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PBIO > SEC Filings for PBIO > Form 10-K on 13-May-2013All Recent SEC Filings

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Form 10-K for PRESSURE BIOSCIENCES INC


13-May-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

OVERVIEW

We are focused on solving the challenging problems inherent in biological sample preparation, a crucial laboratory step performed by scientists worldwide working in biological life sciences research. Sample preparation is a term that refers to a wide range of activities that precede most forms of scientific analysis. Sample preparation is often complex, time-consuming, and in our belief, one of the most error-prone steps of scientific research. It is a widely-used laboratory undertaking, the requirements of which drive what we believe is a large and growing worldwide market. We have developed and patented a novel, enabling technology platform that can control the sample preparation process. It is based on harnessing the unique properties of high hydrostatic pressure. This process, called pressure cycling technology, or PCT, uses alternating cycles of hydrostatic pressure between ambient and ultra-high levels (35,000 psi or greater) to safely, conveniently and reproducibly control the actions of molecules in biological samples, such as cells and tissues from human, animal, plant, and microbial sources.

Our pressure cycling technology uses internally developed instrumentation that is capable of cycling pressure between ambient and ultra-high levels - at controlled temperatures and specific time intervals - to rapidly and repeatedly control the interactions of bio-molecules, such as DNA, RNA, proteins, lipids, and small molecules. Our laboratory instrument, the BarocyclerŽ, and our internally developed consumables product line, including PULSE (Pressure Used to Lyse Samples for Extraction) Tubes, other processing tubes, and application specific kits (which include consumable products and reagents) together make up our PCT Sample Preparation System, or PCT SPS.

We have experienced negative cash flows from operations with respect to our PCT business since our inception. As of December 31, 2012, we did not have adequate working capital resources to satisfy our current liabilities. Based on our current projections, including equity financing subsequent to December 31, 2012, we believe our current cash resources will enable us to extend our cash resources until May 2013.

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As a result, the audit report issued by our independent registered public accounting firm on our consolidated audited financial statements for the fiscal year ended December 31, 2012 contains an explanatory paragraph regarding our ability to continue as a going concern. The audit report issued by our independent registered public accounting firm for our financial statements for the fiscal year ended December 31, 2012 states that there is substantial doubt in our ability to continue as a going concern due to the risk that we may not have sufficient cash and liquid assets at December 31, 2012 to cover our operating and capital requirements for the next twelve-month period; and, if sufficient cash cannot be obtained, we would have to substantially alter or possibly discontinue operations. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The conditions described above could adversely affect our ability to obtain additional financing on favorable terms, if at all. Such factors may cause investors to have reservations about our long-term prospects and may adversely affect our relationships with customers. There can be no assurance that our auditing firm will not qualify its opinion in the future. If we cannot successfully continue as a going concern, our stockholders may lose their entire investment in us.

Management has developed a plan to continue operations. This plan includes reducing expenses, streamlining operations, and obtaining capital through equity and/or debt financing. Our most recent financing, the first and second tranches of which closed on February 6 and March 28, 2013, respectively, and that is expected to close on or about April 30, 2013, is a private placement (the "Private Placement") that has resulted in net cash proceeds of $746,000 to the Company through March 28, 2013. The Private Placement terms and structure are as follows:

On February 6 and March 28, 2013, we entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") with various individuals (each, a "Purchaser"), pursuant to which we sold an aggregate of 4,650 units for a purchase price of $400.00 per unit (the "Purchase Price"), or an aggregate Purchase Price of $1,859,700. This represents the first two tranches of the $2.0 million Private Placement. One or more additional tranches in the Private Placement may close on or before April 30, 2013. Each unit purchased in the first two tranches ("Unit") consists of (i) one share of a newly created series of preferred stock, designated Series J Convertible Preferred Stock, par value $0.01 per share (the "Series J Convertible Preferred Stock"), convertible into 1,000 shares of the Company's Common Stock, par value $0.01 per share ("Common Stock") and (ii) a warrant to purchase 1,000 shares of Common Stock at an exercise price equal to $0.40 per share, with a term expiring three years from the respective closing date ("Warrant"). Of the $1,859,700 invested in the first two tranches of the Private Placement, $746,000 was received in cash and $1,113,700 was from the conversion of outstanding indebtedness and accrued board of directors' fees. The Purchasers in the first two tranches of the Private Placement consisted of certain existing and new investors in the Company as well as all of the members of the Company's Board of Directors.

