PRESSURE BIOSCIENCES INC - Quarter Report: 2010 June (Form 10-Q)
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended
June 30,
2010 or
o
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 0-21615
PRESSURE
BIOSCIENCES, INC.
(Exact
Name of Registrant as Specified in its Charter)
Massachusetts
|
04-2652826
|
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer
|
|
Incorporation
or Organization)
|
Identification
No.)
|
14
Norfolk Avenue
|
||
02375
|
||
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
(508)
230-1828
(Registrant’s
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
x Yes o No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
¨Yes ¨ No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o Accelerated
filer o
Non-accelerated
filer o Smaller
reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2 of the Exchange Act).
o Yes x No
The
number of shares outstanding of the Issuer’s common stock as of June 30, 2010
was 2,621,824.
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Page
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|||
PART
I - FINANCIAL INFORMATION
|
||||
Item
1. Financial Statements (Unaudited)
|
||||
Consolidated
Balance Sheets as of June 30, 2010 and December 31, 2009
|
3 | |||
Consolidated
Statements of Operations for the Three Months and Six Months Ended June
30, 2010 and 2009
|
4 | |||
Consolidated
Statements of Cash Flows for the Six Months Ended June 30, 2010 and
2009
|
5 | |||
Notes
to Consolidated Financial Statements
|
6 | |||
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
|
19 | |||
Item
4T. Controls and Procedures
|
28 | |||
PART
II - OTHER INFORMATION
|
||||
Item
6. Exhibits
|
29 |
2
PRESSURE
BIOSCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
June
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 1,677,354 | $ | 1,609,778 | ||||
Restricted
cash
|
20,012 | 20,012 | ||||||
Short-term
investments
|
248,000 | - | ||||||
Accounts
receivable, net of allowances of $26,820 at June 30, 2010
|
||||||||
and
$8,400 at December 31, 2009
|
274,909 | 203,211 | ||||||
Inventories
|
830,233 | 638,350 | ||||||
Deposits
|
189,250 | 182,010 | ||||||
Prepaid
income taxes
|
1,442 | 3,176 | ||||||
Prepaid
expenses and other current assets
|
71,271 | 86,563 | ||||||
Total
current assets
|
3,312,471 | 2,743,100 | ||||||
PROPERTY
AND EQUIPMENT, NET
|
222,425 | 249,465 | ||||||
OTHER
ASSETS
|
||||||||
Intangible
assets, net
|
206,710 | 231,026 | ||||||
TOTAL
ASSETS
|
$ | 3,741,606 | $ | 3,223,591 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$ | 355,565 | $ | 148,087 | ||||
Accrued
employee compensation
|
131,433 | 105,824 | ||||||
Accrued
professional fees and other
|
176,331 | 271,926 | ||||||
Deferred
revenue
|
19,649 | 8,058 | ||||||
Total
current liabilities
|
682,978 | 533,895 | ||||||
LONG
TERM LIABILITIES
|
||||||||
Deferred
revenue
|
11,510 | 1,609 | ||||||
TOTAL
LIABILITIES
|
694,488 | 535,504 | ||||||
COMMITMENTS
AND CONTINGENCIES (Note 4)
|
||||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Series
A convertible preferred stock, $.01 par value; 313,960 designated
shares;
|
||||||||
266,492
shares issued and outstanding on June 30, 2010 and 152,213 shares
on
|
||||||||
December
31, 2009 (Liquidation value of $3,064,658)
|
2,665 | 1,523 | ||||||
Series
B convertible preferred stock, $.01 par value; 279,256 designated
shares;
|
||||||||
88,711
shares issued and outstanding on June 30, 2010 and 62,039 shares
on
|
||||||||
December
31, 2009 (Liquidation value of $1,667,767)
|
887 | 620 | ||||||
Common
stock, $.01 par value; 20,000,000 shares authorized; 2,621,824
shares
|
||||||||
issued
and outstanding on June 30, 2010 and 2,328,426 shares issued
and
|
||||||||
outstanding
on December 31, 2009
|
26,218 | 23,284 | ||||||
Warrants
to acquire preferred stock and common stock
|
1,132,675 | 1,352,165 | ||||||
Additional
paid-in capital
|
11,911,626 | 9,297,115 | ||||||
Accumulated
deficit
|
(10,026,953 | ) | (7,986,620 | ) | ||||
Total
stockholders' equity
|
3,047,118 | 2,688,087 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 3,741,606 | $ | 3,223,591 |
The
accompanying notes are an integral part of these consolidated financial
statements
3
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
For
the Three Months
Ended June 30, |
For
the Six Months
Ended June 30, |
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
REVENUE:
|
||||||||||||||||
PCT
Products, services, other
|
$ | 283,382 | $ | 159,202 | $ | 472,532 | $ | 381,344 | ||||||||
Grant
revenue
|
118,722 | 111,179 | 220,385 | 195,799 | ||||||||||||
Total
revenue
|
402,104 | 270,381 | 692,917 | 577,143 | ||||||||||||
COSTS
AND EXPENSES:
|
||||||||||||||||
Cost
of PCT products and services
|
126,972 | 90,820 | 214,075 | 231,063 | ||||||||||||
Research
and development
|
304,143 | 315,046 | 598,284 | 622,270 | ||||||||||||
Selling
and marketing
|
294,275 | 252,464 | 576,853 | 530,880 | ||||||||||||
General
and administrative
|
474,381 | 427,384 | 1,012,803 | 858,174 | ||||||||||||
Total
operating costs and expenses
|
1,199,771 | 1,085,714 | 2,402,015 | 2,242,387 | ||||||||||||
Operating
loss
|
(797,667 | ) | (815,333 | ) | (1,709,098 | ) | (1,665,244 | ) | ||||||||
Interest
income
|
1,016 | 1,284 | 1,122 | 3,687 | ||||||||||||
Loss
before income taxes
|
(796,651 | ) | (814,049 | ) | (1,707,976 | ) | (1,661,557 | ) | ||||||||
Income
tax refund
|
- | - | - | 623,262 | ||||||||||||
Net
loss
|
(796,651 | ) | (814,049 | ) | (1,707,976 | ) | (1,038,295 | ) | ||||||||
Accrued
and deemed dividends on convertible preferred stock
|
(127,839 | ) | (33,880 | ) | (384,363 | ) | (523,683 | ) | ||||||||
Net
loss applicable to common shareholders
|
$ | (924,490 | ) | $ | (847,929 | ) | $ | (2,092,339 | ) | $ | (1,561,978 | ) | ||||
Net
loss per share attributable to common stockholders - basic and
diluted
|
$ | (0.35 | ) | $ | (0.39 | ) | $ | (0.80 | ) | $ | (0.71 | ) | ||||
Weighted
average common stock shares outstanding used in the basic
|
||||||||||||||||
and
diluted net loss per share calculation
|
2,621,291 | 2,195,283 | 2,615,557 | 2,195,283 |
The accompanying notes are an integral part of these consolidated financial statements
4
PRESSURE
BIOSCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For
the Six Months
Ended June 30, |
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$ | (1,707,976 | ) | $ | (1,038,295 | ) | ||
Adjustments
to reconcile net loss to operating cash flows:
|
||||||||
Depreciation
and amortization
|
99,904 | 94,679 | ||||||
Stock-based
compensation expense
|
145,103 | 252,861 | ||||||
Bad
debt expense
|
18,420 | 55,600 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Restricted
cash
|
- | 30,000 | ||||||
Short-term
investments
|
(248,000 | ) | - | |||||
Accounts
receivable
|
(90,118 | ) | (2,823 | ) | ||||
Inventories
|
(191,883 | ) | (179,234 | ) | ||||
Deposits
|
(7,240 | ) | 368,364 | |||||
Income
tax receivable
|
- | (623,262 | ) | |||||
Accounts
payable
|
207,478 | (64,009 | ) | |||||
Accrued
employee compensation
|
25,609 | (8,281 | ) | |||||
Deferred
revenue and other accrued expenses
|
(39,341 | ) | 59,843 | |||||
Prepaid
expenses and other current assets
|
17,026 | 172,373 | ||||||
Net
cash used in operating activities
|
(1,771,018 | ) | (882,184 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Additions
to property and equipment
|
(48,548 | ) | (64,932 | ) | ||||
Net
cash used in investing activities
|
(48,548 | ) | (64,932 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Net
proceeds from stock warrant exercise
|
1,421,275 | - | ||||||
Net
proceeds from the issuance of preferred stock
|
465,867 | 1,567,923 | ||||||
Net
cash provided by financing activities
|
1,887,142 | 1,567,923 | ||||||
Change
in cash and cash equivalents
|
67,576 | 620,807 | ||||||
Cash
and cash equivalents, beginning of period
|
1,609,778 | 868,208 | ||||||
Cash
and cash equivalents, end of period
|
$ | 1,677,354 | $ | 1,489,015 | ||||
SUPPLEMENTAL
INFORMATION:
|
||||||||
Income
taxes paid
|
$ | 1,900 | $ | - | ||||
Issuance
of common stock dividend on preferred stock
|
194,011 | - | ||||||
Issuance
of preferred stock warrants for services
|
18,122 | - | ||||||
Issuance
of common stock for services
|
18,720 | - | ||||||
Beneficial
conversion feature on convertible preferred stock
|
154,389 | 489,803 |
The
accompanying notes are an integral part of these consolidated financial
statements
5
PRESSURE
BIOSCIENCES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF JUNE 30, 2010
1)
|
Business Overview and
Management Plans
|
We have
developed instruments which utilize our unique and proprietary pressure cycling
technology (“PCT”), which we sell, along with associated disposables to life
sciences companies, academic institutions and government
agencies. There are currently over 100 users of our enabling
platform. PCT represents the core of our products and has enabled our
customers to perform biological sample preparation and enzymatic digestion in
unique ways that were previously unavailable. The enabling capability
of our PCT products allows us to continue to increase the number of applications
for our platform beyond current uses, which include genomic and proteomic sample
preparation, pathogen inactivation, the control of chemical and enzymatic
reactions, immunodiagnostics, and protein purification. Additionally,
we are pursuing business opportunities to leverage our products and PCT into new
markets beyond our current focus of PCT-enhanced enzymatic digestion products
designed specifically for the mass spectrometry marketplace, as well as sample
preparation products for biomarker discovery, soil and plant biology, forensics,
histology, and counter-bioterror applications.
PCT uses
internally developed instrumentation that is capable of cycling pressure between
ambient and ultra-high levels at controlled temperatures to rapidly and
repeatedly control the interactions of bio-molecules. Our instrument, the
Barocycler®, and our internally developed consumables product line, which
includes PULSE (Pressure Used to Lyse Samples for Extraction) Tubes as well as
application specific kits (which include consumable products and reagents)
together make up the PCT Sample Preparation System.
