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By Brian Marckx, CFA

NASDAQ:BLFS

Q4 / FY 2014 Results: Solid Year With Continued Strength in Core Products, New Revenue Opportunities… BioLife Solutions (BLFS) announced results for Q4 and the full-year ending December 31, 2014. Q4 and full-year revenue, as expected following the company’s revenue preannouncement in January, came in at $1.7 million and $6.2 million. Relative to Q4, gross margin surprised big on the upside, partially benefitting from product mix but most of which looks to be a result of (one-time) engineering/validation work for preparations related to the manufacturing contract with Somahlution for DuraDraft. Meanwhile, OpEx jumped fairly significantly from Q3 (as well as yoy) and was meaningfully higher than our estimate – the difference compared to our numbers appears to be related to more than anticipated sales/mktg spend as well as additional hires and consulting expense in R&D – some of which has to do with development of the biologistex-related software platform. But this unanticipated level of increase in OpEx was completely offset by the wider than expected gross margin, resulting in Q4 net income and EPS coming in just about exactly where we had predicted. Operationally, as we have discussed in recent updates, BioLife has made meaningful progress with stocking their chest with additional revenue opportunities while at the same time continuing to grow their core biopreservation media products business (core products revenue grew 25% in 2014 and management is guiding for 20% - 30% growth in 2015). The most significant bolt-on revenue catalysts were announced during 2014 – those being a contract manufacturing agreement with Somahlution and the formation of biologistex, a joint-venture with SAVSU. The most recent addition to their portfolio of revenue opportunities comes with the manufacture of low molecular weight Dextran solutions. Dextran is used off-label to thaw cryopreserved cells – mostly used for cord blood – but shortages of Dextran has been an ongoing issue for years (with periodic shortages more severe at times). BLFS will use some of its manufacturing capacity to produce low molecular weight Dextran solutions – and has indicated they already have potential customers lined up. And while we do not expect this to be an overly significant revenue contributor (particularly as noted on the Q4 call that BLFS will not be competitive on pricing compared to much larger higher-volume manufacturers), it has the potential to add incrementally and help absorb manufacturing capacity as the company continues to look for additional contract manufacturing opportunities. But while we think these new opportunities (particularly the JV) could add meaningfully to revenue and profitability of BLFS, recent delays to getting the JV fully operational and in initiating manufacture of DuraGraft prompted some meaningful revisions to our model. We discuss this in further detail below. Financials Q4 revenue was $1.67M, down 27% yoy but up 34% sequentially. All of the yoy revenue decrease was a result of the loss of the major contract manufacturing customer (Organ Recovery Systems). BLFS recorded $210k of contract manufacturing-related revenue in Q4 2014 (this was engineering / validation work which needed to be completed prior to initiating manufacture of DuraGraft), down from $1.1 million in Q4 2013. For the full year, revenue was $6.19M, down 31% from $8.95M in 2013 but, again, all of the contraction was related to contract manufacturing. Contract manufacturing revenue fell 71% from $4.42M in 2013 to just $1.28M in 2014. Meanwhile, product sales growth remains very robust – coming in at $1.46M in Q4, a new all-time record and representing a 21% yoy and 17% sequential increase through Q4. For the full-year, product sales increased 25%. We reiterate that while there is potential for short-term volatility in product sales, we continue to expect revenue from the company's biopreservation media to grow over the long term as BLFS successfully expands their customer base. As noted, management is guiding for core products revenue to increase another 20% - 30% in 2015. Q4 OpEx was $2.0MM, up considerably from $1.2M in Q4 2013 and $1.46M in Q3 2014 and about 16% higher than our estimate. While, as indicated, we had expected a meaningful increase in OpEx – mostly as a result of further build-out of the sales/mktg infrastructure in support of the new business opportunities and fees/expenses related to the biologistex agreement – we underestimated S&M spend by $164k (32%). But also contributing to our miss in OpEx was R&D expense more than doubling from Q3 – management noted some of this is not expected to recur and appears to be related to supporting development of the biologistex business. Q4 net loss and EPS were $996k and ($0.08), in-line with our $957 loss and ($0.08) estimates. For the full-year, net loss and EPS were $3.2M and ($0.31), compared to $1.1M loss and ($0.22) in 2013. The increased net loss in 2014 as compared to 2013 can be attributed to the 31% decrease in revenue (again – all of which relates to lost contract manufacturing revenue), higher OpEx for infrastructure build-out and fees related mostly to biologistex, which was partially offset by a 700 basis point widening (42% in 2013 to 49% in 2014) of gross margin. The relatively beefy GM in 2014 was aided by the reduction in (lower margin) contract manufacturing revenue as well as the aforementioned one-time engineering/validation revenue captured in Q4. So, while revenue and net loss deteriorated from 2013 to 2014, the details illustrate that fundamentals of the business remain solid and BLFS is restocking for their next anticipated wave of growth. We reiterate that core product sales growth has been (23% in 2012, 30% in 2013, 25% in 2014) and is expected to continue to be robust (20% - 30% in 2015). The additional OpEx spend relates to new business opportunity investments, namely biologistex – which are expected to make a meaningful contribution over the long-term. On the contract manufacturing side, which has been a spot of softness since the loss of the Organ Recovery Systems contract in Q2 2014, revenue should return to meaningful levels – although this has been delayed from expectations since when the Somahlution agreement was penned. Cash Q4 and full-year cash flow used in operating activities was $697k and $3.2M. Excluding changes in working capital, cash used was $749k in Q4 and $2.5M for the year. BLFS used another $590k in 2014 for the purchase of PP&E. Cash balance (including liquid investments), which was recently bolstered by the $13.6M (net) equity issuance in March, stood at $9.9M at year-end. Management expects cash use to increase by as much as 30% in 2015. We also note that, per the biologistex JV agreement, BLFS will contribute $2.4M to the JV (which is in addition to the $1 million that is being paid monthly from Q3 2014 – Q3 2015). Guidance BLFS provided initial financial guidance for 2015 which includes core product revenue growth of 20% - 30%, gross margin of 50% - 60% and cash use and net loss increasing by as much as 30% - all compared to full-year 2014. See below for free access to our updated report on BLFS. READ THE LATEST FULL RESEARCH REPORT HERE SUBSCRIBE TO ZACKS SMALL CAP RESEARCH to receive our articles and reports emailed directly to you each morning. Please visit our website for additional information on Zacks SCR and to view our disclaimer.