Although we have successfully completed equity financings and reduced expenses in the past, we cannot assure you that our plans to address these matters in the future will be successful. Additional financing may not be available to us on a timely basis, if at all, or on terms acceptable to us. In the event we are unable to raise sufficient funds on terms acceptable to us, we may be required to:

? severely limit or cease our operations or otherwise reduce planned expenditures and forego other business opportunities, which could harm our business. The accompanying financial statements do not include adjustments that may be required in the event of the disposal of assets or the discontinuation of the business;

? obtain financing with terms that may have the effect of diluting or adversely affecting the holdings or the rights of the holders of our capital stock; or

? obtain funds through arrangements with future collaboration partners or others that may require us to relinquish rights to some or all of our technologies or products.

We currently focus the majority of our resources in the area of biological sample preparation, referring to a wide range of activities that precede scientific analysis performed by scientists worldwide working in biological life sciences research. Within the broad field of biological sample preparation, we focus the majority of our product development efforts in three specific areas:
mass spectrometry, forensics, and histology.

? Biomarker Discovery - Mass Spectrometry. A biomarker is any substance (e.g., protein) that can be used as an indicator of the presence or absence of a particular disease-state or condition, and to measure the progression and effects of therapy. Biomarkers can help in the diagnosis, prognosis, therapy, prevention, surveillance, control, and cure of diseases and medical conditions. A number of laboratory instruments are used to help discover biomarkers; a leader among these is the mass spectrometer. The mass spectrometer is one of the laboratory instruments that is frequently used to help discover biomarkers.

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A mass spectrometer is a laboratory instrument used in the analysis of biological samples, primarily proteins, in life sciences research. According to a recently published market report by Transparency Market Research (www.transparencymarketresearch.com) "Spectrometry Market (Atomic, Molecular and Mass Spectrometry) - Global Scenario, Trends, Industry Analysis, Size, Share & Forecast 2011 - 2017," the global spectrometry market was worth $10.2 billion in 2011 and is expected to reach $15.2 billion in 2017, growing at a compounded annual growth rate of 6.9% from 2011 to 2017. In the overall global market, the North American market is expected to maintain its lead position in terms of revenue until 2017 and is expected to have approximately 36.2% of the market revenue share in 2017 followed by Europe. We believe PCT offers significant advantages in speed and quality compared with current techniques used in the preparation of samples for mass spectrometry analysis.

? Forensics. The detection of DNA has become a part of the analysis of forensic samples by laboratories and criminal justice agencies worldwide in their efforts to identify the perpetrators of violent crimes and missing persons. Scientists from the University of North Texas and Florida International University have reported improvements in DNA yield from forensic samples e.g., bone and hair using PCT in the sample preparation process. We believe that that PCT may be capable of differentially extracting DNA from sperm and (female) epithelial cells in swabs collected from rape victims and stored in rape kits. We believe that there are many completed rape kits that remain untested for reasons such as cost, time, and quality of results. We further believe that the ability to differentially extract DNA from sperm and not epithelial cells could reduce the cost of such testing, while increasing quality, safety, and speed.

? Histology. The most commonly used technique worldwide for the preservation of cancer and other tissues for subsequent pathology evaluation is formalin-fixation followed by paraffin-embedding. We believe that the quality and analysis of FFPE tissues is highly problematic, and that PCT offers significant advantages over current processing methods, including standardization, speed, biomolecule recovery, and safety.

