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PBIO > SEC Filings for PBIO > Form 10-Q on 14-Nov-2012All Recent SEC Filings

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Form 10-Q for PRESSURE BIOSCIENCES INC


14-Nov-2012

Quarterly Report


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 need for, and 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 until the end of December 2012;

- 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;

- the capabilities and functionality of our PCT products;

- the expected expenses, benefits and results from our research and development efforts;

- the expected benefits and results from our collaboration efforts, strategic alliances and joint ventures;

- 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, 2011 included in our Annual Report on Form 10-K for the year ended December 31, 2011.

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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, 2011, as well as 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.

As of October 29, 2012, we had available cash of approximately $51,000. We require additional capital to fund our operations and cannot ensure that additional capital will be available on acceptable terms or at all.

We have experienced negative cash flows from operations from our pressure cycling technology business since we commenced our pressure cycling technology operations. As of October 29, 2012, we had available cash of approximately $51,000 which, based on current projections, will be sufficient to fund normal operations until the end of December 2012, and as a result, we have substantial doubt regarding our ability to continue as a going concern. We need substantial additional capital to fund our operations in periods beyond December 2012. If we are unable to raise sufficient funds from equity or debt financings or other sources of financing, we may need to cease our business operations.

We failed to meet applicable NASDAQ Stock Market requirements and as a result we delisted our stock from The NASDAQ Capital Market, which could adversely affect the market liquidity of our common stock and harm our businesses.

Until April 5, 2012, our common stock was traded on The NASDAQ Capital Market. As a result of our stockholders' equity falling below the minimum $2.5 million requirement and the bid price of our common stock remaining below the minimum $1.00 per share requirement for continued inclusion on The NASDAQ Capital Market, on April 5, 2012, our common stock was delisted from The NASDAQ Capital Market and on April 5, 2012 our common stock began trading on the OTCQB Marketplace under the ticker symbol PBIO. We continue to file periodic reports with the Securities and Exchange Commission in accordance with the requirements of Section 12(g) of the Securities Exchange Act of 1934, as amended.

Our delisting from The NASDAQ Capital Market and commencement of trading on the OTCQB Marketplace has resulted and may continue to result in a reduction in some or all of the following, each of which could have a material adverse effect on our shareholders:

• the liquidity of our shares of common stock;

• the market price of our shares of common stock;

• our ability to obtain financing for the continuation of our operations;

• the number of institutional and other investors that will consider investing in our shares of common stock;

• the number of market markers in our shares of common stock;

• the availability of information concerning the trading prices and volume of our shares of common stock;

• and the number of broker-dealers willing to execute trades in our shares of common stock.

Furthermore, as a result of our delisting, our shares of common stock are subject to the so-called "penny stock" rules. The SEC has adopted regulations that define a penny stock to be any equity security that has a market price per share of less than $5.00, subject to certain exceptions, such as any securities listed on a national securities exchange. For any transaction involving a penny stock, unless exempt, the rules impose additional sales practice requirements on broker-dealers, subject to certain exceptions. As a result of being a penny stock, a broker-dealer may find it more difficult to trade our shares of common stock and an investor may find it more difficult to acquire or dispose of our shares of common stock on the secondary market. Investors in penny stocks should be prepared for the possibility that they may lose their whole investment.

We have identified a material weakness in our internal control over financial reporting that could result in a material misstatement of our financial statements.

Our management is responsible for maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports to the SEC is 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 principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our management assessed the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2012 and concluded that the material weaknesses identified in our Annual Report on Form 10-K for the year ended December 31, 2011 relating to the lack of sufficient segregation of duties and lack of sufficiency of personnel have not been fully remediated due to our limited financial resources, and therefore our disclosure controls and procedures were not effective as of September 30, 2012.

