CYRX

CryoPort, Inc. 10-Q Summary: Quarter Ended June 30, 2009

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2009. CryoPort, Inc. is a smaller reporting company focused on providing frozen shipping solutions for the biotechnology and pharmaceutical industries, specifically the CryoPort Express™ System. The company is in a development and commercialization phase, having discontinued its reusable shipper line to focus on the new CryoPort Express™ Shippers. Management has raised substantial doubt about the company's ability to continue as a going concern due to recurring losses and negative cash flows, projecting that current cash reserves will only sustain operations into the third quarter of fiscal 2010 without additional funding.

Key Financial Metrics

Note: The reported Net Income for Q2 2009 is primarily driven by a non-cash gain of $3,134,298 related to the change in fair value of derivative liabilities. Operating cash flow remains negative at $(505,960).

Material Changes vs. Prior Period

• Accounting Change (EITF 07-5): Effective April 1, 2009, the company adopted EITF 07-5, reclassifying warrants and embedded conversion features from equity to derivative liabilities. This resulted in a cumulative reduction to equity of $13.9 million and the recognition of a $3.1 million non-cash gain in the current quarter due to a decrease in the fair value of these liabilities.
• Revenue and Gross Loss: Net sales increased marginally by 2% ($279), but the gross loss widened by 29% to $135,474 due to fixed overhead costs exceeding minimal sales volume.
• Operating Expenses: Selling, general, and administrative (SG&A) expenses increased 30% to $728,309, driven by higher legal and accounting fees related to debt restructuring and strategic partnerships. R&D expenses decreased 21% to $87,725.
• Debt and Liquidity: The company raised $926,500 in net proceeds from convertible debentures during the quarter. However, total liabilities surged to $18.5 million, largely due to the new derivative liability classification. Cash balances declined from $2.2 million in the prior year to $557,000.

Guidance, Outlook, and Risks

• Going Concern: Management explicitly states that the company must obtain additional capital to continue operations beyond the third quarter of fiscal 2010. There is no assurance that funding will be available on acceptable terms.
• Commercialization Strategy: The company is focusing on the CryoPort Express™ System, seeking strategic partnerships with freight carriers and manufacturing companies to facilitate sales to clinical research organizations and pharmaceutical manufacturers.
• Cost Containment: Management is minimizing cash usage by utilizing part-time consultants, deferring payments, and compensating employees and directors with stock rather than cash.
• Risks: Key risks include the inability to secure funding, failure to penetrate the market for the new shipping system, and the volatility of earnings due to the fair value adjustments of derivative liabilities.

Investor Verification Checklist

• Cash Runway: Verify the sufficiency of the ~$1.1 million cash balance (as of August 10, 2009) to fund operations through the third quarter of fiscal 2010.
• Debt Covenants: Review the terms of the convertible debentures, specifically the cash burn covenants and redemption dates, noting recent waivers obtained in July 2009.
• Derivative Liability Volatility: Assess the impact of future stock price fluctuations on the $13.7 million derivative liability, which will cause significant non-cash swings in reported earnings.
• Related Party Transactions: Examine the status of related party notes payable, including missed payments that are currently within a 120-day grace period.
• Management Turnover: Note the recent resignations of the CFO (Dee Kelly) and former CEO (Peter Berry) and the appointment of interim leadership.