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PBIO > SEC Filings for PBIO > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for PRESSURE BIOSCIENCES INC

Form 10-K for PRESSURE BIOSCIENCES INC


31-Mar-2014

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, 2013, 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, 2013, we believe our current cash resources will enable us to extend our cash until August 2014.

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, 2013 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, 2013 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, 2013 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 second and third tranches of which closed on January 29 and February 28, 2014, respectively, and that is expected to close on or about April 4, 2014, is a private placement (the "Private Placement") that has resulted in net cash proceeds of $2,849,110 to the Company through March 28, 2014. The Private Placement terms and structure are as follows:


On December 12, 2013, January 29, 2014 and February 28, 2014, 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 4,000 units for a purchase price of $250.00 per unit (the "Purchase Price"), or an aggregate Purchase Price of $1,000,000, 4,875 units for a purchase price of $250.00 per unit, or an aggregate Purchase Price of $1,218,750 and 1,854 units for purchase price of $340.00, or an aggregate Purchase Price of $630,360, respectively. This represents the first, second and third tranches of the $1.5 million Private Placement which was subsequently increased to $3.5 million. One or more additional tranches in the Private Placement may close on or before April 4, 2014. Each unit purchased in the tranches ("Unit") consists of (i) one share of a newly created series of preferred stock, designated Series K Convertible Preferred Stock, par value $0.01 per share (the "Series K 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 500 shares of Common Stock at an exercise price equal to $0.3125 per share in the first and second tranche and $0.425 per share in the third tranche, with a term expiring three years from the respective closing date ("Warrant"). Of the $2,849,110 invested in the first three tranches of the Private Placement, $2,028,404 was received in cash and $820,706 was from the conversion of outstanding indebtedness and accrued board of directors' fees. The Purchasers in the first three 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.

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 funded 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.

RESULTS OF OPERATIONS

Year Ended December 31, 2013 as compared with December 31, 2012

Revenue

We had total revenue of $1,503,288 in the year ended December 31, 2013 as compared with $1,238,217 in the prior year, a 21% increase.

Products, Services, and Other. Revenue from the sale of products and services was $1,046,678 in the year ended December 31, 2013 as compared with $809,308 in the year ended December 31, 2012 an increase of $237,370 or 29%. During 2013, we had significant sales to our primary distribution partner in the international markets, Constant Systems. We generated consumable sales of $157,676 for the year ended December 31, 2013 as compared with $85,493 during the similar period of the prior year, an increase of $72,183, or 84%. Customers order higher volumes of consumables with their initial order of our PCT and CP instrument systems thus consumables sales will increase as more instrument systems are installed. Sales of our PCT Sample Preparation Accessories increased to $113,435 in 2013 from $93,712 in 2012, an increase of $19,723, or 21%. The number of PCT and CP instrument sales and active leases decreased during 2013 as compared with 2012. The decrease in revenue from instrument sales and leases during 2013 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 and CP 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 EPR Pressure Cells. Our new Austrian distributor for the SG3 Shredder System purchased 18 systems during 2013.


Grant Revenue. During 2013, we recorded $456,610 of grant revenue as compared with $428,909 in 2012. We completed 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 in the third quarter of 2013. We completed all billable work on the grant 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 in the second quarter of 2013.

Cost of Products and Services

The cost of products and services was $567,828 for the year ended December 31, 2013, as compared with $416,415 in 2012. Our gross profit margin on products and services was 46% for the year ended December 31, 2013 vs. 48% at December 31, 2012. The change is primarily due to lower margins realized on sales of Constant Systems cell disruption products. The relationship between the cost of products and services and products 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 $1,035,426 for 2013 compared to $965,623 in 2012, an increase of $69,803 or 7%. Research and development expense included $56,736 and $30,034 of non-cash, stock-based compensation in 2013 and 2012, respectively. In addition we incurred additional rent expense of $11,000 in 2013 and $31,250 of additional consulting expense due to our collaboration agreement with a European research lab.

Selling and Marketing

Selling and marketing expenses were $752,288 in 2013 compared to $714,635 in 2012, an increase of $37,653, or 5%. This increase was primarily due to our arrangement with Constant Systems whereby we pay Constant Systems for their U.S. based representative who handles sales and service for both CS and PBI products to PBI customers. These additional costs were somewhat offset by lower travel related costs. Selling and Marketing expense included $26,550 and $28,945 of non-cash stock based compensation expense in 2013 and 2012, respectively.

General and Administrative

General and administrative costs were $2,474,937 in the year ended December 31, 2013, as compared with $2,605,186 in 2012, a decrease of $130,249 or 5%. During 2012 we wrote off approximately $263,000 in costs related to an anticipated public offering of stock that we did not complete. Those savings were offset by increased spending on investor relations and additional travel related costs in 2013 to augment our fund raising efforts. During the years ended December 31, 2013 and 2012, general and administrative expense included $53,509 and $74,212 of non-cash, stock-based compensation expense, respectively.

Operating Loss

Our operating loss was $3,327,192 for the year ended December 31, 2013 as compared with $3,463,642 for the prior year, a decrease of $136,450 or 4%. The decreased operating loss was due primarily to the additional gross margin provided by the increase in revenues while holding operating costs relatively flat.

Other income (expense), net

Interest Expense Net interest expense totaled $339,818 for the year ended December 31, 2013 as compared with interest expense of $133,417 for the year ended December 31, 2012. We amortized approximately $247,244 of imputed interest against the debt discount on short-term loans relating to warrants and conversion options issued with the loans, in 2013.