We have
experienced negative cash flows from operations with respect to our pressure
cycling technology business since our inception. As of June 30, 2010,
we had working capital resources of approximately $2.6 million. Based
on our current projections, we believe our current cash resources are sufficient
to fund our normal operations through the first quarter of 2011.
We
believe we will need substantial additional capital to fund our operations in
periods beyond the first quarter of 2011. If we are able to obtain
additional capital or otherwise increase our revenues, we may increase spending
in specific research and development applications and engineering projects and
may hire additional sales personnel or invest in targeted marketing
programs. In the event that we are unable to obtain financing on
acceptable terms, or at all, we may be required to limit or cease our
operations, pursue a plan to sell our operating assets, or otherwise modify our
business strategy, which could materially harm our future business
prospects.
2)
|
Interim Financial
Reporting
|
The
accompanying unaudited consolidated financial statements of Pressure
BioSciences, Inc. have been prepared in accordance with accounting principles
generally accepted in the United States of America (“generally accepted
accounting principles” or “GAAP”) for interim financial
information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all material adjustments
(consisting of only normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the three
months and six months ended June 30, 2010 are not necessarily indicative of the
results that may be expected for the year ending December 31,
2010. For further information, refer to the audited consolidated
financial statements and footnotes thereto included in the Company’s Annual
Report on Form 10-K (the “Form 10-K”) for the fiscal year ended December 31,
2009 as filed with the Securities and Exchange Commission on March 31,
2010.
3)
|
Summary of Significant
Accounting Policies
|
Principles
of Consolidation
The
consolidated financial statements include the accounts of Pressure BioSciences,
Inc., and its wholly-owned subsidiary PBI BioSeq, Inc.
Use
of Estimates
To
prepare our consolidated financial statements in conformity with generally
accepted accounting principles, we are required to make significant 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 period. In addition, significant estimates are made in projecting
future cash flows to quantify impairment of assets, deferred tax assets and the
costs associated with fulfilling our warranty obligations for the instruments
that we sell, in our calculation of fair value of stock options awarded, and our
allocation of the proceeds from our equity financings between the preferred
stock and warrants sold. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results could differ from the
estimates and assumptions used.
6
Revenue
Recognition
Revenue
is recognized when realized or earned when all the following criteria have been
met: persuasive evidence of an arrangement exists; delivery has occurred and
risk of loss has passed to the customer; the seller’s price to the buyer is
fixed or determinable; and collectability is reasonably
assured.
Our
current instruments, the Barocycler NEP3229 and NEP2320, require a basic level
of instrumentation expertise to set-up for initial operation. To support a
favorable first experience for our customers, we send a highly trained technical
representative to the customer site to install every Barocycler that we sell,
lease, or rent through our domestic sales force. The installation process
includes uncrating and setting up the instrument, followed by introductory user
training. Product revenue related to current Barocycler instrumentation is
recognized upon the completion of the installation and introductory training
process of the instrumentation at the customer location, for domestic
installations. Product revenue related to sales of PCT
instrumentation to our foreign distributors is recognized upon shipment through
a common carrier. We provide for the expected costs of warranty upon the
recognition of revenue for the sales of our instrumentation. Our sales
arrangements do not provide our customers with a right of return. Product
revenue related to our consumable products such as PULSE Tubes, MicroTubes, and
application specific kits is recorded upon shipment through a common
carrier. Shipping costs are included in sales and marketing
expense. Any shipping costs billed to customers are recognized as
revenue.
We
account for our lease agreements under the operating method. We
record revenue over the life of the lease term and we record depreciation
expense on a straight-line basis over the thirty-six month estimated useful life
of the Barocycler instrument. The depreciation expense associated
with assets under lease agreements is included in the “Cost of PCT products and
services” line item in our consolidated statements of
operations. Many of our lease and rental agreements allow the lessee
to purchase the instrument at any point during the term of the agreement with
partial or full credit for payments previously made. We pay all
maintenance costs associated with the instrument during the term of the
leases.
Revenue
from government grants is recorded when expenses are incurred under the grant in
accordance with the terms of the grant award.
Our
transactions sometimes involve multiple elements (i.e., products and
services). If an arrangement includes undelivered elements that are
not essential to the functionality of the delivered elements, we defer the fair
value of the undelivered elements with the residual revenue allocated to the
delivered elements. Fair value is determined based upon the price charged when
the element is sold separately. If there is not sufficient evidence of the fair
value of the undelivered elements, no revenue is allocated to the delivered
elements and the total consideration received is deferred until delivery of
those elements for which objective and reliable evidence of the fair value is
not available. We provide certain customers with extended service contracts and,
to the extent vendor specific objective evidence, or VSOE, is established, these
service revenues are recognized ratably over the life of the contract, which is
generally one to four years.
Cash
and Cash Equivalents
Our
policy is to invest available cash in short-term, investment-grade,
interest-bearing obligations, including money market funds, and bank and
corporate debt instruments. Securities purchased with initial
maturities of three months or less are valued at cost plus accrued interest,
which approximates fair market value, and are classified as cash
equivalents. As of June 30, 2010, we held approximately $20,000 in a
restricted account as collateral for our corporate credit card and therefore
classified this balance as restricted cash on our consolidated balance
sheet. We purchased six-month certificates of deposit for $248,000 to
mature in December 2010. The balance is represented as short-term
investments on our consolidated balance sheet. These certificates are
valued at cost plus accrued interest.
Research
and Development
Research
and development costs, which are comprised of costs incurred in performing
research and development activities - including wages and associated employee
benefits, facilities, consumable products and overhead costs - are expensed as
incurred. Our research and development activities are performed at our facility
in Massachusetts in conjunction with our collaboration partner sites. In
support of our research and development activities, we utilize our Barocycler
instruments that are capitalized as fixed assets and depreciated over their
expected useful lives.
7
Inventories
Inventories
are valued at the lower of cost (average cost) or market (sales
price). The cost of Barocyclers consists of the cost charged by the
contract manufacturer. The cost of manufactured goods includes
material, freight-in, direct labor, and applicable overhead. As of
June 30, 2010, the recorded cost of all categories was less than the recent
sales price. The composition of inventory as of June 30, 2010 and
December 31, 2009 is as follows:
June
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Raw
materials
|
$ | 163,795 | $ | 92,453 | ||||
Finished
goods
|
666,438 | 545,897 | ||||||
Total
|
$ | 830,233 | $ | 638,350 |
Our
finished goods inventory as of June 30, 2010 included 65 Barocycler
instruments. Our finished goods inventory as of December 31, 2009
included 44 Barocycler instruments.
Property
and Equipment
Property
and equipment are stated at cost, less accumulated depreciation. For financial
reporting purposes, depreciation is recognized using the straight-line method,
allocating the cost of the assets over their estimated useful lives of three
years for certain laboratory equipment, from three to five years for management
information systems and office equipment, and three years for all PCT finished
units classified as fixed assets. Property and equipment includes
total book value of $140,768 relating to Barocycler instruments held under lease
or collaboration.
Intangible
Assets
We have
classified as intangible assets, costs associated with the fair value of
acquired intellectual property. Intangible assets including patents are
amortized on a straight-line basis over sixteen years. The Company’s
intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. When impairment is indicated, any excess of carrying
value over fair value is recorded as a loss. As of the date of this
report’s filing, no event has come to our attention that would cause us to
record an impairment of intangible assets.
Long-Lived
Assets and Deferred Costs
The
Company’s long-lived assets and other assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. Recoverability of an asset to be
held and used is measured by a comparison of the carrying amount of an asset to
the future undiscounted cash flows expected to be generated by the
asset. If such asset is considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the
asset exceeds its fair value. Through the date of this report’s
filing, the Company had not experienced impairment losses on its long-lived
assets.
Concentrations
Credit
Risk
Our
financial instruments that potentially subject us to concentrations of credit
risk consist primarily of cash, cash equivalents, and trade
receivables. We have cash investment policies which, among other
things, limit investments to investment-grade securities. We perform
ongoing credit evaluations of our customers, and the risk with respect to trade
receivables is further mitigated by the fact that many of our customers are
government institutions, large pharmaceutical and biotechnology companies, and
academic laboratories.
8
The
following table illustrates the level of concentration as a percentage of total
revenues during the three months and six months ended June 30, 2010 and
2009:
For
the Three Months
Ended June 30, |
||||||||
2010
|
2009
|
|||||||
Top
Five Customers
|
58 | % | 78 | % | ||||
Federal
Agencies
|
48 | % | 48 | % |
For
the Six Months
Ended June 30, |
||||||||
2010
|
2009
|
|||||||
Top
Five Customers
|
51 | % | 60 | % | ||||
Federal
Agencies
|
44 | % | 38 | % |
The
following table illustrates the level of concentration as a percentage of net
accounts receivable balance as of June 30, 2010 and December 31,
2009:
June
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Top
Five Customers
|
62 | % | 62 | % | ||||
Federal
Agencies
|
25 | % | 12 | % |
Product
Supply
Source
Scientific, LLC has been our sole contract manufacturer for all of our PCT
instrumentation. We have initiated several engineering initiatives to position
us for greater independence from any one supplier, and we are continuing to
develop a network of manufacturers and sub-contractors to reduce our reliance on
any single supplier for PCT components. Until we develop a network of
manufacturers and subcontractors, obtaining alternative sources of supply or
manufacturing services could involve significant delays and other costs and
challenges, and may not be available to us on reasonable terms, if at all. The
failure of a supplier or contract manufacturer to provide sufficient quantities,
acceptable quality and timely products at an acceptable price, or an
interruption of supplies from such a supplier could harm our business and
prospects.
Computation
of Loss per Share
Basic
loss per share is computed by dividing loss available to common shareholders by
the weighted average number of common shares outstanding. Diluted
loss per share is computed by dividing loss available to common shareholders by
the weighted average number of common shares outstanding plus additional common
shares that would have been outstanding if dilutive potential common shares had
been issued. For purposes of this calculation, convertible preferred
stock, common stock dividends, warrants to acquire preferred stock convertible
into common stock, and warrants and options to acquire common stock, are all
considered common stock equivalents in periods in which they have a dilutive
effect and are excluded from this calculation in periods in which these are
anti-dilutive. The loss per share for the six months ended June 30,
2009 reflects a deemed dividend of $489,803, which was not shown previously in
the loss per share calculation for the quarter ended June 30, 2009 filed on
August 10, 2009.
