012.
In April 2007, the Company issued
375,000 shares of restricted common stock in lieu of fees paid to a consultant.
These shares were issued at a value of $1.02 per share (based on the underlying
stock price on the agreement date after a fifteen percent deduction as the
shares are restricted) for a total cost of $382,500 which has been included in
selling, general and administrative expenses for the six months ended September
30, 2007.
Page
28
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 9 - EQUITY,
continued
On July
2, 2007, in connection with the facility lease agreement, the Company issued
10,000 warrants to the lessor, at an exercise price of $1.55 per share for a
period of two years, valued at $15,486 as calculated using the Black Scholes
option pricing model. The Company amortizes the value of the warrants
over the life of the lease and the remaining unamortized value of the warrants
has been recorded in other long term assets. As of September 30, 2007, the
unamortized balance of the value of the warrants issued to the lessor was
$13,626 and $1,860 has been included in selling, general and administrative
expenses as additional rent expense for the three and six months ended September
30, 2007.
On July
30, 2007, in connection with the purchase of manufacturing equipment, the
Company issued 79,208 warrants to the seller at an exercise price of $1.01 per
share, with a five year term. The Company has determined the fair
value of the issued warrants, based on the Black-Scholes pricing model, to be
$79,926 as of the date of grant of which $10,000 has been recorded as fixed
assets as of September 30, 2007 (which approximates the fair market value of the
equipment acquired) and $69,926 has been recorded as consulting and compensation
expense and is included in selling, general and administrative expenses for
services performed by the seller for the three and six months ended September
30, 2007.
On August
21, 2007, in connection with the extension of payment terms of outstanding
amounts owed, the Company issued 20,000 warrants to First Capital Investors,
LLC, at an exercise price of $0.75 per share with a term of two
years. The Company has determined the fair value of the issued
warrants, based on the Black-Scholes pricing model, to be $14,984 as of the date
of grant which has been recorded as consulting and compensation expense and is
included in selling, general and administrative expenses for the three and six
months ended September 30, 2007.
On August
27, 2007, the Company issued a total of 266,000 warrants to purchase shares of
the Company’s common stock to various consultants, board members, and employees.
These warrants have an exercise price of $0.75 per share equal to the market
value of the Company’s common stock on the date of issuance, and have ten year
expiration dates. The Company has determined the fair value of the
issued warrants, based on the Black-Scholes pricing model, to be approximately
$199,314 as of the date of grant. The assumptions used under the
Black-Scholes pricing model included: a risk free rate of 4.75%; volatility of
293%; an expected exercise term of 5 years; and no annual dividend
rate. The fair market value of the warrants has been recorded as
consulting and compensation expense and is included in selling, general and
administrative expenses for the three and six months ended September 30,
2007.
On
October 16, 2007, the shareholders approved an increase in the total number of
voting common shares authorized to be issued to 125,000,000 shares.
On
October 1, 2007, in connection with the convertible debenture financing
transaction, the Company issued to the investors five-year warrants to purchase
5,604,411 shares of common stock at $0.92 per share and two-year warrants to
purchase 1,401,103 shares of common stock at $0.90 per share and 1,401,103
shares of common stock at $1.60 per share (see Note 8).
Also in
connection with the October Debenture financing transaction, the Company issued
Joseph Stevens and Company three year warrants to purchase 560,364 shares of the
Company’s common stock at $0.84 per share (see Note 8).
Page
29
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 10 - LOSS PER SHARE
The
following is a reconciliation of the numerators and denominators of the basic
and diluted loss per share computations for the three and six month periods
ended September 30:
|
For
Three months Ended
September
30,
|
For
Six months Ended
September
30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Numerator
for basic and diluted earnings per share:
Net loss available to common
stockholders
|
$ | (1,569,293 | ) | $ | (629,070 | ) | $ | (9,791,774 | ) | $ | (1,374,578 | ) | ||||
|
Denominator
for basic and diluted loss per common share:
Weighted
average common shares outstanding
|
41,167,472 | 39,721,581 | 41,093,181 | 38,807,022 | ||||||||||||
|
Net
loss per common share available to common stockholders, basic and
diluted
|
$ | (0.04 | ) | $ | (0.02 | ) | $ | (0.24 | ) | $ | (0.04 | ) | ||||
NOTE 11 - RELATED PARTY
TRANSACTIONS
Since
June 2005, the Company has retained the legal services of Gary C. Cannon,
Attorney at Law, for a monthly retainer fee which is currently $9,000 per month.
Mr. Cannon also serves as the Company’s Secretary and a member of the Board of
Directors. The total amount paid to Mr. Cannon for retainer fees and
out-of-pocket expenses for the six months ended September 30, 2008 and 2007 was
$54,000 and $39,000, respectively.
In April
2008, the Company issued 150,022 shares of common stock to Peter Berry, Chief
Executive Officer, resulting from the cashless exercise of 157,000 warrants at
an exercise price of $0.04 per share (see Note 9).
See Note
7 for related-party debt disclosures.
Page
30
CRYOPORT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the
Three and Six Months Ended September 30, 2008 and 2007
NOTE 12 - SUBSEQUENT EVENTS
In
October 2008, the Company issued 105,000 shares of restricted common stock in
lieu of fees paid for services by consultants. Based on the
underlying stock trading values as of the agreement dates, these shares were
issued at an average value of $0.60 per share for total recorded expense of
$63,100 which will be reported in selling, general and administrative expenses
for the Company in the quarter ending December 31, 2008.
In
October 2008, the Company issued a total of 456,840 warrants to various board
members, advisory board members, employees, and ongoing consultants as part of a
previously approved and ongoing compensation plan to purchase shares of the
Company’s common stock at an average exercise price of $0.85 per
share. The exercise prices of these warrants are equal to the fair
values of the Company’s shares as of the dates of each grant. The
fair market value of the warrants based on the Black-Scholes pricing model will
be recorded as consulting and compensation expense and included in selling,
general and administrative expenses in the quarter ending December 31,
2008.
On
November 6, 2008, the Company secured financing for a $100,000 one-year
revolving line of credit (the “Line”) secured by a $100,000 Certificate of
Deposit with Bank of the West. All borrowings under the revolving line of credit
bear variable interest based on the prime rate plus 1% per annum
(approximately 5.0% as of November 6, 2008). The Company utilizes the funds
advanced from the Line for capital equipment purchases to support the launch of
the Company’s newly developed product, the CryoPort Express® One-Way Shipper. As
of November 10, 2008, the outstanding balance of the Line was
$90,000.
Page
31
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In
this Form 10-Q the terms “CryoPort”, “Company” and similar terms refer to
CryoPort, Inc., and its wholly owned subsidiary CryoPort Systems,
Inc.