Other income (expense) net We recognized $531,130 in additional expense due to the initial fair value calculation on the conversion option of our convertible debt and the write off of debt discount upon conversion and payoff of the related debt instruments during 2013.


Change in fair value of derivative liabilities

During the year ended December 31, 2013, we recorded non-cash income of $113,713 from warrant and conversion option liability revaluation in our consolidated statements of operations due to a decrease in the fair value of the conversion option liability on our debt. This decrease in fair value was primarily due to a decrease in the price per share of our Common Stock on December 31, 2013 as compared with the date of issuance of the convertible debt. During the year ended December 31, 2012, we recorded non-cash income of $144,840 for warrant revaluation due to a decrease in fair value of the warrant liability related to warrants issued in our Series D registered direct offering.

Income Taxes

We did not record an income tax benefit or provision for the year ended December 31, 2013 and had an income tax benefit of $2,014 for the year ended December 31, 2012.

Net Loss

During the year ended December 31, 2013, we recorded a net loss applicable to Common Stockholders of $5,247,449 or $(0.44) per share, as compared with $4,400,215 or $(0.43) per share during our year ended December 31, 2012. Although the net loss applicable to Common Stockholders increased in 2013 due to Other Expense, the loss per share remained essentially the same due primarily to the increased number of shares of Common Stock outstanding from the issuance of Common Stock to various service providers in 2013. See Note 2 of the accompanying Notes to Consolidated Financial Statements under the "Computation of Loss per Share" heading.

LIQUIDITY AND FINANCIAL CONDITION

As of December 31, 2013, we did not have adequate working capital resources to satisfy our current liabilities. On January 29 and February 28, 2014, we entered into a Securities Purchase Agreement with various individuals pursuant to which the Company sold an aggregate of 4,875 and 1,854 units for a purchase price of $250.00 and $340.00 per unit, respectively, or an aggregate Purchase Price of $1,849,110. This represents the second and third tranches of a $1.5 million private placement. One or more additional tranches in the Private Placement may close on or before April 4, 2014. Each unit purchased in the second and third tranches consists of (i) one share of a newly created series of preferred stock, designated Series K 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 500 shares of Common Stock at an exercise price equal to $0.3125 and $0.425, respectively, with a term expiring three years from the respective closing date. Of the $1,849,110 invested in the second and third tranches of the Private Placement, $1,456,360 was received in cash and $392,750 was from the conversion of outstanding indebtedness and board of directors' fees. Of the $2,849,110 invested in the first three tranches of the Private Placement, $2,028,404 was received in cash and $820,706 was from the conversion of outstanding indebtedness and accrued board of directors' fees. The Purchasers in the first three 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, 2013, we believe our current cash resources will enable us to extend our cash resources until August 2014. 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 $6 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 sales and marketing persons 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 $2,342,603 for the year ended December 31, 2013 as compared with $2,164,801 for the year ended December 31, 2012. Our accounts payable balance was $1,102,772 as of December 31, 2013, as compared with to $1,199,846 as of December 31, 2012, a decrease of $97,074 for 2013. Accounts payable should continue to become more current as we continue to secure more capital and funds from operations allow for more timely payment of our vendors.

We invested $58,749 in fixed assets (lab equipment) during the year ended December 31, 2013 as compared with no investment in fixed assets in the prior year.

Net cash provided by financing activities for the year ended December 31, 2013 was $2,431,308, as compared with $1,943,487 in the prior year.

In 2013, we raised approximately:

A $2,034,700 in aggregate gross proceeds from our February 6, March 28 and May 20, 2013 Series J private placement, pursuant to which we sold an aggregate of 5,087.5 units for a purchase price of $400 per unit. Each unit consists of one share of Series J Convertible Preferred Stock, convertible into 1,000 shares of our Common Stock and a three-year warrant to purchase 1,000 shares of our Common Stock at a per share exercise price of $0.40. Of the $2,034,700 invested in the Series J Private Placement $921,000 was received in cash and $1,113,700 was from the conversion of outstanding indebtedness and accrued board of directors fees. We incurred fees of $24,405 on this transaction.

B $1,000,000 in aggregate gross proceeds from our December 12, 2013 Series K private placement, pursuant to which we sold an aggregate of 4,000 units for a purchase price of $250 per unit. Each unit consists of one share of Series K Convertible Preferred Stock, convertible into 1,000 shares of our Common Stock and a three-year warrant to purchase 500 shares of our Common Stock at a per share exercise price of $0.3125. Of the $1,000,000 invested in the Series K Private Placement $572,044 was received in cash and $427,956 was from the conversion of outstanding indebtedness. We incurred fees of $43,334 on this transaction.

Loans in the aggregate amount of approximately $1,750,600 were received from eleven lenders. $565,000 of these loans were converted into our Series J and Series K Convertible Preferred Stock and $482,011 of these loans were paid back by December 31, 2013. An additional $240,600 was repaid in February 2014. Warrants to purchase 506,000 shares of the Company's Common Stock were issued to four individuals in connection with these loans. The warrants have an exercise price ranging from $0.25 to $0.40 per share, with terms expiring August 3, 2016 to January 20, 2017.

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, 2013 and 2012, we incurred approximately $23,785 and $23,634, 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 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 . . .

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