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A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting that creates a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. While we have performed additional substantive procedures to ensure that our consolidated financial statements as of and for the three and nine month periods ended September 30, 2012, are fairly stated in all material respects in accordance with GAAP, the completion of our remediation efforts are largely dependent upon our securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely affected in a material manner. If our efforts are insufficient to remediate our material weaknesses, our financial statements may contain material misstatements. Any failure on our part to remediate the material weaknesses successfully may affect the results of the periodic management evaluations on the effectiveness of our internal control over financial reporting and disclosure controls and procedures that we must include in our periodic reports. A material weakness could also cause investors to lose confidence in our reported financial information.

We cannot give any assurance that the measures we are taking to remediate the identified material weaknesses will be effective. We also cannot assure that other material weaknesses will not arise as a result of our failure to maintain adequate disclosure controls and procedures or circumvention of those controls and procedures. Additionally, even if we succeed in improving our controls and procedures, those controls and procedures may not be adequate enough to prevent irregularities, identify irregularities or facilitate a fair presentation of our financial statements or reports we file with the SEC.

OVERVIEW

We have developed instruments which utilize our unique and proprietary pressure cycling technology ("PCT"), which we sell along with associated consumables and services to life sciences companies, academic institutions and government agencies. 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 September 30, 2012, we did not have adequate working capital resources to satisfy our current liabilities and as a result we have substantial doubt about our ability to continue as a going concern. Based on our current projections, including equity financing completed subsequent to September 30, 2012, we believe our current cash resources will enable us to extend our cash resources to fund normal operations until the end of December 2012. Please see Note 6, Subsequent Events.

We need substantial additional capital to fund normal operations in periods beyond the end of December 2012. 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 will likely be required to 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).

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Since we began operations as Pressure BioSciences in February 2005, we have installed 232 Barocycler instruments, of which 145 currently remain installed. Our customers include researchers at academic laboratories, government agencies, biotechnology, pharmaceutical and other life sciences companies in the United States, and six foreign distribution partners.

2005 2006 2007 2008 2009 2010 2011 Q3 2012 YTD
Installed units 5 8 20 41 54 50 31 23

We reported a number of accomplishments in the third quarter of 2012.

· Private Placement for $600,000. We completed an initial tranche of approximately $600,000 of a $1.2 million private placement. The transaction consists of the sale of approximately 120,000 units of Series G Convertible Preferred Stock and warrants to purchase common stock. The investors in the initial tranche included all members of the Company's new Board of Directors, all officers of the Company, all members of the prior Board of Directors, and several existing accredited investors in PBI.

· Distribution Agreement with Constant Systems Ltd. ("Constant Systems"). We entered into a non-exclusive distributor agreement for our PCT product line and a non-exclusive agreement for our patent-pending, mechanical homogenization device, the Shredder SG3, and associated consumables. This agreement allows Constant Systems to market and sell PBI products into England, Scotland, Wales, Ireland, Spain, Italy, Norway, Sweden, Finland, Denmark, and Singapore.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2012 and 2011

Revenue

We recognized revenue of $391,616 for the three months ended September 30, 2012, an increase of 40% from $280,422 for the three months ended September 30, 2011. This increase in total revenue was primarily due to the new Army grant awarded in late 2011 and increased sales of our PCT Shredder Kit.

PCT Products, Services, Other. Revenue from the sale of PCT products and services increased 37% to $297,867 for the three months ended September 30, 2012 as compared to $217,734 during the three months ended September 30, 2011. We expanded into Europe through a sale to a new distributor. We generated additional revenue in the current period from our SG3 Shredder product that became available for sale in late 2011. Sales of consumables of $27,993 were recorded for the three months ended September 30, 2012 compared to $21,034 during the same period in the prior year, a 33% increase. Our domestic and foreign installations of PCT systems are set forth in the table below.

                                              For the Three Months Ended
                                                     September 30,
                                             2012                  2011
          Domestic                                 4                       8
          International                            4                      -
          Total PCT System Installations           8                       8

Grant Revenue. During the three months ended September 30, 2012, we recorded $93,749 of grant revenue as compared to $62,688 for the prior quarter in the same fiscal year. We continue to work on a Phase II grant received from the Department of Defense, or DOD, to fund the development of a PCT-based system to improve the processing of pathogenic organisms. In the prior period, we worked on the Phase II DOD grant and a Phase I grant received from the National Institutes of Health, or NIH, to help fund the development of a high pressure-based system to improve the processing of cancer and other samples. Both grants were awarded in the second half of 2011.

