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| PBIO > SEC Filings for PBIO > Form 10-K on 31-Mar-2009 | All Recent SEC Filings |
31-Mar-2009
Annual Report
OVERVIEW
We are a life sciences company focused on the development and commercialization of a novel, enabling, platform technology called pressure cycling technology ("PCT"). PCT uses cycles of hydrostatic pressure between ambient and ultra-high levels (up to 35,000 psi and greater) to control bio-molecular interactions.
Our pressure cycling technology 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 BarocyclerŽ, 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 ("PCT SPS").
We have experienced negative cash flows from operations with respect to our pressure cycling technology business since our inception. As of December 31, 2008, we had a total cash balance of approximately $918,000. During 2008 we took a number of cost reduction measures, including a comprehensive restructuring program to significantly reduce costs, centralize core operations, and refocus our business strategy in specific areas where our products have found significant market acceptance. The restructuring program included: a reduction in personnel of eight full-time employees (40% of the workforce), reduction in travel and meeting attendance for all personnel, continued reduction in investor relations activities, decreases in the base salary of most of our employees and all of our executive officers, a shutdown of our R&D facility in Rockville, MD, a consolidation of our R&D activities in Massachusetts, and delay of several research and development and marketing programs. We believe that these initiatives will significantly decrease our rate of cash utilization, from just under $1 million per quarter in 2008 to an average of just under $600,000 per quarter during 2009. We also believe that these actions, taken together with the proceeds we received from our $1.8 million equity financing completed in February 2009, will enable us to extend our cash resources into the second quarter of 2010.
Our pressure cycling technology employs a unique approach that we believe has the potential for broad applications 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 (enzymatic) reactions; and
- immunodiagnostics.
Since we began operations as Pressure BioSciences in February 2005, we have focused substantially all of our research and development and commercialization efforts on sample preparation for genomic, proteomic, and small molecule studies.
Our business strategy is to commercialize pressure cycling technology in the area of sample preparation for genomic, proteomic, and small molecule studies ("sample preparation"). We also plan to pursue the further development and commercialization of PCT in other life sciences applications, which could include working with various strategic partners that have greater scientific, and regulatory, expertise in the respective applications than we do. We plan to focus primarily on the application of PCT-enhanced protein digestion for the mass spectrometry market and the advantages of PCT in this market, and the use of PCT in biomarker discovery, soil and plant biology, counter bio-terror and tissue pathology applications.
To support our current strategy, our primary focus is the execution of our commercialization plan for PCT in sample preparation. We remain focused on projects that we feel represent near-term revenue opportunities. If we are successful commercializing our technology in the sample preparation market, we believe that our financial results will be positively affected by a combination of the revenue from the sale, lease, and rental of the Barocycler instruments, the sale of other PCT equipment, such as the PCT Shredder, and by the recurring revenue streams that we hope to realize from the sale of the single-use PULSE Tubes, PCT-dependent kits, and extended service contracts on our instrumentation. We believe the recurring revenue streams that could be generated from our instruments in the field is a very important component of our future financial success. Therefore, we believe that it is important for us to continue to focus on increasing the number of installed Barocyclers in the field. To this end, we have offered our prospective customers the opportunity to lease or rent the Barocycler instruments, and in some cases we have engaged in short-term reagent rental agreements. Under a reagent rental agreement we provide the customer with a Barocycler instrument in exchange for a minimum purchase commitment of consumable products. While these arrangements do not provide us with the immediate revenue of a sale, they do serve to expand the utilization of PCT and they provide a stream of revenue in the form of rental payments and consumable purchases. We define sales, leases, and rentals of Barocycler instruments as revenue-generating installations.
