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Via Edgar and Overnight Mail
December 11, 2009
Kevin Kuhar
Staff Accountant
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549
Re:
BioLife Solutions, Inc.
Form 10-K for the Fiscal-Year ended December 31, 2008
Filed March 31, 2009
Form 10-Q for the Fiscal-Quarter ended September 30, 2009
File No. 000-18170
Dear Mr. Kuhar,
BioLife Solutions, Inc. (the “Company”) is in receipt of the letter from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) dated December 4, 2009 (the “Comment Letter”) to Michael Rice, the Chief Executive Officer and Chief Financial Officer of the Company, with respect to the Company’s Form 10-K for the Fiscal Year ended December 31, 2008, and its Form 10-Q for the Quarterly Period Ended September 30, 2009 filed. We hereby furnish our response to the Comment Letter. The text of the Staff’s comments is set forth in italics below, followed by the response of the Company.
Form 10-Q for the Quarterly Period Ended September 30, 2009
Financial Statements, page 1
Note 2. Financial Condition and Going Concern, page 4
Staff Comment
1.
We note from your response letters dated October 22, 2009 and November 20, 2009 that as of January 1, 2009, the company should have bifurcated the separate embedded feature of the notes and accounted for it as a derivative liability, with changes in fair value subsequently measured through earnings each period. Please respond to the following:
·
Please tell us the accounts and amounts of the adjustments you would need to make to the financial statements for each of the March 31, June 30 and September 30, 2009 quarters to reflect the adoption of EITF 07-05 (section 815-40-15 of FASB ASC).
RESPONSE:Please see the attachment labeled as Exhibit 1, which presents the accounting entry detail for the financial statements for the periods ended March 31, June 30, and September 30, 2009.
Page 2
December 11, 2009
·
Please tell us the method and significant assumptions used to value the derivative liability as of adoption of EITF 07-05 and as of each reporting date (March 31, June 30, and September 30, 2009).
RESPONSE:Please see the attachment labeled as Exhibit 2, which summarizes the methodology and significant assumptions that were used to value the derivatives as of the adoption of EITF 07-05 and as of each reporting date (March 31, June 30, and September 30, 2009).
·
In future filings, including your December 31, 2009 Form 10-K, please revise to reflect the adoption of EITF 07-05 and the resulting derivative liability. Clearly disclose to investors your reasons for concluding that prior Form 10-Q’s filed in fiscal 2009 should not be amended to reflect your accounting for the derivative liability.
RESPONSE:The Staff’s comment is noted, and the company’s future filings, including its December 31, 2009 Form-10-K will reflect the adoption of EITF 07-05 and the resulting derivative liability, providing specific disclosure as to the company’s reasons for concluding that Form 10-Q’s filed in 2009 did not need to be amended.
·
Further, in future filings please include appropriate disclosure about the nature and accounting for the derivative liability, as well as the method and significant assumptions used to value the derivative.
RESPONSE:The Staff’s comment is noted and in future filings the company will make the appropriate disclosure about the nature and accounting for the derivative liability, as well as the method and significant assumptions used to value the derivative.
We acknowledge that the Company is responsible for the adequacy and accuracy of the disclosure in our Quarterly Reports on Form 10-Q. We further acknowledge that Staff comments or changes to disclosure in response to Staff comments in the Form 10-Q do not foreclose the Commission from taking any action with respect to the Form 10-Q, and that the Company may not assert Staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
Should you have any questions regarding our response to the Staff’s comments or wish to discuss this matter further, please do not hesitate to contact me at +1.425.402.1400.
