UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended: December 31, 2008
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 000-15360
BIOJECT MEDICAL TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
| | |
| Oregon | | 93-1099680 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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20245 SW 95th Avenue Tualatin, Oregon | | 97062 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (503) 692-8001
Securities Registered pursuant to Section 12(b) of the Act:
| | |
Title of each class | | Name of each exchange on which registered |
| Common Stock, without par value | | OTC Bulletin Board |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes ¨ No x
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer ¨ | | Accelerated filer ¨ | | Non-accelerated filer ¨ | | Smaller reporting company x |
| | | | (Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $5,148,245, computed by reference to the last sales price ($0.40) as reported by the Nasdaq Capital Market, as of the last business day of the Registrant’s most recently completed second fiscal quarter (June 30, 2008).
The number of shares outstanding of the registrant’s common stock as of March 27, 2009 was 16,729,358 shares.
Documents Incorporated by Reference
Portions of the registrant’s definitive Proxy Statement for the 2009 Annual Shareholders’ Meeting are incorporated by reference into Part III.
BIOJECT MEDICAL TECHNOLOGIES INC.
2008 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I
General
We commenced operations in 1985 and are an innovative developer and manufacturer of needle-free injection therapy systems (“NFITS”).
Our long-term goal is to become the leading supplier of needle-free injection systems to the pharmaceutical and biotechnology industries. During 2007 and 2008, we focused our business development efforts on new and existing licensing and supply agreements with leading pharmaceutical and biotechnology companies, as well as numerous research agreements that could lead to long-term agreements. Our pipeline of prospective new partnerships remains active. We are also actively pursuing additional opportunities both domestically and overseas as we expand our current product line.
Our NFITS work by forcing liquid medication at high speed through a tiny orifice held against the skin. This creates a fine stream of high-pressure medication that penetrates the skin, depositing the medication in the tissue beneath. By bundling customized needle-free delivery systems with partners’ injectable medications and vaccines, we can enhance demand for these products in the healthcare provider and end-user markets.
We began a strategic realignment of our company during 2006 with the singular goal of increasing shareholder value. The realignment has two concurrent phases. Phase One was to focus on our fixed operating expenses, primarily by reducing headcount and related expenses. Along this line, in March 2007 and 2006, we reduced the size of our workforce. In addition, on January 16, 2008, we eliminated an additional 13 positions, incurring approximately $0.1 million of severance and related costs in the first quarter of 2008. Phase Two of our realignment campaign is to increase our revenue by increasing product sales and adding license and development agreements. For example, in October 2007, we entered into a new three-year supply agreement with Serono for the delivery of the cool.click™ and Serojet™ spring-powered needle-free device for use with its recombinant human growth hormone drugs. In addition, in June 2008, we signed a new long-term exclusive license, development and supply agreement with Merial, a global animal health company, for a next generation companion animal device, which allows for the delivery of injectables. In addition, in January 2009, we extended our supply agreement with Ferring Pharmaceuticals to deliver the vial adapter for Ferring’s proprietary products. We have also initiated new discussions with a number of potential new partners, as well as with past partners.
We completed a business assessment for strategic targeting and focusing on the most promising potential partnership opportunities, including opportunities to secure injectable indications allowing us to create our own, or with strategic partners, drug+device combinations for the market. We are committed to working with our current partners and assessing ways to ensure continued beneficial long-term partner relationships. We continue to initiate discussions with new potential partners within the large pharmaceutical market, the biotechnology market, the specialty pharmaceutical market and others.
Revenues and results of operations have fluctuated and can be expected to continue to fluctuate significantly from quarter to quarter and from year to year. Various factors may affect quarterly and yearly operating results including: i) the length of time to close product sales; ii) customer budget cycles; iii) the implementation of cost reduction measures; iv) uncertainties and changes in product sales due to third party payer policies and proposals relating to healthcare cost containment; v) the timing and amount of payments under licensing and technology development agreements; vi) our ability to enter into new agreements with partners; and vii) the timing of new product introductions by us and our competitors.