Safe
Harbor and Forward Looking Statements:
The
Company has made some statements in this Form 10-Q, including some under this
“Management’s Discussion and Analysis or Plan of Operation”, and elsewhere,
which are forward-looking statements within the definition of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Act of
1934, as amended. These statements may discuss the Company’s future
expectations, contain projections of its plan of operation or financial
condition or state other forward-looking information. In this Form 10-Q, forward
looking statements are generally identified by words such as “anticipate”,
“plan”, “believe”, “expect”, “estimate”, and the like. Forward-looking
statements involve future risks and uncertainties, and there are factors that
could cause actual results or plans to differ materially from those expressed or
implied by the statements. The forward-looking information is based on various
factors and is derived using numerous assumptions. A reader, whether investing
in the company’s securities or not, should not place undue reliance on these
forward-looking statements, which apply only as of the date of this Form 10-Q.
Important factors that may cause actual results to differ from projections
include, but are not limited to, the following:
|
·
|
The
success or failure of management’s efforts to implement the Company’s plan
of operations;
|
|
·
|
The
Company’s ability to fund its operating
expenses;
|
|
·
|
The
Company’s ability to compete with other companies that have a similar plan
of operation; and
|
|
·
|
The
effect of changing economic conditions impacting the Company’s plan of
operation;
|
|
·
|
The
Company’s ability to meet the other risks as may be described in its
future filings with the Securities and Exchange
Commission.
|
The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
General
Overview
The
following discussion and analysis of the Company’s financial condition and
results of operations should be read in conjunction with the consolidated
balance sheets as of September 30, 2008 (unaudited) and March 31, 2008 (audited)
and the related consolidated statements of operations for the six months ended
September 30, 2008 and 2007, the consolidated statements of cash flows for the
three and six months ended September 30, 2008 and 2007 and the related notes
thereto (see Item 1. Financial Statements) as well as the audited consolidated
financial statements of the Company as of March 31, 2008 and 2007 and for the
years then ended included in the Company’s Annual Report on Form 10-K for the
year ended March 31, 2008.
Page
32
The
Company cautions readers that important facts and factors described in this
Management’s Discussion and Analysis Of Financial Condition and Results of
Operations elsewhere in this document sometimes have affected, and in the future
could affect, the Company’s actual results, and could cause the Company’s actual
results during fiscal year 2009 and beyond to differ materially from those
expressed in any forward-looking statements made by, or on behalf of the
Company.
Going
Concern
As
reported in the Report of Independent Registered Public Accounting Firm on the
Company’s March 31, 2008 and 2007 consolidated financial statements, the Company
has incurred recurring losses and negative cash flows from operations since
inception. These factors, among others, raise substantial doubt about
the Company’s ability to continue as a going concern.
There are
significant uncertainties which negatively affect the Company’s operations.
These are principally related to (i) the limited distribution network for the
Company’s reusable product line, (ii) the expected launch of the new CryoPort
Express® One-Way Shipper System, (iii) the absence of any significant, long-term
commitments or firm orders from key customers in the Company’s target markets
for the reusable or the one-way shippers, (iv) the success in bringing products
concurrently under development to market with the Company’s key customers.
Moreover, there is no assurance as to when, if ever, the Company will be able to
conduct the Company’s operations on a profitable basis. The Company’s limited
sales to date for the Company’s reusable product, the lack of any purchase
requirements in the existing distribution agreements and those currently under
negotiations, make it impossible to identify any trends in the Company’s
business prospects.
The
Company has not generated significant revenues from operations and has no
assurance of any future significant revenues. The Company incurred net losses of
$9,791,774, including a $6,811,214 loss on debt extinguishment, during the six
months ended September 30, 2008 and net losses of $1,569,293 during the three
month period ended September 30, 2008. In addition, the Company used cash of
$1,584,022 in its operating activities during the six months ended September 30,
2008. Further, the Company has a working capital deficit of $1,422,284 as of
September 30, 2008. These factors raise substantial doubt about the Company’s
ability to continue as a going concern.
On
October 1, 2007, the Company received net proceeds of $3,436,551 from the
issuance of convertible debentures (see Note 8). On May 30, 2008, the
Company received net proceeds of $870,625 from an additional convertible
debenture financing (see Note 8). As a result of the recent
financings, the Company had an aggregate cash and cash equivalents and
restricted cash balance of approximately $1,130,000 as of November 10, 2008
which will be used to fund the sales and marketing efforts as well as provide
the working capital required for the Company’s launch of the CryoPort Express®
One-Way Shipper and is expected to provide the Company with the means for
eventual achievement of sustained profitable operations and the ability to
continue as a going concern.
Page
33
Management
is committed to utilizing the proceeds of these recent financings to fully
execute its business plan and grow at the desired rate to achieve sustainable
profitable operations. To further facilitate the ability of the
Company to continue as a going concern the Company’s management has begun taking
the following steps:
|
1)
|
Focusing
all efforts on the successful launch of the CryoPort Express® One-Way
Shipper. Since funds have been made available management efforts have been
focused on utilizing all resources towards furthering the sales efforts
and the acquisition of raw materials to provide adequate inventory levels
and towards the expansion of manufacturing and processing capabilities to
support the launch of the CryoPort Express® One-Way
Shipper.
|
|
2)
|
Continuing
to minimize operating and financing expenditures as necessary to ensure
the availability of funds until revenues generated and cash collections
adequately support the continued business operations. The
Company’s largest expenses for the six month period ended September 30,
2008, relate to non-cash expenses including (i) $6,811,214
non-cash loss on extinguishment of debt related to amending the October
Debenture (see Note 8 of the accompanying consolidated financial
statements), ii) $986,515 non-cash expense included in interest expense
relating to the amortization of discounts and deferred financing fees on
convertible debentures, and (iii) non-cash expense recorded in selling,
general and administrative costs of $443,026 related to the valuations of
common stock shares issued in lieu of cash for consulting services and the
valuation of warrants issued to various consultants, directors, and
employees. For the six months ended September 30, 2008, the
Company also incurred cash expenses of (i) approximately $69,460 for the
audit fees and consulting services related to the filing of the Company’s
annual and quarterly reports, compliance with Sarbanes-Oxley requirements,
and for the filing of the Company’s annual tax returns and (ii)
approximately $163,478 included in research and development costs related
to the software development for the web based system to be used with
the CryoPort Express® One-Way Shipper. The remaining
operating expenses for the six months ended September 30, 2008 related
primarily to minimal overhead costs including personnel costs, rent and
utilities and meeting the legal and reporting requirements of a public
company.
|
|
3)
|
Utilizing
part-time consultants and temporary employee and requiring employees to
manage multiple roles and responsibilities whenever possible as the
Company has historically utilized in its efforts to keep operating costs
low.