We also derive revenues from Small Business Innovation Research ("SBIR") grants awarded to us by the National Institutes of Health. 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. Additionally, if our work in SBIR Phase I grants is successful, then we expect to apply for larger NIH SBIR Phase II grants. To date we have been awarded two National Institutes of Health ("NIH") Small Business Innovation Research ("SBIR") Phase I Grants and one SBIR Phase II Grant. Both of our Phase I Grants have been completed. The data on one of the Phase I grants was the basis for the submission, and subsequent award, of our Phase II award of approximately $850,000. The Phase II Grant is for work in the area of the use of PCT to extract protein biomarkers, sub-cellular molecular complexes, and organelles, with the expectation that these studies will 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.
In February 2009, we completed a private placement, pursuant to which we sold an aggregate of 156,980 shares of Series A Convertible Preferred Stock, together with warrants, resulting in aggregate gross proceeds to us of $1,805,270.
We believe we have sufficient cash resources to fund normal operations into the second quarter of 2010 due to the restructuring measures we have undertaken and the $1,805,270 we received in connection with our February 2009 private placement. We believe we will need substantial additional capital to fund our current operations beyond the second quarter of 2010. 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.
Years Ended December 31, 2008 as compared to 2007
Revenue
We had total revenue of $852,263 in the year ended December 31, 2008 as compared to $645,870 in the prior year.
PCT Products, Services, Other. Revenue from the sale of PCT products and services was $655,252 in 2008 as compared to $399,787 in 2007. This increase in revenue in 2008 was driven primarily by the installation of a total of 41 Barocycler instruments during 2008 as compared to 20 during 2007, and an increase in sales of consumable products and extended service contracts in 2008 compared to 2007. Although the number of instruments that we installed more than doubled in 2008 as compared to 2007, the increase in revenue was not as significant. This decrease in revenue per instrument installed is due to the fact that twelve of the instruments that we installed during 2008 were sold to our foreign distribution partners at discounted prices. Additionally, ten of our 2008 installations were made pursuant to lease and rental agreements. During 2007 four of our installations were made under lease and rental agreements. When we install instrumentation under lease or rental agreements, we record the revenue over the life of the agreement, generally 12 months or 36 months.
We expect the number of units installed will continue to increase in future periods as we continue to gain commercial awareness of our technology, although we may experience some delays in customer purchases due to current economic conditions in the United States and globally. We also expect that some portion of future installations will 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 may continue to fluctuate from period to period as we continue to drive our installed base and commercialize PCT. We also expect that as we continue to expand the installed base of Barocycler instruments in the field, we will realize increasing revenue 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 2008, we recorded $197,011 of grant revenue as compared to $246,083 in 2007. This decrease in grant revenue was due to a shift in resources from grant-related activities to other research and development projects when the remaining portion of the Phase I grant was completed in the second quarter of 2008. The 2008 revenue was earned in connection with our research and development efforts related to the completion of our SBIR Phase I grant and the commencement of our SBIR Phase II grant in August 2008. We expect that revenue related to the SBIR Phase II grant will increase in 2009, relative to the amount earned in 2008, as we continue to increase our efforts on this important project under an existing grant award. The amount of grant revenue that we recognize in any given period is dependent upon the level of resources we devote to grant-related work in the period under existing grant awards.
Cost of PCT Products and Services
The cost of PCT products and services was $401,017 for the year ended December 31, 2008, compared to $209,050 in 2007. This increase in cost of PCT products and services was primarily due to our increase in sales of Barocycler units. Costs of PCT products and services as a percentage of revenue increased from 52% in 2007 to 61% for 2008. This increase in overall cost of goods sold as a percentage of revenue is due to the fact that we sold 12 Barocycler instruments to our foreign distributors at discounted prices during 2008. Additionally, our gross margins during 2007 were higher than expected due to the sale of several prototype NEP2320 Barocycler instruments during the period. These prototype instruments had been expensed, through the research and development line in the consolidated statement of operations, as they were built; therefore there was no cost of product sales recognized in connection with the sale of these units.
We believe that our cost of PCT Products and Services will improve as a percentage of revenue as we continue to install more instruments, and sell more consumable products, such as PULSE Tubes and ProteoSolve kits. However, we expect our gross margin may fluctuate from period to period as we continue to sell, lease, or rent a varying mix of Barocycler instrumentation and consumable products.