The
following table illustrates our computation of loss per share for the three
months and six months ended June 30, 2010 and 2009:
For
the Three Months
Ended June 30, |
For
the Six Months
Ended June 30, |
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Numerator:
|
||||||||||||||||
Net
loss
|
$ | (796,651 | ) | $ | (814,049 | ) | $ | (1,707,976 | ) | $ | (1,038,295 | ) | ||||
Accrued
preferred stock dividend
|
(20,672 | ) | (33,880 | ) | (70,801 | ) | (33,880 | ) | ||||||||
Beneficial
conversion feature for Series B Preferred Stock
|
- | - | (154,389 | ) | (489,803 | ) | ||||||||||
Series
A Preferred dividends paid in Common Stock
|
(107,167 | ) | - | (152,130 | ) | - | ||||||||||
Series
B Preferred dividends paid in Common Stock
|
- | - | (7,043 | ) | - | |||||||||||
Net
loss applicable to common shareholders
|
$ | (924,490 | ) | $ | (847,929 | ) | $ | (2,092,339 | ) | $ | (1,561,978 | ) | ||||
Denominator
for basic and diluted loss per share:
|
||||||||||||||||
Weighted
average common stock shares outstanding
|
2,621,291 | 2,195,283 | 2,615,557 | 2,195,283 | ||||||||||||
Loss
per common share - basic and diluted
|
$ | (0.35 | ) | $ | (0.39 | ) | $ | (0.80 | ) | $ | (0.71 | ) |
9
The
following table presents securities that could potentially dilute basic loss per
share in the future. For all periods presented, the potentially
dilutive securities were not included in the computation of diluted loss per
share because these securities would have been anti-dilutive. The
Series A Convertible Preferred Stock and Series B Convertible Preferred Stock
are presented below as if they were converted into common shares according to
the conversion terms in Note 5.
For
the Three Months
Ended June 30, |
For
the Six Months
Ended June 30, |
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Stock
options
|
1,019,500 | 215,586 | 1,019,500 | 105,478 | ||||||||||||
Common
stock warrants
|
1,619,800 | 1,569,800 | 1,619,800 | 1,569,800 | ||||||||||||
Preferred
stock warrants
|
940,550 | 1,569,800 | 940,550 | 1,569,800 | ||||||||||||
Convertible
preferred stock:
|
||||||||||||||||
Series
A Convertible Preferred
|
1,744,400 | 1,569,800 | 1,744,400 | 1,569,800 | ||||||||||||
Series
B Convertible Preferred
|
887,110 | - | 887,110 | - | ||||||||||||
6,211,360 | 4,924,986 | 6,211,360 | 4,814,878 |
Accounting
for Income Taxes
We
account for income taxes under the asset and liability method, which requires
recognition of deferred tax assets, subject to valuation allowances, and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Deferred income taxes
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting and income tax
purposes. A valuation allowance is established if it is more likely than
not that all or a portion of the net deferred tax assets will not be
realized. If substantial changes in the Company’s ownership should
occur, as defined in Section 382 of the Internal Revenue Code, there could be
sufficient limitations on the amount of net loss carry forwards that could be
used to offset future taxable income.
In the
six months ended June 30, 2009, we recorded a benefit for income taxes of
$623,262 due to provisions in the American Recovery and Reinvestment Act of 2009
relating to net operating loss carry-backs. The cash was received in
August 2009. Aside from the impact of the passage of this
congressional act, we do not expect any additional income tax benefits relating
to carry-backs to prior periods. If we are successful in
commercializing PCT and in generating operating income, then we may be able to
utilize certain net operating losses we may have at the time against such future
operating profits.
Accounting
for Stock-Based Compensation
We
maintain equity compensation plans under which incentive stock options and
non-qualified stock options are granted to employees, independent members of our
Board of Directors and outside consultants. We recognize equity
compensation expense over the requisite service period using the Black-Scholes
formula to estimate the fair value of the stock options on the date of
grant.
Determining Fair Value of
Stock Option Grants
Valuation
and Amortization Method - The fair value of each option award is estimated on
the date of grant using the Black-Scholes pricing model based on certain
assumptions. The estimated fair value of employee stock options is
amortized to expense using the straight-line method over the vesting
period.
Expected
Term - The Company uses the simplified calculation of expected life, described
in the FASB ASC 718, Compensation-Stock Compensation, as the Company does not
currently have sufficient historical exercise data on which to base an estimate
of expected term. Using this method, the expected term is determined
using the average of the vesting period and the contractual life of the stock
options granted.
Expected
Volatility - Expected volatility is based on the Company’s historical stock
volatility data over the expected term of the award.
Risk-Free
Interest Rate - The Company bases the risk-free interest rate used in the
Black-Scholes valuation method on the implied yield currently available on U.S.
Treasury zero-coupon issues with an equivalent remaining term.
10
Forfeitures
- The Company records stock-based compensation expense only for those awards
that are expected to vest. Specifically, the provisions of FASB ASC
718 require that the Company estimates the forfeiture rate and adjust the
expense that it recognizes to reflect the estimated number of stock options that
will go unexercised. The Company estimated a forfeiture rate of 5%
for awards granted based on historical experience and future expectations of
options vesting.
We
recognized stock-based compensation expense of $50,367 and $106,957 for the
three months ended June 30, 2010 and 2009, respectively. The
following table summarizes the effect of this stock-based compensation expense
within each of the line items of our costs and expenses within our Consolidated
Statements of Operations:
For
the Three Months
Ended, June 30, |
||||||||
2010
|
2009
|
|||||||
Research
and development
|
$ | 22,660 | $ | 46,885 | ||||
Selling
and marketing
|
17,366 | 17,366 | ||||||
General
and administrative
|
10,341 | 42,706 | ||||||
Total
stock-based compensation expense
|
$ | 50,367 | $ | 106,957 |
We
recognized stock-based compensation expense of $145,103 and $252,861 for the six
months ended June 30, 2010 and 2009, respectively. The following
table summarizes the effect of this stock-based compensation expense within each
of the line items of our costs and expenses within our Consolidated Statements
of Operations:
For
the Six Months
Ended, June 30, |
||||||||
2010
|
2009
|
|||||||
Research
and development
|
$ | 40,906 | $ | 99,857 | ||||
Selling
and marketing
|
34,542 | 38,574 | ||||||
General
and administrative
|
69,655 | 114,430 | ||||||
Total
stock-based compensation expense
|
$ | 145,103 | $ | 252,861 |
Fair
Value of Financial Instruments
Due to
their short maturities, the carrying amounts for cash and cash equivalents,
accounts receivable, accounts payable, and accrued expenses approximate their
fair value. Long-term liabilities are primarily related to
liabilities transferred under contractual arrangements with carrying values that
approximate fair value.
Reclassifications
Advertising
Advertising
costs are expensed as incurred. During the six months ended June 30,
2010, we incurred $18,045 in advertising expenses but in the same period last
year, we did not incur significant advertising expenses.
Rent
Expense
Rental
costs are expensed as incurred. During the six months ended June 30,
2010 and 2009, we incurred $66,332 and $43,989, respectively in rent expense for
the use of our corporate office and research and development
facilities.
4)
|
Commitments and
Contingencies
|
Operating
Leases
Our
corporate offices are currently located at 14 Norfolk Avenue, South Easton,
Massachusetts 02375. In November 2007, we signed a lease agreement
commencing in February 2008 pursuant to which we lease approximately 5,500
square feet of office space. We renewed the lease until August 31,
2011 with no increase in the monthly payment. We pay approximately
$6,500 per month for the use of these facilities.
11
Effective
January 31, 2009, we terminated our sub-lease agreement with Proteome Systems,
pursuant to which we leased approximately 650 square feet of laboratory space
plus 100 square feet of office space from Proteome Systems in Woburn,
Massachusetts. We paid approximately $3,200 per month for the use of
these facilities through January 31, 2009 with no further
obligation.
Effective
January 1, 2010, we entered into a three-year lease agreement with the
University of Massachusetts, pursuant to which we are leasing laboratory and
office space on campus at the university. We are paying $5,000 per
month for the use of these facilities.
Royalty
Commitments
In 1996,
we acquired our initial equity interest in BioSeq, Inc., which at the time was
developing our original pressure cycling technology. BioSeq, Inc. acquired
its pressure cycling technology from BioMolecular Assays, Inc. (“BMA”) under a
technology transfer and patent assignment agreement. In 1998, we purchased
all of the remaining outstanding capital stock of BioSeq, Inc., and at such
time, the technology transfer and patent assignment agreement was amended to
require us to pay BMA a 5% royalty on our sales of products or services that
incorporate or utilize the original pressure cycling technology that BioSeq,
Inc. acquired from BMA. We are also required to pay BMA 5% of the proceeds
from any sale, transfer or license of all or any portion of the original
pressure cycling technology. These payment obligations terminate in
2016. During the six months ended June 30, 2010 and 2009, we incurred
$17,281 and $15,002, respectively in royalty expense associated with our
obligation to BMA.
In
connection with our acquisition of BioSeq, Inc., we licensed certain limited
rights to the original pressure cycling technology back to BMA. This
license is non-exclusive and limits the use of the original pressure cycling
technology by BMA solely for molecular applications in scientific research and
development and in scientific plant research and development. BMA is
required to pay us a royalty equal to 20% of any license or other fees and
royalties, but not including research support and similar payments, it receives
in connection with any sale, assignment, license or other transfer of any rights
granted to BMA under the license. BMA must pay us these royalties
until the expiration of the patents held by BioSeq, Inc. in 1998, which we
anticipate will be in 2016. We have not received any royalty payments
from BMA under this license.
Battelle
Memorial Institute
In
December 2008, we entered into an exclusive patent license agreement with the
Battelle Memorial Institute ("Battelle"). The licensed technology is described
in the patent application filed by Battelle on July 31, 2008 (US serial number
12/183,219). This application includes subject matter related to a method and a
system for improving the analysis of protein samples, including through an
automated system utilizing pressure and a pre-selected agent to obtain a
digested sample in a significantly shorter period of time than current methods,
while maintaining the integrity of the sample throughout the preparatory
process. Pursuant to the terms of the agreement we paid Battelle a
non-refundable initial fee. In addition to royalty payments on net
sales on “licensed products”, we are obligated to make minimum royalty payments
for each year that we retain the rights outlined in the patent license agreement
and we are required to have our first commercial sale of the licensed products
within one year following the issuance of the patent covered by the licensed
technology.
Purchase
Commitments
On
December 14, 2009, we submitted a purchase order to Source Scientific, LLC, the
manufacturer of the Company’s PCT Barocycler instrumentation, for 50 Barocycler
NEP2320 units and 12 Barocycler NEP3229 units with various spare
parts. Pursuant to the terms of the purchase order, we placed a
deposit with Source Scientific, LLC, of approximately $338,000 representing
approximately 50% of the expected total value of the order. The
purchase price for the 50 NEP2320 units and 12 NEP3229 units is based upon a
fixed bill of materials. We will be billed for the unpaid purchase
price of each unit at the time each unit is completed and ready for
sale. As of June 30, 2010, we received 35 Barocycler NEP2320 units on
this purchase order.