|
|
4)
|
Continuing
to require that key employees and the Company’s Board of Directors receive
Company stock in lieu of cash as a portion of their compensation in an
effort to minimize monthly cash flow. With this strategy, the Company has
established a critical mass of experienced business professionals capable
of taking the Company forward.
|
|
5)
|
Maintaining
current levels for sales, marketing, engineering, scientific and operating
personnel and cautiously and gradually adding critical and key personnel
only as necessary to support the successful launch and expected revenue
growth of the CryoPort Express® One-Way Shipper and any further expansion
of the Company’s product offerings in the reusable and one-way cryogenic
shipping markets, leading it to additional revenues and
profits.
|
|
6)
|
Adding
other expenses such as customer service, administrative and operations
staff only commensurate with producing increased
revenues.
|
|
7)
|
Focusing
current research and development efforts only on final and future
development, production and distribution of the CryoPort Express® One-Way
Shipper System.
|
|
8)
|
Increasing
sales and marketing resource efforts to focus on marketing and sales
research into the bio-pharmaceutical, clinical trials and cold-chain
distribution industries in order to ensure a successful full launch of the
CryoPort Express® One-Way Shipper
System.
|
Page
34
Research and
Development
The
Company has completed the research and development efforts associated with phase
one of its new product line, the CryoPort Express® One-Way Shipper System, a
line of use-and-return dry cryogenic shippers, for the transport of biological
materials. The Company continues to provide ongoing research associated with the
CryoPort Express® One-Way Shipper System, as it develops improvements on both
the manufacturing processes and product materials for the purpose of achieving
additional cost efficiencies. As with any research effort, there is uncertainty
and risk associated with whether these efforts will produce results in a timely
manner so as to enhance the Company’s market position. For the six months ended
September 30, 2008 and 2007, research and development costs were $216,244 and
$50,300, respectively. Company sponsored research and development costs related
to future products and the testing and design modifications for enhancing
performance and minimizing costs of present products are expensed as incurred
and include such costs as salaries, employee benefits, costs determined
utilizing the Black-Scholes option-pricing model for options issued to the
Scientific Advisory Board, prototype design and materials costs and the
development costs related to the software development for the web based system
to be used with the CryoPort Express® One-Way Shipper.
Critical
Accounting Policies
The
Company’s consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis of making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions, however, in the past the estimates and assumptions have been
materially accurate and have not required any significant changes. Specific
sensitivity of each of the estimates and assumptions to change based on other
outcomes that are reasonably likely to occur and would have a material effect is
identified individually in each of the discussions of the critical accounting
policies described below. Should the Company experience significant changes in
the estimates or assumptions which would cause a material change to the amounts
used in the preparation of the Company’s financial statements, material
quantitative information will be made available to investors as soon as it is
reasonably available.
The
Company believes the following critical accounting policies, among others,
affect the Company’s more significant judgments and estimates used in the
preparation of the Company’s consolidated financial statements:
Allowance for Doubtful Accounts.
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of the Company’s customers to make required
payments. The allowance for doubtful accounts is based on specific
identification of customer accounts and the Company’s best estimate of the
likelihood of potential loss, taking into account such factors as the financial
condition and payment history of major customers. The Company evaluates the
collectibility of the Company’s receivables at least quarterly. Such costs of
allowance for doubtful accounts are subject to estimates based on the historical
actual costs of bad debt experienced, total accounts receivable amounts, age of
accounts receivable and any knowledge of the customers’ ability or inability to
pay outstanding balances. If the financial condition of the Company’s customers
were to deteriorate, resulting in impairment of their ability to make payments,
additional allowances may be required. The differences could be material and
could significantly impact cash flows from operating activities.
Page
35
Inventory. The Company writes
down its inventory for estimated obsolescence or unmarketable inventory equal to
the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand, future pricing and market
conditions. Inventory reserve costs are subject to estimates made by the Company
based on historical experience, inventory quantities, age of inventory and any
known expectations for product changes. If actual future demands, future pricing
or market conditions are less favorable than those projected by management,
additional inventory write-downs may be required and the differences could be
material. Such differences might significantly impact cash flows from operating
activities. Once established, write-downs are considered permanent adjustments
to the cost basis of the obsolete or unmarketable inventories.
Impairment of Long-Lived
Assets. The Company assesses the recoverability of its long-lived assets
by determining whether the depreciation and amortization of long-lived assets
over their remaining lives can be recovered through projected undiscounted cash
flows. The amount of long-lived asset impairment is measured based on fair value
and is charged to operations in the period in which long-lived asset impairment
is determined by management. Manufacturing fixed assets are subject to
obsolescence potential as result of changes in customer demands, manufacturing
process changes and changes in materials used. The Company is not currently
aware of any such changes that would cause impairment to the value of its
manufacturing fixed assets.
Deferred Financing
Costs. Deferred financing costs represent costs incurred in
connection with the issuance of the convertible notes
payable. Deferred financing costs are being amortized over the term
of the financing instrument on a straight-line basis, which approximates the
effective interest method.
Accrued Warranty Costs. The
Company estimates the costs of the standard warranty, included with the reusable
shippers at no additional cost to the customer for a period up to one year.
These estimated costs are recorded as accrued warranty costs at the time of
product sale. These estimated costs are subject to estimates made by the Company
based on the historical actual warranty costs, number of products returned for
warranty repair and length of warranty coverage.
Revenue Recognition. Product
sales revenue is recognized upon passage of title to customers, typically upon
shipment of product. Any provision for discounts and estimated returns are
accounted for in the period the related sales are recorded. Products are
generally sold with right of warranty repair for a one year period but with no
right of return. Estimated costs of warranty repairs are recorded as accrued
warranty costs as described above. Products shipped to customers for speculation
purposes are not considered sold and no revenue is recorded by the Company until
sales acceptance is acknowledged by the customer.
Stock-Based
Compensation. The Company accounts for equity
issuances to non-employees in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock Based
Compensation, and Emerging Issues Task Force ("EITF") Issue
No. 96-18, Accounting for
Equity Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods and Services. All transactions in which
goods or services are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the consideration
received or the fair value of the equity instrument issued, whichever is more
reliably measurable. The measurement date used to determine the fair value of
the equity instrument issued is the earlier of the date on which the third-party
performance is complete or the date on which it is probable that performance
will occur.
Page
36
On
April 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment, which
requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors related to the
Company’s 2000 Equity Incentive Plan based on estimated fair values. The Company
adopted SFAS No. 123(R) using the modified prospective transition method,
which requires the application of the accounting standard as of April 1,
2006, the first day of our fiscal year 2007. The value of the portion of the
award that is ultimately expected to vest is recognized as expense over the
requisite service periods in our consolidated statement of operations. As
stock-based compensation expense recognized in the consolidated statement of
operations for each of the three and six month periods ended September 30, 2008
and 2007 is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The estimated average forfeiture rate
for the each of the three and six month periods ended September 30, 2008 and
2007 was zero as the Company has not had a significant history of
forfeitures.