We view federal agency grants to be an important part of our business plan. These types of grants allow us to bill the federal agency for work that we are planning to perform as part of the development and commercialization of our technology. We generally start by submitting initial grant requests that are in response to requests for proposals ("RFPs") from the federal government through their Small Business Innovation Research ("SBIR") program. Initial ("SBIR Phase I") grants are meant to fund approved research projects for six months, and generally have budgets of approximately $100,000 to $150,000. Because our work in SBIR Phase I grants has been successful, we have applied, and may in the future apply for larger National Institutes of Health ("NIH") SBIR Phase II grants. Such larger grants are typically for a two-year period and can offer as much as $1,000,000 to support significant research projects in areas we would otherwise expect to support with internal funds should SBIR Phase II grants not be awarded. To date, we have been awarded three NIH SBIR Phase I grants and one SBIR Phase II grant. The data on one of the NIH SBIR Phase I grants were the basis for the submission, and subsequent award, of the NIH SBIR Phase II grant awarded to us in the approximate amount of $850,000 in August 2008. This NIH SBIR Phase II grant was for work in the area of using PCT to extract protein biomarkers, sub-cellular molecular complexes, and organelles, with the expectation that these studies might ultimately lead to the release of a new, commercially available PCT-based system, with validated protocols, end-user kits, and other consumables intended for the extraction of clinically important protein biomarkers, sub-cellular molecular complexes, and organelles from human and animal tissues. All three of the NIH SBIR Phase I grants and the NIH SBIR Phase II grant have been completed.

In October 2011, we were awarded a contract of approximately $850,000 from the Department of Defense to help fund the development of a PCT-based system to improve the processing of pathogenic organisms, specifically viruses and bacteria. The contract funds studies until approximately September 2013.

We offer extended service contracts on our laboratory instrumentation to all of our customers. These service contracts allow a customer who purchases a Barocycler instrument to receive on-site scheduled preventative maintenance, on-site repair and replacement of all worn or defective component parts, and telephone support, all at no incremental cost for the life of the service contract. We offer one-year and four-year extended service contracts to customers who purchase Barocycler instruments.

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RESULTS OF OPERATIONS

Year Ended December 31, 2012 as compared with December 31, 2011

Revenue

We had total revenue of $1,238,217 in the year ended December 31, 2012 as compared with $987,729 in the prior year.

PCT Products, Services, and Other. Revenue from the sale of PCT products and services was $809,308 in the year ended December 31, 2012 as compared with $767,765 in the year ended December 31, 2011. During 2012, we sold to new distributors in Europe and in the Asia Pacific region, and to new customers in the United States. We generated consumable sales of $85,493 for the year ended December 31, 2012 as compared with $102,209 during the similar period of the prior year, a decrease of $16,716, or 16%. Conversely, sales of PCT Sample Preparation Accessories increased to $93,712 in 2012 from $49,834 in 2011, an increase of $43,878, or 88%. The number of PCT sales and active leases decreased during 2012 as compared with 2011. The decrease in revenue from PCT sales and leases during 2012 was offset by increased sales of our SG3 Shredder System, sales of the more expensive and higher gross margin Barocycler HUB440 PCT System, and sales of PCT instrument accessories. PCT Instrument Accessories include our MicroTube Adapter Kit Work Stations, Elevated Temperature Kits, Data Acquisition and Control with Software, P-Jump Kit, Reaction Chambers, and EOPR Pressure Cells. Our new Austrian distributor for the SG3 Shredder System purchased 12 units during 2012.

Grant Revenue. During 2012, we recorded $428,909 of grant revenue as compared with $219,964 in 2011. We continue to work on a SBIR Phase II contract 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 SBIR 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 the contract and the grant were awarded in the second half of 2011.

Cost of PCT Products and Services

The cost of PCT products and services was $416,415 for the year ended December 31, 2012, as compared with $342,865 in 2011. Our gross profit margin on PCT products and services was 48% for the year ended December 31, 2012 vs. 55% at December 31, 2011. The change is primarily due to a non-cash charge to an inventory reserve of $50,000. The relationship between the cost of PCT products and services and PCT revenue depends greatly on the mix of instruments we sell, the quantity of such instruments, and the mix of consumable products and instrument accessories that we sell in a given period.