Research and Development
Research and development expenditures decreased to $1,810,590 during 2008 from $2,022,730 in 2007. This decrease was primarily due to the delay of several engineering projects during 2008. This reduction in project spending and a reduction in the total number of employees in our research and development function are steps that were taken as part of our overall cost cutting programs that we implemented during 2008.
Research and development expense included $162,421 and $141,115 of non-cash, stock-based compensation expense related to Statement of Financial Accounting Standards ("SFAS") 123R "Share-Based Payment" ("SFAS 123R") in 2008 and 2007, respectively.
Selling and Marketing
Selling and marketing expenses increased to $1,686,590 in 2008 from $1,386,519 for the year ended December 31, 2007. This increase in selling and marketing expense was primarily the result of our increase in the size of our domestic sales force in early 2008, the addition of our Vice President of Sales in February 2008, and the continued emphasis on strategic marketing programs. In the middle of 2008, we reduced our sales force from seven full time sales directors to three and in late 2008 we further reduced our sales force to two full time directors, as we implemented a full restructuring program to further reduce our rate of cash utilization. Despite these reductions in our sales force, we more than doubled the number of Barocycler instruments that we installed as compared to 2007.
Selling and marketing expense included $93,947 and $70,770 of non-cash, stock-based compensation expense related to SFAS 123R in 2008 and 2007, respectively.
General and Administrative
General and administrative costs totaled $1,920,465 in the year ended December 31, 2008, as compared to $2,174,739 in 2007. The decrease in general and administrative costs was due to a decrease in cash compensation paid to our independent directors, a moratorium on executive bonus payments and a decrease in investor relations spending, and Sarbanes-Oxley compliance costs. These decreases were partially offset by an increase in non-cash, stock-based compensation expense related to SFAS 123R. An increase in spending for patent and trademark work performed in 2008 and general SEC compliance also contributed to partially offset the overall decrease in general and administrative costs. In 2007, our SFAS 123R general and administrative expense was $150,479; in 2008, our general and administrative SFAS 123R expense was $252,827. The increase in general and administrative SFAS 123R expense was due to the fact that our four independent directors did not receive any stock options grants in 2007, but each received non-qualified, fully-vested stock options to purchase 10,000 shares of our common stock in April 2008, resulting in approximately $100,000 in SFAS 123R expense.
Operating Loss from Continuing Operations
The operating loss from continuing operations was $4,966,399 in 2008, as compared to $5,147,168 in the year ended December 31, 2007. This decrease in operating loss was due to an increase in revenue, and therefore gross profit partially offset by an increase in total operating expenses in 2008.
Included in our operating loss was $509,195 and $367,110 of non-cash, stock-based compensation expense related to SFAS 123R in 2008 and 2007, respectively.
Realized Gain on Sale on Securities Held for Sale
During 2007, we completed the liquidation of our investment in Panacos Pharmaceuticals and realized a gain on securities sold of $2,028,720. We did not hold any shares of Panacos Pharmaceuticals common stock in 2008 and therefore did not realize any such gains in 2008.
Interest Income
Interest income totaled $57,954 for the year ended December 31, 2008 as compared to $286,600 for the year ended December 31, 2007. The decrease in interest income from 2007 to 2008 was a result of lower average cash balances and lower yield on our cash during 2008.
Income Tax Benefit from Continuing Operations
For the year ended December 31, 2008 we did not record a benefit for income taxes. For the year ended December 31, 2007 we recorded a benefit for income taxes from continuing operations of $520,214. Despite our history of operating losses, we recorded this benefit due to our expected ability under federal income tax law to carry back current operating losses to offset taxable income that was recorded in 2005.