Convertible
Debentures. If the conversion feature of conventional
convertible debt provides for a rate of conversion that is below market value,
this feature is characterized as a beneficial conversion feature
(“BCF”). A BCF is recorded by the Company as a debt discount pursuant
to EITF Issue No. 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingency Adjustable
Conversion Ratio,” (“EITF 98-05”) and EITF Issue No. 00-27, “Application of EITF Issue No. 98-5
to Certain Convertible Instruments” (“EITF 00-27”). In those
circumstances, the convertible debt will be recorded net of the discount related
to the BCF. The Company amortizes the discount to interest expense
over the life of the debt using the effective interest method (see Note 8 of the
accompanying consolidated financial statements).
Results
of Operations
Three
months ended September 30, 2008 compared to three months ended September 30,
2007:
Net Sales. During the three
months ended September 30, 2008, the Company generated $5,982 from shipper sales
compared to revenues of $32,447 in the same period of the prior year, a decrease
of $26,465 (82%). This revenue decrease is primarily as a result of the prior
year’s sales of the Company’s reusable products which are no longer in
production compared to the current year’s new revenues from introductory sales
from the initial launch of the CryoPort Express® One-Way Shipper
System. The overall low revenues are the result of the Company’s
shift in its sales and marketing focus initiated during fiscal year 2006 to
allow for the planning of the introduction of the one-way shipper into the
bio-pharmaceutical and bio-tech industry sectors. This shift allowed the
marketing and sales efforts to focus on research into the bio-pharmaceutical,
clinical trials and cold-chain distribution industries in order to better
position the Company for a timely and successful launch of the CryoPort Express®
One-Way Shipper System.
Gross Profit/Loss. Gross loss
for the three month period ended September 30, 2008 increased by $78,709 (157%)
to $128,971 compared to $50,262 for the three month period ended September 30,
2007. The increase in the gross loss is mainly attributable to increased
manufacturing overhead costs incurred as the Company increased space, added
personnel and incurred additional equipment maintenance and repair and
depreciation costs related to the initial production of the CryoPort Express®
One-Way Shipper and to the prior year’s temporary production shut-down as a
result of the relocation and restructuring of the Company’s production
operations in Lake Forest, CA initiated in mid-September 2007, resulting in
lower manufacturing overhead costs in 2007. During both periods, cost of sales
exceeded sales due to plant under utilization.
Page
37
Cost of Sales. Cost
of sales for the three month period ended September 30, 2008 increased $52,244
(63%) to $134,953 from $82,709 for the three month period ended September 30,
2007 primarily as the result of increased manufacturing overhead costs incurred
as the Company increased space, added personnel and incurred additional
equipment maintenance and repair costs related to the planning and preparation
for production of the CryoPort Express® One-Way Shipper and to the prior year’s
temporary production shut-down for the relocation and restructuring
of the Company’s production operations in Lake Forest, CA initiated in
mid-September 2007, resulting in lower manufacturing overhead costs in
2007.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses increased by
$243,242 (45%) to $779,691 for the three month period ended September 30, 2008
as compared to $536,449 for the three month period ended September 30, 2007 due
primarily to a $200,836 (41%) increase in general and administrative expenses
from $486,108 for the three month period ended September 30, 2007 to $686,944
for the three month period ended September 30, 2008 and by a $42,406 (84%)
increase in sales and marketing expenses from $50,341 for the three month period
ended September 30, 2007 to $92,747 for the three month period ended September
30, 2008. The increase in the general and administrative expenses is due to
increased accounting fees related to consulting and independent auditor costs
related to SEC compliance requirements including Sarbanes-Oxley compliance,
increased consulting costs related to the valuation of shares and warrants
issued in lieu of cash payments for services, increased insurance costs and
increased travel and related meeting costs associated with the planning for the
launch of the CryoPort Express® One-Way Shipper. The increase in
sales and marketing expenses is related to increased travel, consulting and
advertising costs associated with the initial launch efforts of the CryoPort
Express® One-Way Shipper.
Research and Development Expenses.
Research and development expenses increased by $83,740 (386%) to $105,453
for the three month period ended September 30, 2008 as compared to $21,713 for
the three month period ended September 30, 2007 primarily due to the consulting
costs associated with the software development for the web based system to be
used with the CryoPort Express® One-Way Shipper and to other research
and development activity related to the CryoPort Express® One-Way Shipper
System, as the Company strives to develop improvements in both the manufacturing
processes and product materials for the purpose of achieving additional product
cost efficiencies.
Interest Expense. Interest
expense increased $637,453 to $658,099 for the three month period ended
September 30, 2008 as compared to $20,646 for the three month period ended
September 30, 2007. This increase is primarily due to $540,341 of amortized debt
discount, $10,767 of amortized financing fees, and $83,924 of accrued interest,
all related to the convertible debentures issued in October 2007 and May 2008.
These increases were offset by a reduction in interest expense for related party
notes payable and note payable to officer as the result of the payments made
against the principal note balances.
Interest Income. The Company
recorded interest income of $11,194 for the three month period ended September
30, 2008 as compared to zero for the three month period ended September 30, 2007
as the result of increased cash balances related to the funds received in
connection with the convertible debentures issued in October 2007 and May
2008.
Gain on Extinguishment of Debt.
The Company incurred a gain on extinguishment of debt of $91,727 during
the three months ended September 30, 2008 as the result of the August 29, 2008
Amendment of the October Debentures which provided for an increase of $866,202
in the principal balance of the October Debentures for the interest that would
have been paid September 31, 2008 and December 31, 2008 and for 15% of the
aforementioned interest and the outstanding principal as of the date of the
amendment. The gain consists of a combination of the $866,202
increase in principal offset by the $899,004 increase in the unamortized
discount balance and the previously accrued interest of $58,925 related to the
October Debentures to reflect the present value of the debentures as of August
29, 2008 (see Note 8 of the accompanying consolidated financial
statements). There was no gain or loss on extinguishment of debt in
the three months ended September 30, 2007.
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38
Net Loss. As a result of the
factors described above, the net loss for the three months ended September 30,
2008 increased by $940,223 to $1,569,293 or ($0.04) per share
compared to $629,070 or ($0.02) per share for the three months ended September
30, 2007. Loss from operations for the three months ended September
30, 2008 increased $405,691 to $1,014,115 compared to $608,424 for the three
months ended September 30, 2007.