Severance and Change of Control
Agreements
Each of
our executive officers is entitled to receive a severance payment if terminated
by the Company without cause. The severance benefits would include a
payment in an amount equal to one year of each executive officer’s annualized
base salary compensation plus accrued paid time off. Additionally,
each executive officer will be entitled to receive medical and dental insurance
coverage for one year following the date of termination. The total
commitment related to these agreements in the aggregate is approximately $1.0
million.
12
Each of
our executive officers, other than Mr. Richard T. Schumacher, our President and
Chief Executive Officer, is entitled to receive a change of control payment in
an amount equal to one year of such executive officer’s annualized base salary
compensation, accrued paid time off, and medical and dental coverage, in the
event of a change of control of the Company. In the case of Mr.
Schumacher, this payment would be equal to two years of annualized base salary
compensation, accrued paid time off, and two years of medical and dental
coverage. The total commitment related to these agreements in the
aggregate is approximately $1.3 million.
5)
|
Stockholders’
Equity
|
Preferred
Stock
In 1996,
our Board of Directors authorized the issuance of 1,000,000 shares of preferred
stock with a par value of $0.01. As of June 30, 2010, 20,000 shares of preferred
stock have been designated as Series A Junior Participating Preferred Stock,
none of which are issued and outstanding, 313,960 shares of preferred stock have
been designated as Series A Convertible Preferred Stock, par value $0.01 per
share (“Series A Convertible Preferred Stock”), of which 266,492 shares are
issued and outstanding, and 279,256 shares of preferred stock have been
designated as Series B Convertible Preferred Stock, par value $0.01 per share
(“Series B Convertible Preferred Stock”), of which 88,711 shares are issued and
outstanding.
Series A Convertible
Preferred Stock
On
February 12, 2009, we completed a private placement, pursuant to which we sold
an aggregate of 156,980 units (the “Series A Units”) for a purchase price of
$11.50 per unit (the “Series A Purchase Price”), resulting in gross proceeds to
us of $1,805,270 (the “Series A Private Placement”). Each Series A
Unit consisted of (i) one share of Series A Convertible Preferred
Stock convertible into 10 shares of our common stock, (ii) a warrant to purchase
one share of Series A Convertible Preferred Stock at an exercise price equal to
$12.50 per share, with a term expiring 15 months after the date of closing
(“15-Month Series A Preferred Stock Warrant”); and (iii) a warrant to purchase
10 shares of common stock at an exercise price equal to $2.00 per share, with a
term expiring 30 months after the date of closing (the “30-Month Common Stock
Warrants”). We did not pay any placement fees associated with this
transaction but the expenses related to the offering totaled approximately
$233,000.
The
proceeds from the sale of each Series A Unit was allocated between the Series A
Convertible Preferred Stock, the 15-Month Series A Preferred Stock Warrant and
the 30-Month Common Stock Warrant based on the relative estimated fair value of
each security. The estimated fair value of the warrants was
determined using the Black-Scholes formula, resulting in an allocation of the
gross proceeds of $882,253 to the total warrants issued. The
allocation of the gross proceeds to the Series A Convertible Preferred Stock was
$923,017. In accordance with the provisions of FASB ASC 470-20, Debt with Conversion and Other
Options, an additional adjustment between Additional Paid in Capital and
Accumulated Deficit of $489,803 was recorded to reflect an implicit non-cash
dividend related to the allocation of proceeds between the stock and warrants
issued. The $489,803
represents the value of the adjustment to additional paid in capital related to
the beneficial conversion feature of the Series A Convertible Preferred
Stock. The value adjustment was calculated by subtracting the fair
market value of the underlying common stock on February 12, 2009 issuable upon
conversion of the Series A Convertible Preferred Stock from the fair market
value of the Series A Convertible Preferred Stock as determined when the Company
performed a fair market value allocation of the proceeds to the Series A
Convertible Preferred Stock and warrants.
Each
share of Series A Convertible Preferred Stock receives a cumulative dividend at
the rate of 5% per annum of the Series A Purchase Price, payable semi-annually
on June 30 and December 31, commencing on June 30, 2009 (with the first payment
being pro-rated based on the number of days occurring between the date of
issuance and June 30, 2009). Dividends may be paid in cash or in
shares of common stock at our option, subject to certain
conditions. The shares of Series A Convertible Preferred Stock also
are entitled to a liquidation preference, such that in the event of any
voluntary or involuntary liquidation, dissolution or winding up of our Company,
the holders of Series A Convertible Preferred Stock will be paid out of the
assets of the Company available for distribution to our stockholders before any
payment shall be paid to the holders of common stock, an amount per share equal
to the Series A Purchase Price, plus accrued and unpaid
dividends. The Series A Convertible Preferred Stock and the Series B
Convertible Preferred Stock (as described below) will be treated on an
equivalent basis with respect to payments made in connection with a
liquidation. The Board approved the method of payment in the form of
common stock for the June 30, 2009 dividend, the December 31, 2009 dividend, and
the June 30, 2010 dividend.
Each
share of Series A Convertible Preferred Stock is convertible into 10 shares of
common stock at any time at the option of the holder, subject to adjustment for
stock splits, stock dividends, recapitalizations and similar transactions (the
“Series A Conversion Ratio”). Unless waived under certain circumstances by the
holder of Series A Convertible Preferred Stock, such holder’s shares of Series A
Convertible Preferred Stock may not be converted if upon such conversion the
holder’s beneficial ownership would exceed certain thresholds. Each
share of Series A Convertible Preferred Stock will automatically be converted
into shares of common stock at the Series A Conversion Ratio then in
effect: (i) if, after 12 months from the closing of the Series A
Private Placement, the common stock trades on the Nasdaq Capital Market (or
other primary trading market or exchange on which the common stock is then
traded) at a price equal to $4.00 for 20 out of 30 consecutive trading days with
average daily trading volume of at least 10,000 shares or (ii) upon a registered
public offering by the Company at a per share price equal to $2.30 with
aggregate gross proceeds to the Company of not less than $10
million.
13
The
holders of Series A Convertible Preferred Stock are not entitled to vote on any
matters presented to the stockholders of the Company for their action or
consideration at any meeting of stockholders of the Company (or by written
consent of stockholders in lieu of meeting), except that the holders of Series A
Convertible Preferred Stock may vote separately as a class on any matters that
would amend, alter or repeal any provision of our Restated Articles of
Organization, as amended, in a manner that adversely affects the powers,
preferences or rights of the Series A Convertible Preferred Stock and such
holders may also vote on any matters required by law.
At any
time after February 11, 2014, upon 30 days written notice, we have the right to
redeem the outstanding shares of Series A Convertible Preferred Stock at a price
equal to the Series A Purchase Price, plus all accrued and unpaid dividends
thereon. The redemption price may be paid in two annual
installments.
15-Month Series A Preferred
Stock Warrants and 30-Month Common Stock Warrants
Subject
to the terms and conditions of the applicable warrants, the Company had the
right to call for cancellation the 15-Month Series A Preferred Stock Warrants if
the volume weighted average price of our common stock on the Nasdaq Capital
Market (or other primary trading market or exchange on which our common stock is
then traded) equaled or exceeded $1.75 for either (i) 10 consecutive trading
days or (ii) 15 out of 25 consecutive trading days. Pursuant to these
provisions, on March 30, 2010, the Company called all of the 15-Month Series A
Preferred Stock Warrants.
The
15-Month Series A Preferred Stock Warrants had an exercise price equal to $12.50
per share, with a term expiring on May 12, 2010. Each of the 15-Month
Series A Preferred Stock Warrants were exercised in connection with the warrant
call and, therefore, there are no longer any 15-Month Series A Preferred Stock
Warrants outstanding. The 30-Month Common Stock Warrants have an
exercise price equal to $2.00 per share, with a term expiring on August 12,
2011. Unless waived
under certain circumstances by the holder of the 30-Month Common Stock Warrant,
such holder’s 30-Month Common Stock Warrants may not be exercised if upon such
exercise the holder’s beneficial ownership would exceed certain
thresholds.
Each of
the 15-Month Series A Preferred Stock Warrants permitted, and each of the
30-Month Common Stock Warrants permit the holder to conduct a “cashless
exercise” at any time the holder of the warrant is an “affiliate” (as defined in
the Securities Purchase Agreement) of the
Company.
The
warrant exercise price and/or number of shares issuable upon exercise of the
applicable warrant are subject to adjustment for stock dividends, stock splits
or similar capital reorganizations, as set forth in the warrants. As
a result of the issuance of Common Stock in connection with dividends paid on
the Series A Preferred Stock and the Series B Preferred Stock, the exercise
price of the 30-Month Common Stock Warrants has been adjusted from $2.00 to
$1.80 (the “New Exercise Price”) to prevent dilution. The number of
shares for which the 30-Month Common Stock Warrants are exercisable is equal to
the original per share exercise price of the Warrant, prior to any adjustment,
divided by the New Exercise Price, multiplied by the original number of Warrant
Shares.
Subject
to the terms and conditions of the 30-Month Common Stock Warrant, the Company
has the right to call for cancellation the 30-Month Common Stock Warrant if the
volume weighted average price for our common stock on the Nasdaq Capital Market
(or other primary trading market or exchange on which our common stock is then
traded) equals or exceeds $2.80 for either (i) 10 consecutive trading days or
(ii) 15 out of 25 consecutive trading days.
The
warrants granted in connection with the Series A Units were valued based on a
Black-Scholes pricing model at the date of the grant. The 15-Month
Series A Preferred Stock Warrants and 30-Month Common Stock Warrants were
granted with an exercise price of $1.25 per share of Series A Convertible
Preferred Stock and $2.00 per share of common stock,
respectively. The 15-Month Series A Preferred Stock Warrants and
30-Month Common Stock Warrants vested immediately. The relative fair
value of the warrants was calculated to be $882,253 and was recorded to
stockholders’ equity in the first quarter of 2009. The assumptions
for the Black-Scholes pricing model are represented in the table below with the
15-month Series A Preferred Stock Warrants being reflected on a per share common
stock equivalent basis.