We expect to record an income tax benefit of approximately $623,000 during 2009 due to new legislation within the American Recovery and Reinvestment Act of 2009 relating to net operating loss carrybacks. The cash is expected to come in during the second half of 2009. Aside from the impact of the passage of this congressional act, we do not expect any other income tax benefit relating to carry backs from prior periods. If we are successful commercializing PCT and if we are able to generate operating income, then we may be able to utilize the net operating loss carry-forwards that we generate.
Gain on Sale of Net Assets Related to Discontinued Operations
During 2008, we did not realize any gain, or loss, in connection with discontinued operations. During 2007, we realized a gain on the sale of Source Scientific, LLC of $1,155,973. This gain is comprised of the $378,503 charge that we recorded in the first quarter of 2007 under the provisions of Staff Accounting Bulletin ("SAB") Topic 5E, "Accounting for Divestiture of a Subsidiary or Other Business Operation ("SAB Topic 5E") and the gain of $1,534,476, net of income taxes of $218,060, that we recorded during the second quarter of 2007, the period in which we completed the sale.
We recorded this gain in connection with the receipt on May 29, 2007 of $1,780,071 from Mr. Richard W. Henson and Mr. Bruce A. Sargeant, the principals of Source Scientific, LLC, as full payment for their purchase of our remaining interest in that business.
Upon completion of the transaction, we accounted for the total gain on the sale of our ownership interests in Source Scientific, LLC as discontinued operations. The charge that we recorded in 2007, under the provisions of SAB Topic 5E, was reclassified as discontinued operations to reflect this change.
Net Loss
Our net loss in 2008 was $4,908,445 as compared to a net loss of $1,155,661 in 2007. This increase in net loss was due to the fact that our operating losses were not partially offset by realized gains from the sale of securities held, and a gain on sale of assets related to discontinued operations during 2008 and benefit from income taxes, as was the case during 2007.
We expect that our net loss in 2009 will be lower than it was in 2008 due to the significant cost cutting measures that we implemented during 2008.
LIQUIDITY AND FINANCIAL CONDITION
As of December 31, 2008, our working capital position was $1,602,556, the primary components of which were cash and cash equivalents, accounts receivable, inventory, prepaid expenses, and deposits. Our working capital balance was partially offset by accounts payable, accrued employee compensation, and other accrued expenses. As of December 31, 2007, our working capital balance was $5,933,822, the primary components of which were cash and cash equivalents, income taxes receivable, prepaid expenses, and deposits. We expect to continue to fund our operations from our working capital balance.
During 2008, we took a number of cost reduction measures, including a comprehensive restructuring program to significantly reduce costs, centralize core operations, and refocus our business strategy in specific areas where our products have found significant market acceptance. The restructuring program included: a reduction in personnel of eight full-time employees (40% of the workforce), reduction in travel and meeting attendance for all personnel, continued reduction in investor relations activities, decreases in the base salary of most of our employees and all of our executive officers, a shutdown of the our R&D facility in Rockville, MD, a consolidation of our R&D activities in Massachusetts and delay of several research and development and marketing programs. We believe that these initiatives significantly decreased our rate of cash utilization, from just under $1 million per quarter to an average of just under $600,000 per quarter during 2009.
On February 12, 2009, we completed a private placement, pursuant to which we sold an aggregate of 156,980 units for a purchase price of $11.50 per unit (the "Purchase Price"), resulting in gross proceeds to us of $1,805,270 (the "Private Placement"). Each unit consists of (i) one share of a newly created series of preferred stock, designated "Series A Convertible Preferred Stock," par value $0.01 per share (the "Series A Convertible Preferred Stock") convertible into 10 shares of our common stock, (ii) a warrant to purchase, at the purchaser's election to be made within 7 days of the closing, either 10 shares of our common stock, at an exercise price equal to $1.25 per share, with a term expiring 15 months after the date of closing ("15 Month Common Stock Warrant"), or 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 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"). The holders of our shares of Series A Convertible Preferred Stock, however, are entitled to receive a cumulative dividend at the rate of 5% per annum of the purchase price paid for the Series A Convertible Preferred Stock, payable semi-annually on June 30 and December 31, commencing on June 30, 2009. See Note 11 to our Consolidated Financial Statements for a further description of the Series A Convertible Preferred Stock and Warrants issued in the Private Placement.