Six
months ended September 30, 2008 compared to six months ended September 30,
2007:
Net Sales. During the six
months ended September 30, 2008, the Company generated $19,406 from shipper
sales compared to revenues of $37,988 in the same period of the prior year, an
decrease of $18,582 (49%). This revenue decrease is primarily as a result of the
prior year’s sales of the Company’s reusable products which are no longer in
production compared to the current year’s new revenues from introductory sales
from the initial launch of the CryoPort Express® One-Way Shipper
System. The overall low revenues are the result of the Company’s
shift in its sales and marketing focus initiated during fiscal year 2006 to
allow for the planning of the introduction of the one-way shipper into the
bio-pharmaceutical and bio-tech industry sectors. This shift allowed the
marketing and sales efforts to focus on research into the bio-pharmaceutical,
clinical trials and cold-chain distribution industries in order to better
position the Company for a timely and successful launch of the CryoPort Express®
One-Way Shipper System.
Gross Profit/Loss. Gross loss
for the six month period ended September 30, 2008 increased by $120,897 (107%)
to $233,925 compared to $113,028 for the six month period ended September 30,
2007. The increase in the gross loss is mainly attributable to increased
manufacturing overhead costs incurred as the Company increased space, added
personnel and incurred additional equipment maintenance and repair and
depreciation costs related to the initial production of the CryoPort Express®
One-Way Shipper and to the prior year’s temporary production shut-down as a
result of the relocation and restructuring of the Company’s production
operations in Lake Forest, CA initiated in mid-September 2007, resulting in
lower manufacturing overhead costs in 2007. During both periods, cost of sales
exceeded sales due to plant under utilization.
Cost
of Sales. Cost of sales for the six month period ended
September 30, 2008 increased $102,315 (68%) to $253,331 from $151,016 for the
six month period ended September 30, 2007 primarily as the result of increased
manufacturing overhead costs incurred as the Company increased space, added
personnel and incurred additional equipment maintenance and repair costs related
to the planning and preparation for production of the CryoPort Express® One-Way
Shipper and to the prior year’s temporary production shut-down for
the relocation and restructuring of the Company’s production operations in Lake
Forest, CA initiated in mid-September 2007, resulting in lower manufacturing
overhead costs in 2007.
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39
Selling, General and Administrative
Expenses. Selling, general and administrative expenses increased by
$208,727 (18%) to $1,339,731 for the six month period ended September 30, 2008
as compared to $1,131,004 for the six month period ended September 30, 2007 due
primarily to a $94,691 (9%) increase in general and administrative expenses from
$1,029,457 for the six month period ended September 30, 2007 to $1,124,148 for
the six month period ended September 30, 2008 and by a $114,036 (112%) increase
in sales and marketing expenses from $101,547 for the three month period ended
September 30, 2007 to $215,583 for the three month period ended September 30,
2008. The increase in the general and administrative expenses is due to
increased accounting fees related to consulting and independent auditor costs
related to SEC compliance requirements including Sarbanes-Oxley compliance,
increased consulting costs related to the valuation of shares and warrants
issued in lieu of cash payments for services, increased insurance costs and
increased travel and related meeting costs associated with the planning for the
launch of the CryoPort Express® One-Way Shipper. The increase in
sales and marketing expenses is related to increased travel, consulting and
advertising costs associated with the initial launch efforts of the CryoPort
Express® One-Way Shipper.
Research and Development Expenses.
Research and development expenses increased by $165,944 (330%) to
$216,244 for the six month period ended September 30, 2008 as compared to
$50,300 for the six month period ended September 30, 2007 primarily due to the
consulting costs associated with the software development for the web based
system to be used with the CryoPort Express® One-Way Shipper and to
other research and development activity related to the CryoPort Express® One-Way
Shipper System, as the Company strives to develop improvements in both the
manufacturing processes and product materials for the purpose of achieving
additional product cost efficiencies.
Interest Expense. Interest
expense increased $1,135,222 to $1,213,868 for the six month period ended
September 30, 2008 as compared to $78,646 for the six month period ended
September 30, 2007. This increase is primarily due to $958,616 of amortized debt
discount, $27,929 of amortized financing fees, and $180,646 of accrued interest,
all related to the convertible debentures issued in October 2007 and May 2008.
These increases were offset by a reduction in interest expense for related party
notes payable and note payable to officer as the result of the payments made
against the principal note balances.
Interest Income. The Company
recorded interest income of $24,008 for the six month period ended September 30,
2008 as compared to zero for the six month period ended September 30, 2007 as
the result of increased cash balances related to the funds received in
connection with the convertible debentures issued in October 2007 and May
2008.
Gain (Loss) on Extinguishment of
Debt. The Company incurred a loss on extinguishment of debt of $6,902,941
during the six months ended September 30, 2008 as the result of the April 30,
2008 Amendment of the October Debentures which provided for a six month deferral
of principal payments. The loss consists of a combination of the
$5,858,344 increase in the fair market value of warrants issued in connection
with the October Debentures as a result of the increase in the number of shares
to be purchased under each of the October Warrants and to the decrease in the
Exercise Price of October Warrants from $0.90, $0.92 and $1.60 to
$0.60 each, the elimination of the April 30, 2008 unamortized balance of
deferred financing costs of $312,197 and the $732,400 reduction in the
unamortized discount balance related to the October Debentures to reflect the
present value of the debentures as of April 30, 2008 (see Note 8 of the
accompanying consolidated financial statements). There was no loss on
extinguishment of debt in the six months ended September 30, 2007.
The
Company incurred a gain on extinguishment of debt of $91,727 during the six
months ended September 30, 2008 as the result of the August 29, 2008 Amendment
of the October Debentures which provided for an increase of $866,202 in the
principal balance of the October Debentures for the interest that would have
been paid September 31, 2008 and December 31, 2008 and for 15% of the
aforementioned interest and the outstanding principal as of the date of the
amendment. The gain consists of a combination of the $866,202
increase in principal offset by the $899,004 increase in the unamortized
discount balance and the previously accrued interest of
$58,925 related to the October Debentures to reflect the present
value of the debentures as of August 29, 2008 (see Note 8 of the accompanying
consolidated financial statements). There was no gain on
extinguishment of debt in the six months ended September 30, 2007.
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40
Net Loss. As a result of the
factors described above, the net loss for the six months ended September 30,
2008 increased by $8,417,196 to $9,791,774 or ($0.24) per share
compared to $1,374,578 or ($0.04) per share for the six months ended September
30, 2007. Loss from operations for the six months ended September 30,
2008 increased $495,568 to $1,789,900 compared to $1,294,332 for the six months
ended September 30, 2007.