Cost of PCT Products and Services

The cost of PCT products and services was $108,689 for the three months ended September 30, 2012 compared to $93,610 for the comparable period in 2011. Our gross profit margin on PCT products and services increased to 64% for the three months ended

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September 30, 2012, as compared to 57% for the prior period. The increase is from a favorable profit margin on our PCT Shredder Kit.

Research and Development

Research and development expenditures were $247,717 during the three months ended September 30, 2012 as compared to $248,188 in the same period in 2011. Our work on research and development projects remained steady during both periods.

Research and development expense recognized in the three months ended September 30, 2012 and 2011 included $21,633 and $11,609 of non-cash, stock-based compensation expense, respectively. The increase was primarily due to expense in the current period resulting from the Company's election to re-price certain employee stock options during the quarter ended September 30, 2012.

Selling and Marketing

Selling and marketing expenses decreased to $164,313 for the three months ended September 30, 2012 from $193,975 for the comparable period in 2011. This decrease was primarily due to employee related savings from a smaller headcount offset by tradeshow and travel related expenses.

During the three months ended September 30, 2012 and 2011, selling and marketing expense included $17,877 and $6,452 of non-cash, stock-based compensation expense, respectively. The increase was primarily due to expense in the current period resulting from the Company's election to re-price certain employee stock options during the quarter ended September 30, 2012.

General and Administrative

General and administrative costs totaled $557,417 for the three months ended September 30, 2012 as compared to $490,460 for the comparable period in 2011. We increased our investor relations efforts in the current period while the prior period included audit fees incurred in connection with SEC filings.

During the three months ended September 30, 2012 and 2011, general and administrative expense included $57,216 and $14,459 of non-cash, stock-based compensation expense, respectively. The increase was primarily due to expense in the current period resulting from new grants of stock options awarded to the Board of Directors and the Company's election to re-price certain employee stock options during the quarter ended September 30, 2012.

Operating Loss

Our operating loss was $686,520 for the three months ended September 30, 2012 as compared to $745,811 for the comparable period in 2011. The decreased operating loss resulted primarily for increased revenue.

Other Income (Expense), Net

Interest (Expense) Income

Interest expense totaled $10,540 for the three months ended September 30, 2012 as compared to interest expense of $39,358 for the three months ended September 30, 2011. We recorded $4,216 of interest expense for the three months ended September 30, 2012 related to a promissory note. We recorded $8,013 of interest expense for the three months ended September 30, 2011 related to our short-term loans. We also amortized approximately $31,000 of imputed interest against the debt discount on these short-term loans.

Change in Fair Value of Warrant Derivative Liability

During the three months ended September 30, 2012, we recorded a non-cash charge of $98,978 for warrant revaluation in our consolidated statements of operations due to an increase in the fair value of the warrant liability related to warrants issued in our Series D registered direct offering. This increase in fair value was primarily due to a reduced exercise price during the quarter. During the three months ended September 30, 2011, we recorded non-cash income of $223,446 for warrant revaluation in our consolidated statements of operations due to a decrease in the fair value of the warrant liability related to warrants issued in our Series C private placement. This decrease in fair value was primarily due to a lower stock price at quarter-end and time remaining on warrants.

Net Loss

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During the three months ended September 30, 2012, we recorded a net loss to common shareholders of $925,827 or $(0.09) per share, as compared to a net loss to common shareholders of $953,846 or $(0.15) per share in the three months ended September 30, 2011. The decrease in net loss per share is primarily due to a significant increase in the number of outstanding shares of common stock resulting from the sale of common stock in February 2012.

Nine Months Ended September 30, 2012 and 2011

Revenue

We recognized revenue of $1,022,185 for the nine months ended September 30, 2012, an increase of 57% from $651,751 during the nine months ended September 30, 2011. This increase is due to an increase in grant revenue and the sales of our Barocycler HUB instrument system and its accessories.