14
Assumptions
|
Preferred
|
Common
|
||||||
Expected
life (in months)
|
15
|
30 | ||||||
Expected
volatility
|
142.0 |
%
|
109.0 | % | ||||
Risk-free
interest rate
|
0.875 | % | 1.375 | % | ||||
Exercise
price
|
$ | 1.25 | $ | 2.00 | ||||
Stock
price
|
$ | 0.90 | $ | 0.90 | ||||
Fair
value per warrant
|
$ | 0.45 | $ | 0.41 |
Series B Convertible
Preferred Stock
On
November 18, 2009, we sold an aggregate of 62,039 units (the “Series B Units”)
for a purchase price of $18.80 per unit (the “Series B Purchase Price”),
resulting in gross proceeds to us of $1,166,333. This was the first
tranche of a $2.5 million private placement. The second tranche
closed on March 18, 2010 for the sale of 26,672 Series B Units with gross
proceeds of $501,434 (collectively the two tranches are referred to as the
“Series B Private Placement”). Each Series B Unit consists of (i) one
share of Series B Convertible Preferred Stock convertible into 10 shares of our
common stock and (ii) a warrant to purchase one share of Series B Convertible
Preferred Stock at an exercise price equal to $23.80 per share for warrants
issued in November 2009 and at an exercise price of $28.80 for warrants issued
in March 2010, in each case with a term expiring on August 11, 2011 (the “Series
B Warrant”).
In
connection with the Series B Private Placements, we paid a finder’s fee of
$100,478, plus warrants to purchase 5,344 shares of Series B Convertible
Preferred Stock at $28.80 per share, expiring August 11, 2012.
The
proceeds from the sale of each Series B Unit were allocated between the Series B
Convertible Preferred Stock and the Series B Warrant based on the relative
estimated fair value of each security. The estimated fair value of
the Series B Warrants was determined using the Black-Scholes formula, resulting
in an allocation of the gross proceeds of $592,685 to the total warrants issued
for both tranches. The allocation of the gross proceeds to the Series
B Convertible Preferred Stock was $1,075,083 for both tranches. In
accordance with the provisions of FASB ASC 470-20, Debt with Conversion and Other
Options, an additional adjustment between Additional Paid in Capital and
Accumulated Deficit of $294,838 was recorded to reflect an implicit non-cash
dividend related to the allocation of proceeds between the Series B Convertible
Preferred Stock and Series B Warrants issued in both tranches. The $294,838 represents
the value of the adjustment to additional paid in capital related to the
beneficial conversion feature of the Series B Convertible Preferred
Stock. The value adjustment was calculated by subtracting the fair
market value of the underlying common stock issuable upon conversion of the
Series B Convertible Preferred Stock on the date of the respective closing from
the fair market value of the Series B Convertible Preferred Stock as determined
when the Company performed a fair market value allocation of the proceeds to the
Series B Convertible Preferred Stock and Series B Warrants.
Each
share of Series B Convertible Preferred Stock will receive a cumulative dividend
at the rate of 5% per annum of the Series B Purchase Price, payable
semi-annually on June 30 and December 31, commencing on December 31, 2009 (with
the first payment being pro-rated based on the number of days occurring between
the date of issuance and December 31, 2009). Dividends may be paid in
cash or in shares of common stock at our option, subject to certain
conditions. The shares of Series B Convertible Preferred Stock also
are entitled to a liquidation preference, such that in the event of any
voluntary or involuntary liquidation, dissolution or winding up of our Company,
the holders of Series B Convertible Preferred Stock will be paid out of the
assets of the Company available for distribution to our stockholders before any
payment shall be paid to the holders of common stock, an amount per share equal
to the Series B Purchase Price, plus accrued and unpaid
dividends. The Series B Convertible Preferred Stock and the Series A
Convertible Preferred Stock will be treated on an equivalent basis with respect
to payments made in connection with a liquidation. The Board approved
the method of payment in the form of common stock for the December 31, 2009
dividend and the June 30, 2010 dividend.
Each
share of Series B Convertible Preferred Stock is convertible into 10 shares of
common stock at any time at the option of the holder, subject to adjustment for
stock splits, stock dividends, recapitalizations and similar transactions (the
“Series B Conversion Ratio”). Each share of Series B Convertible
Preferred Stock will automatically be converted into shares of common stock at
the Series B Conversion Ratio then in effect: (i) if, after 12 months
from the closing of the applicable tranche of the Series B Private Placement,
the common stock trades on the Nasdaq Capital Market (or other primary trading
market or exchange on which the common stock is then traded) at a price equal
$5.64 for 20 out of 30 consecutive trading days with average daily trading
volume of at least 10,000 shares or (ii) upon a registered public offering by
the Company at a per share price equal to $5.64, with aggregate gross proceeds
to the Company of not less than $10 million. Unless waived under
certain circumstances by the holder of the Series B Convertible Preferred Stock,
such holder’s Series B Convertible Preferred Stock may not be converted if upon
such conversion the holder’s beneficial ownership would exceed certain
thresholds.
15
The
holders of Series B Convertible Preferred Stock are not entitled to vote on any
matters presented to the stockholders of the Company for their action or
consideration at any meeting of stockholders of the Company (or by written
consent of stockholders in lieu of meeting), except that the holders of Series B
Convertible Preferred Stock may vote separately as a class on any matters that
would amend, alter or repeal any provision of our Restated Articles of
Organization, as amended, in a manner that adversely affects the powers,
preferences or rights of the Series B Convertible Preferred Stock and such
holders may also vote on any matters required by law.
At any
time after February 12, 2014, upon 30 days written notice, we have the right to
redeem the outstanding shares of Series B Convertible Preferred Stock at a price
equal to the Series B Purchase Price, plus all accrued and unpaid dividends
thereon. The redemption price may be paid in two annual
installments. The Series B Convertible Preferred Stock and the Series
A Convertible Preferred Stock will be treated on an equivalent basis with
respect to payments made in connection with redemption.
Series B
Warrants
The
Series B Warrants issued in November 2009 have an exercise price equal to $23.80
and the Series B Warrants issued in March 2010 have an exercise price equal to
$28.80, in each case with a term expiring on August 11, 2011. The
Series B Warrants permit the holder to conduct a “cashless exercise” at any time
the holder of the Series B Warrant is an “affiliate” (as defined in the
Securities Purchase Agreement) of the Company.
The
Series B Warrant exercise price and/or number of shares issuable upon exercise
of the Series B Warrant will be subject to adjustment for stock dividends, stock
splits or similar capital reorganizations, as set forth in the Series B
Warrants.
Subject
to the terms and conditions of the Series B Warrants, the Company has the right
to call for cancellation the Series B Warrants if the volume weighted average
price of our common stock on the Nasdaq Capital Market (or other primary trading
market or exchange on which our common stock is then traded) equals or exceeds
$4.70 for either (i) 10 consecutive trading days or (ii) 15 out of 25
consecutive trading days.
In
connection with the Series B Private Placement on March 18, 2010, we issued
warrants to our placement agent to purchase 1,679 shares of Series B Convertible
Preferred Stock at $28.80 per share, expiring August 11, 2012. The
Series B Warrants and placement agent warrants were valued based on a
Black-Scholes pricing model at the date of the grants. The Series B
Warrants and placement agent warrants vested immediately. The
relative fair value of the Series B Warrants was calculated to be $173,060 and
was recorded to stockholders’ equity. The assumptions for the
Black-Scholes pricing model are represented in the table below for the warrants
issued in both tranches reflected on a per share common stock equivalent
basis. The assumptions for the placement agent show the range of
values for both tranches.
Assumptions
|
Preferred
warrants |
Placement
Agent |
||||||
Expected
life (in months)
|
17 | 33 | ||||||
Expected
volatility
|
146.4 | % | 125.0 | % | ||||
Risk-free
interest rate
|
1.000 | % | 1.000 | % | ||||
Exercise
price
|
$ | 2.88 | $ | 2.88 | ||||
Fair
value per warrant
|
$ | 0.95 | $ | 1.08 |
On March
30, 2010, the Company called for cancellation any 15-Month Series A Preferred
Stock Warrants that remained unexercised as of April 28, 2010. In
connection with this warrant call, 15-Month Series A Preferred Stock Warrants to
purchase 98,372 shares of Series A Convertible Preferred Stock were exercised at
$12.50 per share, for gross proceeds to the Company of $1,229,650, before
deducting expenses associated with the warrant call notice. 15-Month
Series A Preferred Stock Warrants to purchase an additional 10,150 shares of
Preferred Stock were exercised on a cashless basis, resulting in the net
issuance of 2,883 shares of Series A Convertible Preferred
Stock. Pursuant to the terms of the 15-Month Series A Preferred Stock
Warrants, upon exercise of such warrants, the holders became entitled to receive
an aggregate of 57,390 shares of common stock in payment of dividends on the
Series A Convertible Preferred Stock paid on June 30, 2009 and December 31,
2009.
16
Common
Stock
Shareholders Rights
Plan
On March
3, 2003, our Board of Directors adopted a shareholder rights plan (the “Rights
Plan”) and declared a distribution of one Right for each outstanding share of
our common stock to shareholders of record at the close of business on March 21,
2003 (the “Rights”). Initially, the Rights will trade automatically
with the common stock and separate Right Certificates will not be issued.
The Rights Plan is designed to deter coercive or unfair takeover tactics and to
ensure that all of our shareholders receive fair and equal treatment in the
event of an unsolicited attempt to acquire the Company. The Rights
will expire on February 27, 2013 unless earlier redeemed or exchanged.
Each Right entitles the registered holder, subject to the terms of a Rights
Agreement, to purchase from the Company one one-thousandth of a share of the
Company’s Series A Junior Participating Preferred Stock at a purchase price of
$45.00 per one one-thousandth of a share, subject to adjustment. In general, the
Rights will not be exercisable until a subsequent distribution date which will
only occur if a person or group acquires beneficial ownership of 15% or more of
our common stock or announces a tender or exchange offer that would result in
such person or group owning 15% or more of the common stock. With respect to any
person or group who currently beneficially owns 15% or more of our common stock,
the Rights will not become exercisable unless and until such person or group
acquires beneficial ownership of additional shares of common stock.
Subject
to certain limited exceptions, if a person or group acquires beneficial
ownership of 15% or more of our outstanding common stock or if a current 15%
beneficial owner acquires additional shares of common stock, each holder of a
Right (other than the 15% holder whose Rights become void once such holder
reaches the 15% threshold) will thereafter have a right to purchase, upon
payment of the purchase price of the Right, that number of shares of our common
stock which at the time of such transaction will have a market value equal to
two times the purchase price of the Right. In the event that, at any time
after a person or group acquires 15% or more of our common stock, we are
acquired in a merger or other business combination transaction or 50% or more of
our consolidated assets or earning power are sold, each holder of a Right will
thereafter have the right to purchase, upon payment of the purchase price of the
Right, that number of shares of common stock of the acquiring company which at
the time of such transaction will have a market value of two times the purchase
price of the Right.
Our Board
of Directors may exchange the Rights (other than Rights owned by such person or
group which have become void), in whole or in part, at an exchange ratio of one
share of common stock per Right (subject to adjustment). At any time prior
to the time any person or group acquires 15% or more of our common stock, the
Board of Directors may redeem the Rights in whole, but not in part, at a price
of $0.001 per Right.