On December 19, 2008, we received $200,000 from one of our distributors in the escrow account for the private placement. Prior to February 12, 2009, the distributor requested that the $200,000 be used as payment for anticipated future purchases of our PCT instrument and consumable products, and not for an investment in the private placement. This amount will be recorded as deferred revenue in the first quarter of 2009.
We believe that because of the cost restructuring measures we have undertaken, together with the $1,805,270 we received in connection with our February 2009 private placement of units, consisting of Series A Convertible Preferred Stock and warrants, we have sufficient cash resources to fund normal operations into the second quarter of 2010. We believe we will need substantial additional capital to fund our current operations beyond the second quarter of 2010. 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.
In June 2008, we engaged Emerging Growth Equities, Ltd. ("EGE"), an investment banking firm, to assist us in raising equity financing to support our research and development activities, commercialization efforts, working capital requirements, and general corporate purposes. The engagement of EGE contemplates a private placement of our securities exempt from the registration requirements under Regulation D promulgated under the Securities Act of 1933, as amended (the "Act") of up to $8,000,000 or more at our discretion (the "Financing"). We have agreed to pay EGE a cash fee of 8% of the gross proceeds from the Financing and to issue EGE warrants to purchase 8% of the number of securities issued in the Financing. The warrants will have a five year term and an exercise price equal to the price of the securities issued in the Financing. However, EGE will receive a lower fee of 3% of the gross proceeds from the Financing and warrants to purchase 3% of the number of securities issued in the Financing with respect to all investors that they do not introduce to us. EGE is also entitled to a retainer of $7,500 per month for three months in 2008.
Either EGE or we may terminate the engagement in general with prior written notice. If during the 12 month period following termination of the engagement we sell securities to any investor introduced to us by EGE, we will pay a declining fee to EGE based upon the number of months elapsed since the date of termination, commencing with a cash fee of 8% of the gross proceeds received from such investors, plus warrants to purchase 8% of the number of securities issued to such investors in the first month following termination of the engagement and with such fees being reduced by 1/12 for each month following such termination. We have also agreed to customary indemnification of EGE in connection with the Financing. Notwithstanding our engagement of EGE, we can provide no assurance that any such equity offerings will occur, or that additional financing will be available to us of acceptable or affordable terms. To date, they have not been successful in raising any funds for us. In October 2008, we revised the terms of our engagement with EGE to eliminate any requirement to pay EGE any fees with respect to any funds we raise without the help of EGE.
Net cash used in continuing operations during 2008 was $4,420,209 as compared to net cash used in continuing operations of $3,896,422 during 2007. The cash used in operations in 2008 included our net loss, an increase in inventory and accounts receivable and a decrease in accrued compensation, partially offset by decreases in deposits, and prepaid expenses. We expect net cash used in continuing operations to decrease in 2009 as we decrease our overall rate of cash utilization.
Net cash used in investing activities during 2008 was $145,819 as compared to net cash provided by investing activities of $1,852,482 in the prior year. The cash generated in 2007 was entirely from the sale of 513,934 shares of Panacos Pharmaceuticals common stock, partially offset by purchases of fixed assets. The cash used in 2008 was related to purchases of fixed assets in connection with Barocyclers under lease. We expect that our investment in fixed assets will decrease in 2009 as we continue to conserve our cash resources.
Net cash generated from financing activities during 2007 was $571,133 and relates to the sale of 126,750 shares of our common stock to 8 non-affiliated investors pursuant to a private placement that we completed in November 2007. We had $9,750 of cash flows from financing activities during 2008.
Net cash provided by discontinued operations during 2007 of $1,562,011 was due to the completion of the divestiture of Source Scientific, LLC. We did not have any cash flows from discontinued operations during 2008.
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