PCT Products, Services, Other. Revenue from the sale of PCT products and services was $687,023 for the nine months ended September 30, 2012 as compared to $589,063 during the nine months ended September 30, 2011, a 17% increase. We sold to new distributors in the Asia Pacific and European regions. Revenue increased from sales of our Barocycler HUB instrument system and its accessories, the PCT Shredder Kit and microtube workstations. The Barocycler HUB system and PCT Shredder Kit became available for sale in late 2011. We had fewer active Barocycler leases during 2012 due to expirations. Sales of consumables of $66,869 were recorded for the nine months ended September 30, 2012 compared to $60,059 during the same period in the prior year, an 11% increase. Our domestic and foreign installations of PCT systems are set forth in the table below.

                                                For the Nine Months Ended
                                                      September 30,
                                                2012               2011
            Domestic                                 14                 22
            International                             9                  3
            Total PCT System Installations           23                 25

Grant Revenue. During the nine months ended September 30, 2012, we recorded $335,162 of grant revenue an increase from $62,688 for the comparable period. We continue to work on a Phase II grant received from the Department of Defense, or DOD, to fund the development of a PCT-based system to improve the processing of pathogenic organisms. We completed all billable work by the end of April 2012 on the Phase I grant received from the National Institutes of Health, or NIH, to help fund the development of a high pressure-based system to improve the processing of cancer and other samples. Both grants were awarded in the second half of 2011.

Cost of PCT Products and Services

The cost of PCT products and services was $296,086 for the nine months ended September 30, 2012 compared to $250,835 for the comparable period in 2011. Our gross profit margin on PCT products and services stayed steady at 57% for both periods. The gross margin was primarily affected by discounted sales to distributors and growth in sales of high gross margin product offerings.

Research and Development

Research and development expenditures were $775,635 during the nine months ended September 30, 2012 as compared to $730,962 in the same period in 2011. We capitalized approximately $50,000 of engineering expenses to Inventory as overhead as a one-time implementation charge in the prior period.

Research and development expense recognized in the nine months ended September 30, 2012 and 2011 included $27,759 and $36,951 of non-cash, stock-based compensation expense, respectively. This decrease is due to expense adjustments for fully vested options included in the first half of 2011, which did not occur in the same period in 2012 offset by expense recorded in the current period for option re-pricing.

Selling and Marketing

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Selling and marketing expenses decreased to $570,578 for the nine months ended September 30, 2012 from $740,358 for the comparable period in 2011. This decrease was primarily due to employee related savings from a smaller headcount offset by tradeshow and travel related expenses.

During the nine months ended September 30, 2012 and 2011, selling and marketing expense included $24,659 and $40,192 of non-cash, stock-based compensation expense, respectively. This decrease is due to expense adjustments for fully vested options included in the first half of 2011, which did not occur in the same period in 2012 offset by expense recorded in the current period for option re-pricing.

General and Administrative

General and administrative costs totaled $1,713,778 for the nine months ended September 30, 2012 as compared to $1,351,303 for the comparable period in 2011. We increased our investor relations efforts in the current period. We also incurred increased audit fees relating to accounting matters and legal fees in connection with our completed private placements and amendments to our Registration Statement on Form S-1 originally filed in December 2011.

During the nine months ended September 30, 2012 and 2011, general and administrative expense included $64,398 and $36,546 of non-cash, stock-based compensation expense, respectively. The increase was primarily due to expense in the current period resulting from new grants of stock options awarded to the Board of Directors and the Company's election to re-price certain employee stock options during the current period.

Operating Loss

Our operating loss was $2,333,892 for the nine months ended September 30, 2012 as compared to $2,421,707 for the comparable period in 2011. The decreased operating loss resulted primarily from increased revenue.

Other Income (Expense), Net

Interest (Expense) Income

Interest expense totaled $71,067 for the nine months ended September 30, 2012 as compared to interest expense of $39,029 for the nine months ended September 30, . . .

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