Stock Options and
Warrants
Our
stockholders approved our amended 2005 Equity Incentive Plan (the “Plan”)
pursuant to which an aggregate of 1,800,000 shares of our common stock were
reserved for issuance upon exercise of stock options or other equity awards made
under the Plan. Under the Plan, we may award stock options, shares of
common stock, and other equity interests in the Company to employees, officers,
directors, consultants, and advisors, and to any other persons the Board of
Directors deems appropriate.
As of
June 30, 2010, options to acquire 1,325,500 shares were outstanding under the
Plan with 474,500 shares available for future grant under the
Plan. As of June 30, 2010, options to acquire 239,000 shares are
outstanding under the 1999 Non-qualified Stock Option Plan. No
additional options may be granted under the 1999 Non-qualified Stock Option
Plan.
As of
June 30, 2010, 1,569,800 of the 30-Month Common Stock Warrants were
outstanding. Series B Warrants to purchase 94,055 shares of Series B
Convertible Preferred Stock, which includes warrants given to our placement
agent, were outstanding. On March 31, 2010, we issued warrants to an
investor relations firm to purchase 50,000 shares of our common stock at an
exercise price equal to $3.00 per share, with a term expiring on August 11,
2012, in exchange for consulting services provided to us by such
firm.
17
The
following tables summarize information concerning common stock issuable upon the
exercise of outstanding stock options and warrants to acquire either common
stock or preferred stock convertible into common stock:
Stock
Options
|
Warrants
|
|||||||||||||||||||||||
Shares
|
Weighted
Average
price
per
share
|
Shares
|
Weighted
Average
price
per
share
|
Total
Shares
|
Exercisable
|
|||||||||||||||||||
Balance
outstanding, 12/31/2008
|
1,222,499 | $ | 3.30 | - | 1,222,499 | 932,334 | ||||||||||||||||||
Granted
|
485,000 | 0.82 | 3,846,640 | 1.78 | 4,331,640 | |||||||||||||||||||
Exercised
|
- | (40,000 | ) | 1.25 | (40,000 | ) | ||||||||||||||||||
Expired
|
(5,000 | ) | 4.25 | - | - | (5,000 | ) | |||||||||||||||||
Forfeited
|
(137,999 | ) | 3.40 | - | - | (137,999 | ) | |||||||||||||||||
Balance
outstanding, 12/31/2009
|
1,564,500 | $ | 3.30 | 3,806,640 | $ | 1.78 | 5,371,140 | 4,955,152 | ||||||||||||||||
Granted
|
- | - | 283,510 | 2.88 | 283,510 | |||||||||||||||||||
Exercised
|
- | - | (1,529,800 | ) | 1.25 | (1,529,800 | ) | |||||||||||||||||
Expired
|
- | - | - | - | - | |||||||||||||||||||
Forfeited
|
- | - | - | - | - | |||||||||||||||||||
Balance
outstanding, 6/30/2010
|
1,564,500 | $ | 2.52 | 2,560,350 | $ | 2.22 | 4,124,850 | 3,949,189 |
Options
Outstanding
|
Options
Exercisable
|
||||||||||||||||||||||||
Range
of
Exercise Prices
|
Number
of
Options
|
Weighted
Average Remaining
Contractual
Life
|
Exercise
Price
|
Number
of
Options
|
Weighted
Average Remaining
Contractual
Life
|
Exercise
Price
|
|||||||||||||||||||
$ |
0.77 - $2.70
|
704,000 | 6.4 | $ | 1.25 | 585,673 | 6.0 | $ | 1.34 | ||||||||||||||||
2.71 - 3.08
|
319,500 | 4.7 | 2.93 | 283,166 | 4.2 | 2.95 | |||||||||||||||||||
3.09 - 3.95
|
302,000 | 5.9 | 3.67 | 302,000 | 5.9 | 3.67 | |||||||||||||||||||
3.96 - 5.93
|
239,000 | 6.6 | 4.24 | 218,000 | 6.5 | 4.22 | |||||||||||||||||||
$ |
0.77 - $5.93
|
1,564,500 | 6.0 | $ | 2.52 | 1,388,839 | 5.7 | $ | 2.63 |
During
the six months ended June 30, 2009, the total fair value of stock options
awarded was $258,620. We did not grant employee stock options during
the six months ended June 30, 2010.
As of
June 30, 2010, the total estimated fair value of unvested stock options to be
amortized over their remaining vesting period was $119,340. The
non-cash, stock based compensation expense associated with the vesting of these
options is expected to be $78,776 for the second half of 2010 and $40,564 in
2011.
6)
|
Subsequent
Events
|
We
performed a review of events subsequent to the balance sheet date through the
date the financial statements were issued and determined that there were no such
events requiring disclosure in the financial statements.
18
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. In some cases, forward-looking statements
are identified by terms such as “may”, “will”, “should”, “could”, “would”,
“expects”, “plans”, “anticipates”, “believes”, “estimates”, “projects”,
“predicts”, “potential”, and similar expressions intended to identify
forward-looking statements. Such statements include, without limitation,
statements regarding:
- |
our
ability to raise additional equity or debt financing on acceptable terms,
if at all;
|
- |
our
belief that we have sufficient liquidity to finance normal operations
through the first quarter of 2011;
|
- |
our
need to take additional cost reduction measures, cease operations or sell
our operating assets, if we are unable to obtain sufficient additional
financing in the future;
|
- |
the
amount of cash necessary to operate our business;
|
- |
the
amount of grant revenue and anticipated uses of grant revenue in future
periods;
|
- |
our
plans and expectations with respect to our pressure cycling technology
(PCT) operations;
|
- |
the
potential applications for PCT in, and the demonstration of
proof-of-concept of PCT for, sample preparation, pathogen inactivation,
protein purification, control of chemical reactions and immunodiagnostics,
among others;
|
- |
the
expected expenses, benefits and results from our research and development
efforts;
|
- |
the
expected benefits and results from our collaboration
efforts;
|
- |
the
expected increase in number of PCT units installed and the increase in
revenues from sale of consumable products and extended service
contracts;
|
- |
the
potential size of the market for biological sample
preparation;
|
- |
general
economic conditions; and
|
- |
the
anticipated future financial performance and business operations of our
Company.
|
These
forward-looking statements are only predictions and involve known and unknown
risks, uncertainties, and other factors that may cause our actual results,
levels of activity, performance, or achievements to be materially different from
any future results, levels of activity, performance, or achievements expressed
or implied by such forward-looking statements. Also, these forward-looking
statements represent our estimates and assumptions only as of the date of this
Report. Except as otherwise required by law, we expressly disclaim any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statement contained in this Report to reflect any change in our
expectations or any change in events, conditions, or circumstances on which any
of our forward-looking statements are based or to conform to actual
results. We qualify all of our forward-looking statements by these
cautionary statements. You should read this section in combination
with the section entitled Management’s Discussion and Analysis of Financial
Condition and Results of Operations for the year ended December 31, 2009
included in our Annual Report on Form 10-K for the year ended December 31,
2009.
19
RISK
FACTORS
Factors
that could cause or contribute to differences in our future financial and
operating results include those discussed in the risk factors set forth in Item
1 of our Annual Report on Form 10-K for the year ended December 31, 2009, as
well as the risk factor below and those discussed elsewhere in this
Report. The risks described in our Form 10-K and this Report are not
the only risks that we face. Additional risks not presently
known to us or that we do not currently consider significant may
also have an adverse effect on us. If any of the risks
actually occur, our business, results of operations, cash flows or
financial condition could suffer.
If
the research market opportunity for biological sample preparation is smaller
than we believe, or we are unable to achieve a meaningful share of such market,
we may not be able to increase our revenues and our overall business may
suffer.
Based on
published research reports, we believe that the research market for biological
sample preparation is comprised of approximately 450,000 researchers working in
about 80,000 labs worldwide, almost all of whom perform some level of sample
preparation. If, by raising and devoting additional capital to our
sales and marketing efforts, we are able to attain a 2.5% market share, we
believe that we could achieve revenues of approximately $32 million per year,
based upon expected pricing for our existing products. We cannot
assure you, however, that we have correctly estimated the size of the market or
that we will be able to achieve a meaningful share of that
market. Our estimations are based on assumptions that may ultimately
be incorrect. If our estimates of the size of the potential market,
the number of researchers and labs or the portion of those researchers who
perform any level of sample preparation prove to be incorrect, the market
opportunity for our products may be smaller than we believe. In that
event, our prospects for generating revenue may be adversely affected, and our
business may suffer. Even if the size of the market is consistent
with our estimates, the amount of revenues we achieve may be significantly lower
than what we have predicted if we are unable to raise sufficient capital to
support increased sales and marketing efforts or have overestimated the expected
pricing for our existing products. Further, even if our estimates and
predictions are correct, we cannot be certain when we would achieve any
increased revenues, if at all. Regardless of the accuracy of any of
our assumptions, our sales force may not be successful in selling our PCT
product line because scientists may not perceive the advantages of PCT over
other sample preparation methods.
20
We have
developed instruments which utilize our unique and proprietary pressure cycling
technology (“PCT”), which we sell, along with associated disposables to life
sciences companies, academic institutions and government
agencies. There are currently over 100 users of our enabling
platform. PCT represents the core of our products and has enabled our
customers to perform biological sample preparation and enzymatic digestion in
unique ways that were previously unavailable. The enabling capability
of our PCT products allows us to continue to increase the number of applications
for our platform beyond current uses, which include genomic and proteomic sample
preparation, pathogen inactivation, the control of chemical and enzymatic
reactions, immunodiagnostics, and protein purification. Additionally,
we are pursuing business opportunities to leverage our products and PCT into new
markets beyond our current focus of PCT-enhanced enzymatic digestion products
designed specifically for the mass spectrometry marketplace, as well as sample
preparation products for biomarker discovery, soil and plant biology, forensics,
histology, and counter-bioterror applications.
PCT uses
internally developed instrumentation that is capable of cycling pressure between
ambient and ultra-high levels at controlled temperatures to rapidly and
repeatedly control the interactions of bio-molecules. Our instrument, the
Barocycler®, and our internally developed consumables product line, which
includes PULSE (Pressure Used to Lyse Samples for Extraction) Tubes as well as
application specific kits (which include consumable products and reagents)
together make up the PCT Sample Preparation System.
We have
experienced negative cash flows from our business. As of June 30,
2010, we had working capital resources of approximately $2.6
million. Based on our current projections, we believe our current
cash resources are sufficient to fund our normal operations through the first
quarter of 2011. Depending upon the results of the Company’s future
financing and partnering activities and sales efforts, we may make cost
reductions as required to accomplish this goal.