Research and Development

Research and development expenditures were essentially unchanged at $965,623 for 2012 compared to $969,473 in 2011. Research and development expense included $30,034 and $39,375 of non-cash, stock-based compensation in 2012 and 2011, 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

Selling and marketing expenses were $714,635 in 2012 compared to $931,073 in 2011, a decrease of $216,438, or 23%. This decrease was primarily due to a reduction in headcount. Selling and marketing expense included $28,945 and $43,201 of non-cash, stock-based compensation expense in 2012 and 2011, 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.

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General and Administrative

General and administrative costs were $2,605,186 in the year ended December 31, 2012, as compared with $2,034,458 in 2011, an increase of $570,728 or 28%. During 2012 we wrote off approximately $263,000 in costs related to an anticipated public offering of stock that we did not complete. We also incurred $513,288 of additional investor related costs which were partially offset by a reduction in consulting costs of $189,000.

During the years ended December 31, 2012 and 2011, general and administrative expense included $74,212 and $39,398 of non-cash, stock-based compensation expense, respectively. This increase is primarily due to expense in the current period resulting from new grants of stock awarded to the Board of Directors and the Company's election to re-price employee stock options.

Operating Loss

Our operating loss was $3,463,642 for the year ended December 31, 2012 as compared with $3,290,140 for the prior year, an increase of $173,502 or 5%. The increased operating loss was due primarily to the additional general and administrative expenses resulting from the delisting by NASDAQ partially offset by the increase in revenues and gross margin and reduced selling and marketing expense.

Other income (expense), net

Interest Expense Net interest expense totaled $133,417 for the year ended December 31, 2012 as compared with interest expense of $138,071 for the year ended December 31, 2011. We amortized approximately $91,000 of imputed interest against the debt discount on short-term loans relating to warrants issued with the loans in 2011.

Change in fair value of warrant derivative liability

During the year ended December 31, 2012, we recorded non-cash income of $144,840 from 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 D registered direct offering. This decrease in fair value was primarily due to a decrease in the price per share of our Common Stock on December 31, 2012 as compared with the date of issuance of the warrants. During the year ended December 31, 2011, we recorded non-cash income of $430,423 for warrant revaluation due to a decrease in fair value of the warrant liability related to warrants issued in our Series C private placement and our Series D registered direct offering.

Income Taxes

We had an income tax benefit of $2,014 for the year ended December 31, 2012 and did not incur any tax benefit or provisions for the year ended December 31, 2011.

Net Loss

During the year ended December 31, 2012, we recorded a net loss applicable to common stockholders of $4,400,215 or $(0.43) per share, as compared with $5,107,661 or $(0.77) per share during our year ended December 31, 2011. The decrease in loss per share is due primarily to the increased number of shares of Common Stock outstanding from the sale of Common Stock in February 2012. See Note 2 of the accompanying Notes to Consolidated Financial Statements under the "Computation of Loss per Share" heading.

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LIQUIDITY AND FINANCIAL CONDITION

As of December 31, 2012, we did not have adequate working capital resources to satisfy our current liabilities. On February 6 and March 28, 2013, we entered into a Securities Purchase Agreement with various individuals pursuant to which the Company sold an aggregate of 4,650 units for a purchase price of $400.00 per unit or an aggregate Purchase Price of $1,859,700. This represents the first two tranches of a $2.0 million private placement. One or more additional tranches in the Private Placement may close on or before May 31, 2013. Each unit purchased in the first two tranches consists of (i) one share of a newly created series of preferred stock, designated Series J Convertible Preferred Stock, par value $0.01 per share convertible into 1,000 shares of the Company's Common Stock, par value $0.01 per share, and (ii) a warrant to purchase 1,000 shares of Common Stock at an exercise price equal to $0.40 per share, with a term expiring three years from the respective closing date. Of the $1,859,700 invested in the first two tranches of the Private Placement, $746,000 was received in cash and $1,113,700 was from the conversion of outstanding indebtedness and accrued board of directors' fees. The Purchasers in the first two tranches of the Private Placement consisted of certain existing and new investors in the Company as well as all of the members of the Company's Board of Directors. Based on our current projections, including equity financing subsequent to December 31, 2012, we believe our current cash resources will enable us to extend our cash resources until May 2013. Although we have successfully completed equity financings and reduced expenses in the past, we cannot assure you that our plans to address these matters in the future will be successful. If we are not successful there is substantial doubt that we can continue as a going concern.