Assets
and Liabilities
At
September 30, 2008, the Company had total assets of $2,438,089 compared to total
assets of $3,460,889 at March 31, 2008, a decrease of $1,022,800. The Company’s
combined cash balance as of September 30, 2008 was $1,427,242 including
restricted cash, a decrease of $1,007,459 compared to $2,434,701 as of March 31,
2008. During the six month period ended September 30, 2008, cash used
in operations of $1,584,022 and cash used in investing activities of $53,676 was
offset by cash provided by financing activities of $625,713. As of
November 10, 2008, the Company’s cash on hand was approximately $1,130,000. The
decrease in current cash on hand is due to cash used in operations and cash paid
for principal and interest payments partially offset by proceeds from
convertible debt.
Net
accounts receivable at September 30, 2008 was $4,473, a decrease of $16,938
(79%) from $21,411 at March 31, 2008. This decrease is due to the revenue
decrease during the six months ended September 30, 2008 compared to the six
months ended March 31, 2008, primarily as a result of decreased sales of
reusable shippers.
Net
inventories increased $299,393 (246%), to $421,345 as of September 30, 2008,
from $121,952 as of March 31, 2008. The increase in inventories is due to the
purchases of raw materials during the six months ended September 30, 2008 for
the build-up of dewars in finished goods inventory in anticipation of the full
launch of the CryoPort Express® One-Way Shipper System. This increase from
purchases was partially offset by usages of inventory during the six months
ended September 30, 2008 in order to fulfill sales of reusable
shippers.
Net fixed
assets increased $22,489 to $216,341 at September 30, 2008 from $193,852 at
March 31, 2008 as a result of increases of $53,043 for purchases of additional
production equipment during September 30, 2008 to support the anticipated
increased manufacturing operations for the launch of the CryoPort Express®
One-Way Shipper System, which was partially offset by $30,554 of depreciation
for the six months ended September 30, 2008.
Net
intangible assets increased to $1,107 at September 30, 2008 from $474 at March
31, 2008 as a result of fees paid for new trademark applications which are
pending approval.
The
Company has recorded the combined value of $349,834 of the valuation of shares
and warrants as calculated using the Black Scholes option pricing model issued
to Carpe DM under a 36-month consulting agreement to as prepaid expense which is
being amortized over the life of the services agreement. As of September 30,
2008, the unamortized balance of the value of the shares and warrants issued to
Carpe DM, Inc. was $233,230 of which $116,604 is included in prepaid expenses
and other current assets and $116,626 is included as a non-current
asset.
Net
deferred financing fees decreased $232,453 to $93,317 at September 30, 2008
compared to $325,769 at March 31, 2008 due to reductions for the elimination
of the unamortized balance of $312,197 related to the October
Debentures due to the extinguishment of debt as of April 30, 2008 and the
amortization of $27,929 of deferred financing fees during the six months ended
September 30, 2008, which were offset by the addition of $107,673 in deferred
financing fees related to the May 2008 Debenture.
Total
liabilities at September 30, 2008 were $5,059,342, an increase of $1,598,272
(46%) from $3,461,070 as of March 31, 2008. This increase was mainly
due to the recording of the May Debenture, the increase in principal related to
the August Amendment of the October Debenture and the amortization of the
offsetting debt discounts related to the May and October
Debentures. Accounts payable was $248,805 at September 30, 2008, an
increase of $14,507 from $234,298 at March 31, 2008. Accrued expenses decreased
$245 to $94,803 at September 30, 2008 from $95,048 at March 31, 2008. Accrued
warranty costs decreased $5,625 (19%) to $24,368 at September 30, 2008 from
$29,993 as of March 31, 2008 relating to the usage of the accrual for warranty
replacements during the six months ended September 30, 2008. Accrued salaries
were $129,878 at September 30, 2008, a decrease of $8,225 (6%) from $138,103 at
March 31, 2008. This decrease is due to accrued bonus payments which were paid
in April 2008 and usage of accrued vacation pay.
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41
On
October 1, 2007, the Company issued to four accredited investors Original Issue
Discount 8% Senior Secured Convertible Debentures (the “October Debentures”)
having a principal face amount of $4,707,705 and generating gross proceeds of
$4,001,551. After accounting for commissions, legal and other fees, the
net proceeds to the Company totaled $3,436,551.
In
connection with the financing transaction, the Company issued to the investors
five-year warrants to purchase 5,604,411 shares of common stock at $0.92 per
share and two-year warrants to purchase 1,401,103 shares of common stock at
$0.90 per share and 1,401,103 shares of common stock at $1.60 per share
(collectively, the “October Warrants”). Valuation of these warrants as
calculated using the Black Scholes option pricing model equaled $7,838,791 on
the date of grant.
Under
EITF Issue No. 00-27, the value of the October Warrants issued to the investors
is calculated relative to the total amount of the debt offering. The relative
fair value of the October Warrants issued to the investors was determined to be
$2,941,267, or 62.5% of the total offering. The relative fair value of the
October Warrants, along with the effective beneficial conversion feature of the
debt ($3,557,761) and the face value discount given to the investors ($706,154),
totaled in excess of the face amount of the October Debentures. As such, the
Company recorded a debt discount equal to the face value of the October
Debentures of $4,707,705. The debt discount is being amortized by the Company
through the maturity dates of the October Debentures. On April 30, 2008, in
connection with the deferral of six months of principal payments, the
unamortized balance of the debt discount was decreased from $3,375,592 to $
2,643,192 to reflect the fair value of the convertible debt as of the date of
the debt extinguishment, and $732,400 is included in the loss on extinguishment
of debt. As of September 30, 2008 and March 31, 2008, the unamortized
balance of the debt discount was $2,897,013 and 3,522,357, respectively. During
the six months ended September 30, 2008, the Company recorded additional
interest expense of $791,918 related to the amortization of the debt discount
for the October Debentures.
On April
30, 2008, the Convertible Debenture Agreement was amended to reflect changes to
the monthly redemption of principal and changes to the October Warrants issued
with the original October Debentures. Under the terms of the April
30, 2008 Amendment (the “April Amendment”), the monthly principal redemptions
were suspended until August 1, 2008 and the remaining principal due on the
October Debentures will be paid thereafter on the first date of each month in
equal installments through March 27, 2010, the expiration date. Further, the
April Amendment changes the exercise price of the October Warrants issued under
the terms of the Securities Purchase Agreement and related Agreements from
$0.90, $0.92 and $1.60 to $0.60 each. The number of shares to be purchased under
each of the October Warrants was also adjusted under the terms of the April
Amendment so that the original dollar amounts to be raised by the Company
through the exercise of each of the October Warrants remained the
same.