We
believe we will need substantial additional capital to fund our operations in
periods beyond the first quarter of 2011. If we are able to obtain
additional capital or otherwise increase our revenues, we may increase spending
in specific research and development applications and engineering projects and
may hire additional sales personnel or invest in targeted marketing
programs. In the event that we are unable to obtain financing on
acceptable terms, or at all, we may be required to limit or cease our
operations, pursue a plan to sell our operating assets, or otherwise modify our
business strategy, which could materially harm our future business
prospects.
We hold
14 United States and 10 foreign patents covering multiple applications of PCT in
the life sciences field. Our pressure cycling technology employs a unique
approach that we believe has the potential for broad use in a number of
established and emerging life sciences areas, including;
-
|
sample
preparation for genomic, proteomic, and small molecule
studies;
|
-
|
pathogen
inactivation;
|
-
|
protein
purification;
|
-
|
control
of chemical (particularly enzymatic) reactions; and
|
-
|
Immunodiagnostics
(clinical laboratory testing).
|
Since we
began operations as Pressure BioSciences in February 2005, we have installed 150
Barocycler instruments, of which 108 currently remain installed. Our
customers include researchers at academic laboratories, government agencies and
biotechnology, pharmaceutical and other life sciences companies in the United
States, and six foreign distribution partners.
2005
|
2006
|
2007
|
2008
|
2009
|
YTD
June
2010
|
|||||||||||||||||||
Installed
units
|
5 | 8 | 20 | 41 | 54 | 22 |
21
RESULTS OF
OPERATIONS
Three
Months Ended June 30, 2010 and 2009
Revenue
We
recognized revenue of $402,104 for the three months ended June 30, 2010 as
compared to $270,381 during the three months ended June 30, 2009.
PCT Products, Services,
Other. Revenue from the sale of PCT products and services was $283,382
for the three months ended June 30, 2010 as compared to $159,202 during the
three months ended June 30, 2009. The increase is due to more sales
than rentals of instruments while the prior period included discounted sales to
distributors. Sales of consumables of $33,082 were recorded for the
three months ended June 30, 2010 compared to $15,290 during the same period in
the prior year, an increase of $17,792 or 116%. Our domestic and
foreign installations of PCT systems are set forth in the table
below.
For
the Three Months
Ended June 30, |
||||||||
2010
|
2009
|
|||||||
Domestic
|
12 | 9 | ||||||
International
|
- | 3 | ||||||
Total
PCT System Installations
|
12 | 12 |
Grant Revenue. During the
three months ended June 30, 2010 and 2009, we recorded $118,722 and $111,179 of
grant revenue, respectively. We received a new SBIR Phase I grant for
approximately $100,000 effective March 30, 2010. We expect grant
revenues to remain consistent over the next several quarters as the amount of
time and expense incurred in connection with the grants
continues. The level of grant revenue that we recognize in any given
quarter is dependent upon the level of resources we devote to grant related work
in the period.
Cost
of PCT Products and Services
The cost
of PCT products and services was $126,972 for the three months ended June 30,
2010 compared to $90,820 for the comparable period in 2009. This
increase was primarily due to a corresponding increase in PCT instrument
sales.
Research
and Development
Research
and development expenditures were $304,143 during the three months ended June
30, 2010 as compared to $315,046 in the same period in 2009. This
slight decrease resulted primarily from reduced project spending.
Research
and development expense recognized in the three months ended June 30, 2010 and
2009 included $22,660 and $46,885 of non-cash, stock-based compensation expense,
respectively.
Selling
and Marketing
Selling
and marketing expenses increased slightly to $294,275 for the three months ended
June 30, 2010 from $252,464 for the comparable period in 2009. This
increase was primarily due to recruiting efforts of sales personnel and
compensation for new sales director.
During
the three months ended June 30, 2010 and 2009, selling and marketing expense
included $17,366 and $17,366 of non-cash, stock-based compensation expense,
respectively.
General
and Administrative
General
and administrative costs totaled $474,381 for the three months ended June 30,
2010 as compared to $427,384 for the comparable period in 2009. This
increase was primarily due to investor relations and patent related activities
offset by a decrease in non-cash stock based compensation expense.
During
the three months ended June 30, 2010 and 2009, general and administrative
expense included $10,341 and $42,706 of non-cash, stock-based compensation
expense, respectively. The non-cash, stock-based compensation expense
is expected to increase in the third quarter due to stock options granted to new
board members.
22
Operating
Loss
Our
operating loss was $797,667 for the three months ended June 30, 2010 as compared
to $815,333 for the comparable period in 2009. The reduced operating
loss resulted primarily for the reasons noted above.
Net
Loss
During
the three months ended June 30, 2010, we recorded a net loss to common
shareholders of $924,490 or $(0.35) per share, as compared to $847,929 or
$(0.39) per share in the three months ended June 30, 2009.
Six
Months Ended June 30, 2010 and 2009
Revenue
We
recognized revenue of $692,917 for the six months ended June 30, 2010 as
compared to $577,143 during the six months ended June 30, 2009,
respectively.
PCT Products, Services,
Other. Revenue from the sale of PCT products and services was $472,532
for the six months ended June 30, 2010, as compared to $381,344 during the six
months ended June 30, 2009. Sales of consumables of $59,327 were
recorded for the six months ended June 30, 2010 compared to $41,040 during the
same period in the prior year, an increase of $18,287 or 45%. Our
domestic and foreign installations of PCT systems are set forth in the table
below.
For
the Six Months
Ended June 30, |
||||||||
2010
|
2009
|
|||||||
Domestic
|
22 | 16 | ||||||
International
|
- | 6 | ||||||
Total
PCT System Installations
|
22 | 22 |
We expect
the number of units installed will continue to increase in future periods due to
our commercialization efforts although delays in customer purchases could occur
due to current economic conditions in the global
economy. Furthermore, we may realize some difficulties in signing up
new distribution partners if we are unable to secure additional funding through
equity or debt financings. We also expect that most of future
installations will continue to be for the smaller, lower priced, Barocycler
NEP2320 model and some will be placed under lease or short-term rental
agreements. Therefore, we expect that the average revenue per
installation will continue to fluctuate from period to period. As we
expand the installed base of Barocycler instruments in the field, we expect to
realize increasing revenues from the sale of consumable products and extended
service contracts. In the short-term, these recurring revenue streams
may continue to fluctuate from period to period.
Grant
Revenue. During the six months ended June 30, 2010 and 2009,
we recorded $220,385 and $195,799 of grant revenue, respectively. We
completed the SBIR Phase I grant in the first quarter of 2010 and received a new
SBIR Phase I grant from another federal agency for approximately $100,000
effective March 30, 2010. We expect grant revenues to remain
consistent over the next several quarters as the amount of time and expense
incurred in connection with the grants continues. The level of grant
revenue that we recognize in any given quarter is dependent upon the level of
resources we devote to grant related work in the period.
Cost
of PCT Products and Services
The cost
of PCT products and services was $214,075 for the six months ended June 30, 2010
compared to $231,063 for the comparable period in 2009. Our gross
profit margin on PCT products and services increased to 55% for the six months
ended June 30, 2010, as compared to 39% for the six months ended June 30,
2009. The increase in the gross profit margin on PCT products and
services was due primarily to sales of Barocycler units to our international
distributors at distributor discounted prices in the prior year and increased
rental rates this year on Barocycler leases.
The
relationship between the cost of PCT products and services and PCT revenue will
depend greatly on the mix of instruments we sell, the quantity of such
instruments, and the mix of consumable products that we sell in a given
period.
23
Research
and Development
Research
and development expenditures were $598,284 in the first six months of 2010 as
compared to $622,270 in the same period in 2009. This consistent
spending reflects consistent efforts on a number of R&D projects we are
currently funding.
Research
and development expense recognized in the first half of 2010 and 2009 included
$40,906 and $99,857 of non-cash, stock-based compensation expense,
respectively.
Selling
and Marketing
Selling
and marketing expenses increased slightly to $576,853 for the six months ended
June 30, 2010 from $530,880 for the comparable period in 2009. This
increase was primarily due to recruiting efforts of sales personnel and
compensation for new sales director.
During
the first half of 2010 and 2009, selling and marketing expense included $34,542
and $38,574 of non-cash, stock-based compensation expense,
respectively.
General
and Administrative
General
and administrative costs totaled $1,012,803 for the six months ended June 30,
2010 as compared to $858,174 for the comparable period in 2009, an increase of
$154,629 or 18%. The increase is principally due to the expenses of
patent filings and investor relations activities.
During
the first half of 2010 and 2009, general and administrative expense included
$69,655 and $114,430 of non-cash, stock-based compensation expense,
respectively.
Operating
Loss
Our
operating loss was $1,709,098 for the six months ended June 30, 2010 as compared
to $1,665,244 for the comparable period in 2009. The additional
operating loss resulted primarily because of the factors noted
above.
Income
Taxes
During
the first half of 2010, we did not record a benefit for income
taxes. In the six months ended June 30, 2009, we recorded a benefit
for income taxes of $623,262 due to provisions in the American Recovery and
Reinvestment Act of 2009 relating to net operating loss
carry-backs.
Net
Loss
During
the first half of 2010, we recorded a net loss to common shareholders of
$2,092,339 or $(0.80) per share, as compared to $1,561,978 or $(0.71) per share
in the first half of 2009. Our net loss in the first half of 2010
increased from the corresponding net loss in the first half of 2009 because the
prior period’s net loss reflects an income tax benefit of $623,262 which we did
not have in the first half of 2010. The difference between net loss
applicable to common shareholders and net loss relates to the beneficial
conversion calculation associated with the intrinsic value of the Series A
Convertible Preferred Stock and Series B Convertible Preferred
Stock. See Note 3 of the Notes to Consolidated Financial Statements
under the Computation of Loss per Share heading.
LIQUIDITY AND FINANCIAL
CONDITION
As of
June 30, 2010, our working capital position was $2,629,493 the primary
components of which were cash and cash equivalents, accounts receivable,
inventory, prepaid expenses, and deposits, partially offset by accounts payable,
accrued employee compensation, and other accrued expenses. As of
December 31, 2009, our working capital position was $2,209,205.
On March
18, 2010, we sold an aggregate of 26,672 units (the “Series B Units”) for a
purchase price of $18.80 per unit, resulting in net proceeds to us of
$465,867. An initial tranche of Series B Units was sold in November
2009. Each Series B Unit consists of (i) one share of a newly created
Series B Convertible Preferred Stock convertible into 10 shares of our common
stock and (ii) a warrant to purchase one share of Series B Convertible Preferred
Stock at an exercise price equal to $28.80 per share with a term expiring on
August 11, 2011 (“Series B Warrant”). See Note 5 of the Notes to
Consolidated Financial Statements for a further description of the Series B
Convertible Preferred Stock and Series B Warrants issued in the Series B Private
Placement.