We currently have active licensing and/or development agreements, which often include commercial product supply provisions, with Merial, the Centers for Disease Control and Prevention and Vical.
We currently have significant supply agreements or commitments with Serono, Merial and Ferring Pharmaceuticals Inc.
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See Note 2 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this Annual Report on Form 10-K for detailed descriptions of our agreements or arrangements with these companies.
“Biojector,” “Bioject,” “Vitajet,” “Iject” and “Zetajet” are trademarks or registered trademarks of Bioject Inc.
Where You Can Find More Information
We make available, free of charge, on our website at www.bioject.com our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are filed electronically with the SEC. You can also obtain copies of these reports by contacting Investor Relations at 503-692-8001, ext. 4207. The public may read and copy any materials we file with the Commission at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission atwww.sec.gov.
Needle-Free Injection
Medications are currently delivered using various methods, each of which has both advantages and limitations. The most commonly used drug delivery techniques include oral ingestion, intravenous infusion, subcutaneous, intradermal and intramuscular injection, inhalation and transdermal “patch” diffusion. Many drugs are effective only when injected.
Injections using traditional needle-syringes suffer from many shortcomings, including: (i) the risk of needlestick injuries; (ii) the risk of penetrating a patient’s vein; and (iii) the patient’s aversion to needles and discomfort. The most dangerous of these, the contaminated needlestick injury, occurs when a needle that has been exposed to a patient’s blood accidentally penetrates a healthcare worker’s skin. Contaminated needles can transmit deadly blood-borne pathogens including such viruses as HIV and Hepatitis B.
Because of growing awareness in recent years of the danger of blood-borne pathogen transmission, needle safety has become a higher concern for hospitals, healthcare professionals and their patients. As a result, pressure on the healthcare industry to eliminate the risk of contaminated needlestick injuries has increased. For example, the U.S. Occupational Safety and Health Administration (“OSHA”) issued regulations, effective in 1992, which require healthcare institutions to treat all blood and other body fluids as infectious. These regulations were changed by Congress with passage of the Needlestick Safety Prevention Act, which was effective in 2001. These regulations require implementing “engineering and work practice controls” to “isolate or remove blood-borne pathogen hazards from the workplace.” Among the required controls are special handling and disposal of contaminated “sharps” in biohazardous “sharps” containers, safer medical devices, including needleless systems, and follow-up testing for victims of needlestick injuries. To date, more than 30 states and the U.S. Occupational Safety and Health Administration have adopted, or have pending, legislation or regulations that require health care providers to utilize systems designed to reduce the risk of needlestick injuries.
The costs resulting from needlestick injuries vary widely. Accidental needlesticks involving sterile needles involve relatively little cost. Needlesticks with contaminated needles require investigation and follow-up. These are much more expensive. Investigation typically includes identifying the source of contamination, testing the source for blood-borne pathogens and repeatedly testing the needlestick victim for infection over an extended period. Some healthcare providers are requiring additional measures, including treating all needlestick injuries as contaminated unless proven otherwise.
In an effort to protect healthcare workers from needlestick injuries, many healthcare facilities have adopted more expensive, alternative technologies. While these technologies can help to reduce accidental needlesticks, they cannot eliminate the risk.
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Description of Our Products
Biojector® 2000
Our Biojector® 2000 system (B2000) consists of two components: a hand-held, reusable jet injector and a sterile, single-use, disposable plastic syringe capable of delivering variable doses of medication up to 1.0 mL. The B2000 system is a refinement of jet injection technology that enables healthcare professionals to reliably deliver measured variable doses of medication through the skin, either intramuscularly or subcutaneously, without a needle.