The
Company incurred a loss on extinguishment of debt of $6,902,941 during the six
months ended September 30, 2008 as the result of the April 30, 2008 Amendment of
the October Debentures which provided for a six month deferral of principal
payments. The loss consists of a combination of the $5,858,344
increase in the fair market value of warrants issued in connection with the
October Debentures as a result of the increase in the number of shares to be
purchased under each of the October Warrants and to the decrease in the Exercise
Price of October Warrants from $0.90, $0.92 and $1.60 to $0.60 each,
the elimination of the April 30, 2008 unamortized balance of deferred financing
costs of $312,197 and the $732,400 reduction in the unamortized discount balance
related to the October Debentures to reflect the present value of the debentures
as of April 30, 2008 (see Note 8 of the accompanying consolidated financial
statements).
On August
29, 2008, the Company entered into an “Amendment to Debentures, Agreement and
Waiver” (the “August Amendment”) with BridgePointe Master Fund, Ltd. and the
Enable Funds (the “2007 Debenture Holders”), to amend the October 2007
Convertible Debenture previously amended on April 30, 2008. The August Amendment
waives quarterly interest payments that would otherwise been due on October 1,
2008 and January 1, 2009 and defers the monthly redemption dates from July 31,
2008 through November 30, 2008 to commence upon December 31, 2008,
and terminating upon full redemption of the October Debenture. In
consideration for entering into the August Amendment, the outstanding principal
amount of the October Debentures was increased to an amount equal to
115% of the sum of (i) the outstanding principal amount of as of August 29,
2008, the date of the August Amendment, plus (ii) an amount equal to the
additional amount of interest that would have accrued on the September 2007
Debenture from July 1, 2008 through December 31, 2008. There were no changes to
the warrants related to the October Debentures as a result of the August
Amendment. Based on the terms of the August Amendment, the principal
balances of the October Debentures increased by $866,202 to
$5,285,599. The difference between the fair value of the amended
October Debentures and the carrying value of the original October Debentures at
the date of debt extinguishment amounting to $91,727 was recorded as a gain on
debt extinguishment for the six months ended September 30, 2008.
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42
A debt
discount of $3,082,511 was recorded in connection with the August Amendment to
the October Debentures which includes $117,851 related to the interest that
would have accrued from September to December 2008. This portion of
the debt discount is being amortized through December 2008, while the remaining
$2,964,660 of the debt discount is being amortized through the maturity dates of
the October Debentures. As of September 30, 2008 and March 31, 2008,
the unamortized balance of the debt discount was $2,897,013 and $3,522,357,
respectively. During the six months ended September 30, 2008, the
Company recorded additional interest expense of $791,948 related to the
amortization of the debt discount associated with the amended October
Debentures.
As of
September 30, 2008 and March 31, 2008, the principal balance of the October
Debentures totaled $5,285,599 and $4,419,397, respectively, of which the current
portion of $2,973,149 and $1,936,884 is included in the Company’s current
liabilities in the accompanying consolidated balance sheets at September 30,
2008 and March 31, 2008, respectively. During the six months ended September 30,
2008 the Company recorded interest expense of $147,313 related to the October
Debentures (see Note 8 in the accompanying consolidated financial
statements).
On May
30, 2008, the Company issued to an accredited investor an Original Issue
Discount 8% Senior Secured Convertible Debenture (the “May 2008 Debenture”)
having a principal face amount of $1,250,000 and generating gross proceeds of
$1,062,500. After accounting for commissions, legal and other fees, the
net proceeds to the Company totaled $870,625.
In
connection with the financing transaction, the Company issued to the investor
five-year warrants to purchase 1,488,095 shares of the Company’s common stock at
$0.92 per share and five-year warrants to purchase 1,488,095 shares of common
stock at $1.35 per share (collectively, the “May Warrants”).
Under
EITF Issue No. 00-27, the value of the May Warrants issued to the investors is
calculated relative to the total amount of the debt offering. The relative fair
value of the May Warrants issued to the investors was determined to be $815,471,
or 65.2% of the total offering. The relative fair value of the May Warrants,
along with the effective beneficial conversion feature of the debt ($434,529)
and the face value discount given to the investors ($187,500), totaled in excess
of the face amount of the May Debenture. As such, the Company recorded a debt
discount equal to the face value of the May Debenture of $1,250,000. The debt
discount is being amortized by the Company through the maturity date of the May
Debenture. As of September 30, 2008, the unamortized balance of the debt
discount was $1,083,332. During the six months ended September 30, 2008, the
Company recorded additional interest expense of $166,668 related to the
amortization of the debt discount (see Note 8 in the accompanying
consolidated financial statements).
Current
portion of related party notes payable was $150,000 at September 30, 2008 and
March 31, 2008 in accordance with the terms of the promissory notes. On October
31, 2008, the Company paid the July 1, 2008 note payments, due on these related
party notes. Management expects to continue to pay all payments due prior to the
expiration of the 120-day grace periods.
The March
31, 2008 balance of $12,000 on the note payable to Falk Shaff and Ziebell, was
paid in full during the six months ended September 30, 2008.
Current
portion of notes payable to officer remained the same balance of $72,000 at
September 30, 2008 and March 31, 2008, reflecting the maximum monthly
payment due of $6,000 per month.
Long-term
related party notes payable decreased $23,262 to $1,558,822 at September 30,
2008 from $1,582,084 at March 31, 2008 due to aggregate payments made of $60,000
against the principal note balances which were offset by additional interest
accrued of $36,738 for the six month period ended September 30,
2008.
Notes
payable to officer decreased $30,343 from $129,115 as of March 31, 2008 to
$98,772 as of September 30, 2008 related to principal payments of $36,000 which
were offset by additional interest accrued of $5,675 for the six months ended
September 30, 2008.
Liquidity
and Capital Resources
As of
September 30, 2008, the Company’s current assets of $1,979,464 exceeded its
current liabilities of $3,401,748 by $1,422,284. $2,588,587 of current
liabilities as of September 30, 2008 represents current portions of convertible
debentures.
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43
Total
cash including restricted cash, decreased $1,007,459 to $1,427,242 at September
30, 2008 from $2,434,701 at March 31, 2008 as a result of cash used in operating
activities of $1,584,022 and purchases of fixed assets and trademark costs of
$53,676 which were partially offset by $625,713 cash provided by financing
activities primarily due to proceeds from borrowings from the May 2008 Debenture
less principal payments on notes payable and line of credit.
Total
assets decreased $1,022,800 to $2,438,089 as of September 30, 2008 compared to
$3,460,889 as of March 31, 2008 mainly as a result of cash used in operating
activities during the six months ended September 30, 2008 which were partially
offset by the proceeds from borrowings under the May 2008 Debenture, the
increase in inventories, and the increase in deferred financing fees related to
the May 2008 Debenture.