24
In
connection with the warrant call notice issued on March 30, 2010, 15 Month
Series A Preferred Stock Warrants to purchase 98,372 shares of Series A
Convertible Preferred Stock were exercised at $12.50 per share, for net proceeds
to the Company of $1,421,275 in March and April 2010, before deducting expenses
associated with the warrant call notice. Warrants to purchase an
additional 10,150 shares of Preferred Stock were exercised on a cashless basis,
resulting in the net issuance of 2,883 shares of Preferred Stock.
As of
June 30, 2010, we had working capital resources of approximately $2.6
million. Based on our current projections, we believe our current
cash resources, which include the funds we received from the Series A Preferred
Stock Warrant exercise in March and April 2010, are sufficient to fund our
normal operations through the first quarter of 2011. Depending upon
the results of the Company’s future financing and partnering activities and
sales efforts, we may make cost reductions as required to accomplish this
goal.
We
believe we will need substantial additional capital to fund our operations in
periods beyond the first quarter of 2011. If we are able to obtain
additional capital or otherwise increase our revenues, we may increase spending
in specific research and development applications and engineering projects and
may hire additional sales personnel or invest in targeted marketing
programs. In the event that we are unable to obtain financing on
acceptable terms, or at all, we may be required to limit or cease our
operations, pursue a plan to sell our operating assets, or otherwise modify our
business strategy, which could materially harm our future business
prospects.
Net cash
used in operations for the six months ended June 30, 2010 was $1,771,018 as
compared to $882,184 for the six months ended June 30, 2009. The
increase in cash used in operations in 2010 as compared to 2009 is principally
due to the investment of $248,000 in certificates of deposit in 2010 and an
increase in Barocycler inventory, and the federal income tax refund received in
2009.
Net cash
used in investing activities for the six months ended June 30, 2010 was $48,548
as compared to cash used of $64,932 for the same period in the prior
year. During the six months ended June 30, 2010, we purchased tooling
and installed Barocycler instruments under collaboration or lease agreements
while selling several demonstration units. Cash used in investing
activities during the first six months of 2009 was for Barocycler instruments
that we purchased and installed under collaboration or lease agreements.
Net cash
provided by financing activities for the six months ended June 30, 2010 was
$1,887,142 as compared to $1,567,923 for the same period in the prior
year. We closed the second tranche of the Series B Private Placement
on March 18, 2010 with the sale of an additional 26,672 Series B Units with net
proceeds of $465,867.
COMMITMENTS AND
CONTINGENCIES
Operating
Leases
Our
corporate offices are currently located at 14 Norfolk Avenue, South Easton,
Massachusetts 02375. In November 2007, we signed a lease agreement
commencing in February 2008 pursuant to which we lease approximately 5,500
square feet of office space. We renewed the lease until August 31,
2011 with no increase in the monthly payment. We pay approximately
$6,500 per month for the use of these facilities.
Effective
January 1, 2010, we entered into a three-year lease agreement with the
University of Massachusetts, pursuant to which we are leasing laboratory and
office space on campus at the university. We are paying $5,000 per
month for the use of these facilities.
Royalty
Commitments
In 1996,
we acquired our initial equity interest in BioSeq, Inc., which at the time was
developing our original pressure cycling technology. BioSeq, Inc. acquired
its pressure cycling technology from BioMolecular Assays, Inc. (“BMA”) under a
technology transfer and patent assignment agreement. In 1998, we purchased
all of the remaining outstanding capital stock of BioSeq, Inc., and at such
time, the technology transfer and patent assignment agreement was amended to
require us to pay BMA a 5% royalty on our sales of products or services that
incorporate or utilize the original pressure cycling technology that BioSeq,
Inc. acquired from BMA. We are also required to pay BMA 5% of the proceeds
from any sale, transfer or license of all or any portion of the original
pressure cycling technology. These payment obligations terminate in
2016. During the six months ended June 30, 2010 and 2009, we incurred
$17,281 and $15,002, respectively in royalty expense associated with our
obligation to BMA.
In
connection with our acquisition of BioSeq, Inc., we licensed certain limited
rights to the original pressure cycling technology back to BMA. This
license is non-exclusive and limits the use of the original pressure cycling
technology by BMA solely for molecular applications in scientific research and
development and in scientific plant research and development. BMA is
required to pay us a royalty equal to 20% of any license or other fees and
royalties, but not including research support and similar payments, it receives
in connection with any sale, assignment, license or other transfer of any rights
granted to BMA under the license. BMA must pay us these royalties
until the expiration of the patents held by BioSeq, Inc. in 1998, which we
anticipate will be in 2016. We have not received any royalty payments
from BMA under this license.
25
Battelle
Memorial Institute
In
December 2008, we entered into an exclusive patent license agreement with the
Battelle Memorial Institute ("Battelle"). The licensed technology is described
in the patent application filed by Battelle on July 31, 2008 (US serial number
12/183,219). This application includes subject matter related to a method and a
system for improving the analysis of protein samples, including through an
automated system utilizing pressure and a pre-selected agent to obtain a
digested sample in a significantly shorter period of time than current methods,
while maintaining the integrity of the sample throughout the preparatory
process. Pursuant to the terms of the agreement we paid Battelle a
non-refundable initial fee. In addition to royalty payments on net
sales on “licensed products”, we are obligated to make minimum royalty payments
for each year that we retain the rights outlined in the patent license agreement
and we are required to have our first commercial sale of the licensed products
within one year following the issuance of the patent covered by the licensed
technology.
Target
Discovery Inc.
In March
2010, we signed a strategic product licensing, manufacturing, co-marketing, and
collaborative research and development agreement with Target Discovery
Inc.(“TDI”). Under the terms of the agreement, we have been licensed by TDI to
manufacture and sell a highly innovative line of chemicals used in the
preparation of tissues for scientific analysis ("TDI reagents"). The
TDI reagents were designed for use in combination with our pressure cycling
technology. The companies believe that the combination of PCT and the
TDI reagents can fill an existing need in life science research for an automated
method for rapid extraction and recovery of intact, functional proteins
associated with cell membranes in tissue samples.
Purchase
Commitments
On
December 14, 2009, we submitted a purchase order to Source Scientific, LLC, the
manufacturer of the Company’s PCT Barocycler instrumentation, for 50 Barocycler
NEP2320 units and 12 Barocycler NEP3229 units with various spare
parts. Pursuant to the terms of the purchase order, we placed a
deposit with Source Scientific, LLC, of approximately $338,000 representing
approximately 50% of the expected total value of the order. The
purchase price for the 50 NEP2320 units and 12 NEP3229 units is based upon a
fixed bill of materials. We will be billed for the unpaid purchase
price of each unit at the time each unit is completed and ready for
sale. As of June 30, 2010, we received 35 Barocycler NEP2320 units on
this purchase order.
Severance
and Change of Control Agreements
Each of
our executive officers is entitled to receive a severance payment if terminated
by the Company without cause. The severance benefits would include a payment in
an amount equal to one year of each executive officer’s annualized base salary
compensation plus accrued paid time off. Additionally, each executive officer
will be entitled to receive medical and dental insurance coverage for one year
following the date of termination. The total commitment related to these
agreements in the aggregate is approximately $1.0 million.
Each of
our executive officers, other than Mr. Richard T. Schumacher, our President and
Chief Executive Officer, is entitled to receive a change of control payment in
an amount equal to one year of such executive officer’s annualized base salary
compensation, accrued paid time off, and medical and dental coverage, in the
event of a change of control of the Company. In the case of Mr.
Schumacher, this payment would be equal to two years of annualized base salary
compensation, accrued paid time off, and two years of medical and dental
coverage. The total commitment related to these agreements in the aggregate is
approximately $1.3 million. The severance payment is
meant to induce the executive to become an employee of the Company and to remain
in the employ of the Company, in general, and particularly in the event of a
change in control.
26
RECENT ACCOUNTING
STANDARDS
In June
2009, the FASB issued FASB ASC 105, Generally Accepted Accounting
Principles, which establishes the FASB Accounting Standards Codification
as the sole source of authoritative generally accepted accounting
principles. Pursuant to the provisions of FASB ASC 105, the Company
has updated references to GAAP in its financial statements issued for the period
ended December 31, 2009. The adoption of FASB ASC 105 did not impact
the Company’s financial position or results of operations.
On June
30, 2009, the Company adopted FASB ASC 855, Subsequent Events, which
requires disclosure of the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial
statements. The adoption of FASB ASC 855 did not have a material
impact on our financial statements.
The Financial Accounting
Standards Board, or FASB, issued Accounting Standards Update, or ASU, No.
2009-13, Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue
Arrangements, or ASU 2009-13. ASU 2009-13 amends existing revenue
guidance related to revenue arrangements with multiple deliverables to allow the
use of companies’ estimated selling prices as the value for deliverable elements
under certain circumstances and to eliminate the use of the residual method for
allocation of deliverable elements. ASU 2009-13 is effective for
fiscal years beginning on or after June 15, 2010, with earlier adoption
permitted. The Company is currently evaluating the impact this standard will
have on its financial statements.
27
ITEM
4T. CONTROLS AND PROCEDURES
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Securities Exchange Act of 1934
filings are recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including our President and Chief Executive
Officer (Principal Executive Officer) and Chief Financial Officer (Principal
Financial Officer), as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, as ours are designed to do, and management was
necessarily required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As of
June 30, 2010, we carried out an evaluation, under the supervision and with the
participation of our management, including our Principal Executive Officer and
Principal Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934. Based upon that
evaluation, our Principal Executive Officer and Principal Financial Officer
concluded that our disclosure controls and procedures are effective at the
reasonable assurance level.
There
have been no changes in our internal controls over financial reporting that
occurred during the period covered by this Report that have materially affected,
or are reasonably likely to materially affect, our internal controls over
financial reporting.
28
Reference
|
||||
10.1 | Amendment No. 2 to Pressure BioSciences, Inc. 2005 Equity Incentive Plan |
Filed
herewith
|
||
31.1
|
Principal
Executive Officer Certification Pursuant to Item 601(b)(31) of Regulation
S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
Filed
herewith
|
||
32.1
|
Principal
Executive Officer Certification Pursuant to Item 601(b)(32) of Regulation
S-K, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
Filed
herewith
|
29
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
PRESSURE
BIOSCIENCES, INC.
|
|||
Date:
August 16, 2010
|
By:
|
/s/ Richard T.
Schumacher
|
|
Richard
T. Schumacher
|
|||
President
& Chief Executive Officer
|
|||
(Principal
Executive Officer,
Principal Financial Officer and Principal Accounting Officer) |
30