We believe we will need approximately $5 million in additional capital to fund our three-pronged operational plan, which was designed to help increase revenues by:

A. implementing a next-generation upgrade to our product line and offering a superior instrument with greater net margins;

B. gaining additional non-dilutive monies from governmental research and development applications, and/or engineering projects; and

C. hiring a small team of salespersons to target research facilities and academic institutions, and cultivate our current customer list of pharmaceutical, military and paramilitary organizations.

However, if we are unable to obtain such funds, through sales, the capital markets or other source of 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.

Net cash used in operating activities was $2,164,801 for the year ended December 31, 2012 as compared with $2,141,863 for the year ended December 31, 2011. Our accounts payable balance was $1,199,846 as of December 31, 2012, as compared with to $890,676 as of December 31, 2011, an increase of $309,170 for 2012. In 2011 accounts payable increased $763,849. Accounts payable continues to increase as we conserve cash for use in operating the business until we secure additional capital.

We did not make any investments in fixed assets during the year ended December 31, 2012 as compared with $2,642 in the prior year.

Net cash provided by financing activities for the year ended December 31, 2012 was $1,943,487, net of $196,818 in cash dividends paid on Convertible Preferred Stock, as compared with $1,814,431 in the prior year.

In 2012, we raised approximately:

A. $800,000 in aggregate gross proceeds from our February 7, 2012 private placement of units totaling 971,867 shares of restricted Common Stock and warrants to purchase 485,937 shares of restricted Common Stock. Of the $800,000 invested, $412,453 was received in cash of which $35,000 was used to pay investment banking fees, and $387,547 was from the conversion of outstanding principal and interest on convertible promissory notes issued by us in 2011.

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B. $500,000 in aggregate gross proceeds from our April 9, 2012 Series E registered direct offering with Ironridge Global IV Ltd. ("Ironridge"), pursuant to which we sold Ironridge an aggregate of 500 shares of our Series E Convertible Preferred Stock for a purchase price of $1,000 per share. Each share of Series E Convertible Preferred Stock was convertible into approximately 980 shares of our Common Stock. $147,065 of the proceeds was used to pay for investment banking fees.

C. $726,598 in aggregate gross proceeds from our July 6 and November 15, 2012 Series G private placement, pursuant to which we sold an aggregate of 145,320 units for a purchase price of $5.00 per unit. Each unit consists of one share of Series G Convertible Preferred Stock, convertible into 10 shares of our Common Stock and a three-year warrant to purchase 5 shares of our Common Stock at a per share exercise price of $0.50. Of the $726,598 invested in the Series G Private Placement $31,100 was received in cash and $695,498 was from the conversion of outstanding indebtedness and accrued board of directors fees. We incurred fees of $12,302 on this transaction.

Loans in the aggregate amount of approximately $1,394,000 were received from eight individuals, of which $45,000 was received from two directors of the Company. We will accrue interest of 6% on loans of $1,294,000 to six individuals but no interest given to the other two individuals. $481,000 of these loans were converted into our Series G Convertible Preferred Stock and $50,000 of these loans was paid back by December 31, 2012. The remaining balance of $863,000 was converted into Company Series J Convertible Preferred Stock on February 6, 2013. Warrants to purchase 50,000 shares of the Company's Common Stock were issued to two individuals in connection with these loans. The warrants have an exercise price equal to $0.50 per share, with a term expiring on August 21, 2015.

Our Common Stock is listed on the Over-the-Counter QB market under the ticker symbol PBIO.

COMMITMENTS AND CONTINGENCIES

Royalty Commitments

In 1996, we acquired our initial equity interest in BioSeq, Incorporated ("BioSeq"). At the time, BioSeq was developing our original pressure cycling technology. They 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; and, consequently, 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 acquired from BMA. Similarly, the Company is 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 year ended December 31, 2012 and 2011, we incurred approximately $23,634 and $21,090, respectively, in royalty expense associated with our obligation to BMA.

In connection with our acquisition of BioSeq, 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 . . .

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