The
Company’s total outstanding indebtedness increased $1,598,272 to $5,059,342 at
September 30, 2008 from $3,461,070 at March 31, 2008 primarily from the issuance
of the May 2008 Debentures, the increase to the October 2007 Debentures from the
August Amendment which were partially offset by payments against notes payable,
line of credit and accrued salaries.
Item
4T. Controls and Procedures
As of
September 30, 2008, an evaluation was carried out under the supervision and with
the participation of the Company’s management, including our Chief Executive
Officer and our Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934). Based upon that
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the design and operation of these disclosure controls and
procedures were effective. No significant changes were made in our internal
controls or in other factors that could significantly affect these controls
subsequent to September 30, 2008.
(a)
Evaluation of Disclosure Controls and Procedures. The Company carried out an
evaluation under the supervision and with the participation of the Company’s
management, including the Company’s Chief Executive Officer (“CEO”) and our
Chief Financial Officer (“CFO”), of the effectiveness of the Company’s
disclosure controls and procedures. Based upon that evaluation, the CEO and CFO
concluded that as of September 30, 2008, our disclosure controls and procedures
were effective in timely alerting them to the material information relating to
the Company (or the Company’s consolidated subsidiaries) required to be included
in the Company’s periodic filings with the SEC, subject to the various
limitation on effectiveness set forth below under the heading , “LIMITATIONS ON
THE EFFECTIVENESS OF INTERNAL CONTROLS,” such that the information relating to
the Company, required to be disclosed in SEC reports (i) is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms, and (ii) is accumulated and communicated to the Company’s management,
including our CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure.
(b)
Changes in internal control over financial reporting. There has been no change
in the Company’s internal control over financial reporting that occurred during
the fiscal quarter ended September 30, 2008 that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
LIMITATIONS
ON THE EFFECTIVENESS OF INTERNAL CONTROLS
The
Company’s management, including the CEO and CFO, does not expect that our
disclosure controls and procedures on our internal control over financial
reporting will necessarily prevent all fraud and material error. An internal
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of the control system must reflect the fact that
there are resource constraints, and the benefits of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the internal control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, control may become inadequate because of changes in conditions,
and/or the degree of compliance with the policies or procedures may
deteriorate.
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44
PART II - OTHER INFORMATION
Item
1. Legal Proceedings
The
Company becomes 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. In the opinion of
management, there are no legal matters involving the Company that would have a
material adverse effect upon the Company’s condition or results of
operations.
Item
2. Unregistered Sales of Equity Securities
During
the six months ended September 30, 2008, the Company issued a total of 139,722
shares of restricted common stock in lieu of fees paid for services performed by
various consultants. Based on the underlying stock trading values as
of the agreement dates, these shares were issued at an average value of $0.72
per share for a total recorded cost of $105,669 which is included in selling,
general and administrative expenses for the six months ended September 30,
2008.
During
the six months ended September 30, 2008, the Company issued 82,693 shares of
common stock resulting from exercises of stock options and warrants at an
average price of $0.04 per share for proceeds of $3,308 and issued 150,022
shares of common stock from cashless exercises of a total of 157,000
warrants.
During
the six months ended September 30, 2008, the Company issued a total of 88,600
warrants to various board members, advisory board members, and employees to
purchase shares of the Company’s common stock at an average exercise price of
$0.92 per share. The exercise prices of these warrants are equal to
the fair values of the Company’s shares as of the dates of each
grant. The Company has determined the aggregate fair value of the
issued warrants, based on the Black-Scholes pricing model, to be approximately
$337,358 as of the dates of each grant. The fair market value of the
warrants has been recorded as consulting and compensation expense and is
included in selling, general and administrative expenses for the six months
ended September 30, 2008.
In
connection with the May Debenture financing transaction, the Company issued to
the investor five-year warrants to purchase 1,488,095 shares of the Company’s
common stock at $0.92 per share and five-year warrants to purchase 1,488,095
shares of common stock at $1.35 per share (see Note 8 of the accompanying
consolidated financial statements). Also in connection with the May
2008 debenture financing transaction the Company issued National Securities
Corporation five year warrants to purchase 148,810 shares of the Company’s
common stock at $0.84 per share (see Note 8 of the accompanying consolidated
financial statements).
On
April 30, 2008, the Convertible Debenture Agreement was amended to reflect
changes to the monthly redemption of principal and changes to the October
Warrants issued with the original October Debentures. Under the terms of
the April 30, 2008 Amendment (the "Amendment"), the monthly principal
redemptions were suspended until August 1, 2008 and the remaining principal due
on the October Debetures will be paid thereafter on the first date of each month
in equal installments through March 27, 2010, the expiration date.
Further, the Amendment changes the exercise price of the October Warrants issued
under the terms of the Securities Purchase Agreement and related Agreements from
$0.90, $0.92 and $1.60 to $0.60 each. The number of shares to be purchased
under each of the October Warrants was also adjusted under the terms of the
Amendment so that the original dollar amounts to be raised by the Company
through the exercise of each of the October Warrants will remain the same
resulting in an increase of 6,024,743 warrants. The company has determined
the aggregate fair value of the total issued warrants, based on the
Black-Scholes pricing model, to be approximately $5,858,344 and has included
this amount in the loss on extinguishment of debt for the six months ended
September 30, 2008 (see Note 8 in the accompanying consolidated financial
statments).
The
issuances of the securities of the Company in the above transactions were deemed
to be exempt from registration under the Securities Act by virtue of Section
4(2) thereof or Regulation D promulgated thereunder, as a transaction by an
issuer not involving a public offering. With respect to each transaction listed
above, no general solicitation was made by either the Company or any person
acting on the Company’s behalf; the securities sold are subject to transfer
restrictions; and the certificates for the shares contained an appropriate
legend stating such securities have not been registered under the Securities Act
and may not be
offered
or sold absent registration or pursuant to an exemption therefrom.
Page
45
Item
3. Defaults Upon Senior Securities
None
Item
4. Submission of Matters to a Vote of Security Holders
None
Item
5. Other Information
None
Page
46
Item
6. Exhibits
Exhibit
Index
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
|
|
32.1
|
Certification
Pursuant to 18 U.S.C. §1350 of Chief Executive
Officer
|
|
32.2
|
Certification
Pursuant to 18 U.S.C. §1350 of Chief Financial
Officer
|
Page
47
SIGNATURES
In
accordance with the requirements of the Exchange Act, the Registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
CryoPort,
Inc.
|
||
|
Dated:
November 14, 2008
|
By:
|
/s/ Peter
Berry
|
|
Peter
Berry, CEO, President
|
||
|
Dated:
November 14, 2008
|
By:
|
/s/ Dee S.
Kelly
|
|
Dee
S. Kelly, Vice President, Finance
(Principal
Financial and Accounting Officer)
|
||
Page
48