The first component of the system, the Biojector® 2000, is a portable hand-held device, which is approximately the size of a TV remote. It is designed both for ease of use by healthcare professionals, as well as to be attractive and non-threatening to patients. The Biojector® 2000 injector uses disposable CO2 cartridges as a power source. The CO2 cartridges, which are purchased from an outside supplier, give an average of ten injections before requiring replacement. The CO2 gas provides consistent, reliable pressure on the plunger of the disposable syringe, thereby propelling the medication into the tissue. The CO2 propellant does not come into contact with either the patient or the medication. The B2000 is also available with a tank adapter which allows the device to be attached to a large volume CO2 tank. The tank adapter eliminates the need to change CO2 cartridges after every ten injections and is an attractive option for applications where a large number of injections are given in a relatively short period of time.
The second component of the system, the Biojector® single-use disposable syringe, is provided in a sterile, peel-open package and consists of a plastic, needle-free, variable dose syringe, Drug Reconstitution System (“DRS” or “Vial Adapter”) needle-free syringe filling device, which is used to fill the syringe, and a safety cap. The body of the syringe is transparent and has graduated markings to aid accurate filling by healthcare workers.
There are five different Biojector® syringes, each of which is intended for a different injection depth or body type. The syringes are molded using our patented manufacturing process. A trained healthcare worker selects the syringe appropriate for the intended type of injection. One syringe size is for subcutaneous injections, while the others are designed for intramuscular injections, depending on the patient’s body characteristics and the location of the injection.
Giving an injection with a Biojector® 2000 system is easy and straightforward. The healthcare worker giving the injection checks the CO2 pressure on an easy-to-read gauge at the rear of the injector, draws medication up into a disposable plastic syringe using our needle-free Vial Adapter, inserts the syringe into the Biojector® 2000, presses the syringe tip against the appropriate disinfected surface on the patient’s skin, and then presses an actuator, thereby injecting the medication. A thin stream of medication is expelled at high velocity through a precision molded, small diameter orifice in the syringe. The medication is injected at a velocity sufficient to penetrate the skin and force the medication into the tissue at the desired depth.
The current suggested list price for the Biojector® 2000 professional jet injector is $1,200, and the suggested list price for Biojector® syringes is $200 for a box of 100 syringes. CO2 cartridges are sold for a suggested list price of $8.00 for a box of ten. Discounts are offered for volume purchases.
Drug Reconstitution System
The needle-free drug reconstitution system allows for the transfer of diluents to reconstitute powdered medications into liquid form and withdrawal of liquid medication into a syringe without the use of a needle. Our 13mm Vial Adapter has a compact, polycarbonate spike design to draw up liquid medication and to reconstitute lyophilized (powdered) medication. It allows healthcare workers and patients to access medication without using a needle. The Vial Adapter fits most single and multi-dose medication vials available in the U.S. and European markets, and is widely used in clinics and home healthcare throughout North America. While the Vial Adapter is an integral part of the needle-free syringe packaging for the Biojector® 2000 needle-free injection system, it functions perfectly with any conventional syringe.
Several pharmaceutical manufacturers include this unique product as part of their drug reconstitution kits.
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The 13mm Vial Adapter is the ideal solution to the challenges of reconstituting and drawing up medication. It provides clinicians and patients the highest levels of safety, convenience and ease of use.
The suggested list price for the Vial Adapter is $196.00 for a box of 400. Discounts are offered for volume purchases.
Vitajet®
The Vitajet® is also composed of two components, a portable injector unit and a disposable syringe. It is smaller and lower in cost than other products in our needle-free offering. The method of operation and drug delivery is similar to the Biojector®, except that the Vitajet® is powered by a spring rather than by CO2. Due to its ease of use and lower cost, it is a good solution for home-use self-injection. Vitajet’s® regulatory labeling limits its use to the injection of insulin. A modified Vitajet®, called the cool.click™, has received regulatory clearance for injection of Serono’s human growth hormone Saizen® and another modified Vitajet®, called the SeroJet™, has regulatory clearance for administering Serono’s human growth hormone Serostim® for the treatment of AIDS wasting. The Vetjet™ is a modified Vitajet® for use in the veterinary market and is licensed to Merial. We believe that the Vitajet® has the potential to achieve regulatory labeling for additional subcutaneous injections. Currently, the Vitajet is not sold for insulin use and is only offered in the modified versions of the cool.click™, SeroJet™ and Vetjet™.