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| Sincerely, | |
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| /s/ Michael Rice | |
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| Michael Rice Chief Executive Officer and Chief Financial Officer | |
Page 3
December 11, 2009
Exhibit 1 – Accounting Entry Detail
| Debit | Credit |
Quarter Ended March 31, 2009*** |
|
|
Convertible Note Discount | 49,429 |
|
Conversion Feature Liability |
| 49,429 |
Conversion Feature Liability | 41,079 |
|
Mark to Market Adjustment (Retained Earnings) |
| 41,079 |
Retained Earnings – Amort of Discount Expense | 23,279 |
|
Convertible Note Discount |
| 23,279 |
To record cumulative effect of adopting 07-05 as of January 1st, 2009 |
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|
Quarter Ended March 31, 2009 |
|
|
Mark to Market (Income Statement) | 3,100 |
|
Conversion Feature Liability |
| 3,100 |
To record quarterly adjustment to fair value of conversion feature. |
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Interest Expense – Discount Amortization | 6,206 |
|
Convertible Note Discount |
| 6,206 |
To record accretion of convertible note debt discount. |
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|
|
Quarter Ended June 30, 2009 |
|
|
Mark to Market (Income Statement) | 11,175 |
|
Conversion Feature Liability |
| 11,175 |
To record quarterly adjustment to fair value of conversion feature. |
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Interest Expense – Discount Amortization | 6,346 |
|
Convertible Note Discount |
| 6,346 |
To record accretion of convertible note debt discount. |
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Quarter Ended September 30, 2009 |
|
|
Conversion Feature Liability | 20,005 |
|
Mark to Market (Income Statement) |
| 20,005 |
To record quarterly adjustment to fair value of conversion feature. |
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Interest Expense – Discount Amortization | 6,415 |
|
Convertible Note Discount |
| 6,415 |
To record accretion of convertible note debt discount. |
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———————
*** Includes the cumulative adoption entries, which would have been made on January 1, 2009.
Page 4
December 11, 2009
Exhibit 2 – Derivative Valuation Method and Key Assumptions
Methodology:
In order to value the derivative conversion feature, we utilized a convertible bond model based on research by K. Tsiveriotis and C. Fernandes*, which bifurcates the value of the instrument into two components: an equity component and a debt component. The derivative conversion feature value is equal to the probability-weighted value of the equity component. The analysis valued the conversion feature on each reporting date: January 1, March 31, June 30, and September 30, 2009. At each reporting date, the amount of debt and accrued interest increased due to quarterly draws (see below).
Key Assumptions:
The key assumptions utilized to value the credit derivative include the required return, risk-free rate, stock price, volatility, and probability of equity financing:
1.Required Return: The required return reflects the credit worthiness of the issuer. The analysis relied on guidance from S&P's Corporate Ratings Criteria, which indicated that the note would likely be rated below investment grade. The yields observed for the FINRA High Yield Index (source: Bloomberg) fell in the 10-17% range. The term loan is secured against all the assets of the firm. A required return of 15% was utilized for the analysis.
2.Risk-free Rate: A risk-free rate was selected based on corresponding Treasury rates that match the remaining term of the instrument at each reporting date.
3.Stock Price: The analysis utilized the last trade price of the common stock of BioLife Solutions (OTCBB: BLFS) on each reporting date. These figures were obtained from Bloomberg. The value of the conversion feature is positively correlated with stock price movements.
4.Volatility: The common stock of BioLife Solutions is thinly traded. Due to the illiquidity of the stock, its historical volatility varied month-to-month and was not considered indicative of market participant expectations of future volatility. Volatility utilized was based on an analysis of comparable companies with more actively traded stock.
5.Probability of Equity Financing: The conversion feature can only be exercised upon receipt of equity financing in excess of two million dollars. Based on discussions with Management, the term loan/credit facility was established specifically to provide for the cash needs of the company until it reached cash flow positive, thereby eliminating the need for the company to spend management resources on raising additional capital, and allow those resources to be spent on growing the business. In July 2009, the company reduced operating expenses in order to increase operating cash flow, in an attempt to continue to have the unused balance of the facility provide the capital required until the company reached cash flow positive. Since the credit facility has been put in place, the company has not expended any effort to gain any outside financing and, does not consider an equity financing as remotely likely or even possible prior to the due date. Based on the company's lack of corporate activity in the equity markets and the observations above, management estimated the probabilities of equity financing as presented below.
| January 1, 2009 | March 31, 2009 | June 30, 2009 | Sept. 30, 2009 |
Principal | $5,063,127 | $6,463,127 | $6,963,127 | $7,588,127 |
Accrued Interest | 278,960 | 385,813 | 504,081 | 632,372 |
Total | $5,342,087 | $6,848,940 | $7,467,208 | $8,220,499 |
Required Return | 15% | 15% | 15% | 15% |
Risk-free Rate | 0.37% | 0.57% | 0.35% | 0.14% |
Term of Risk-Free Rate | 1 Year | 1 Year | 6 month | 3 month |
Stock Price | $0.03 | $0.05 | $0.17 | $0.13 |
Volatility | 100% | 100% | 100% | 100% |
Probability | 5% | 5% | 2.5% | 1% |
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* Source: Tsiveriotis, K., Fernandes, C., 1998. Valuing convertible bonds with credit risk. The Journal of Fixed Income 8 (3), 95–102.