We have other products under development, which are intended to address other markets or to enhance the Biojector® 2000 system. See “Research and Product Development.”
Marketing and Competition
The traditional needle-syringe is currently the primary method for administering intramuscular and subcutaneous injections.
During the last 20 years, there have been many attempts to develop portable one-shot jet injection hypodermic devices. Problems have arisen in the attempts to develop such devices including: (i) inadequate injection power; (ii) little or no control of pressure and depth of penetration; (iii) complexity of design, with related difficulties in cost and performance; (iv) difficulties in use, including filling and cleaning; and (v) the necessity for sterilization between uses.
In recent years, several spring-driven, needle-free injectors have been developed and marketed, primarily for injecting insulin. We believe that market acceptance of these devices has been limited due to a combination of the cost of the devices coupled with the difficulties of their use.
Also in recent years, various versions of a “safety syringe” have been designed and marketed. Most versions of the safety syringe generally involve a standard or modified needle-syringe with a plastic guard or sheath surrounding the needle. Such covering is usually retracted or removed in order to give an injection. The intent of the safety syringe is to reduce or eliminate needlestick injuries. However, while the safety syringe is in use and before the needle has been covered, a safety syringe still poses a risk of needlestick injury. Additionally, some safety syringes require manipulation after injection and pose the risk of needlestick injury during that manipulation. Safety syringes are also often bulky and add to contaminated waste disposal costs.
Our primary sales and marketing objective is to form development, licensing and supply arrangements with leading pharmaceutical, biotechnology and veterinary companies, which would ordinarily include some or all of the following components: i) licensing revenues for full or partially exclusive access to our products for a specific application or medical indication; ii) development fees if we customize one of our products for the customer or develop a new product; iii) milestone payments related to the customer’s progress in developing products to be used in conjunction with our products; iv) royalty revenue derived from strategic partners’ drug sales; and v) product revenues from the sale of our products to the customer pursuant to a supply agreement. Product sales through this channel would ordinarily be made to the pharmaceutical or biotechnology company, whose sales force would then sell that company’s injectable pharmaceutical products, along with our products, to end-users.
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Selling to new customers in our target markets is often a lengthy process. A new customer is typically adopting our products as a new technology. Accordingly, the purchase approval process usually involves a lengthy product evaluation process, including testing and approval by several individuals or committees within the potential customer’s organization and a thorough cost-benefit analysis.
The medical equipment market is highly competitive, and competition is likely to intensify. Many of our existing and potential competitors have been in business longer than us and have substantially greater technical, financial, marketing, sales and customer support resources. We believe that the primary competition for the Biojector® 2000 system, and other needle-free jet injection systems we may develop, is the traditional, disposable needle-syringe and the safety syringe. Leading suppliers of needle-syringes and safety syringes include: Becton-Dickinson & Co., Sherwood Medical Co., a subsidiary of Tyco International, and Terumo Corp. of Japan. Manufacturers of traditional needle-syringes compete primarily on price, which generally ranges from approximately $0.10 to $0.28 per unit. Manufacturers of safety syringes compete on features, quality and price. Safety syringes generally are priced in a range of $0.30 to $0.79 per unit.
We expect to compete with traditional needle-syringes and safety syringes based on issues of healthcare worker safety, ease of use, reduced cost of disposal, patient comfort, and reduced cost of compliance with OSHA regulations and other legislation. Except in the case of certain safety syringes, we do not expect to compete with needle-syringes based on purchase cost alone. However, we believe that the B2000 system will compete effectively based on overall cost when all indirect costs, including disposal of syringes and testing, treatment and workers’ compensation expenses related to needlestick injuries, are considered.
Several companies are developing devices that will likely compete with our jet injection products for certain applications. We are not aware of any current competing products with U.S. regulatory approval that have total features and benefits comparable to the B2000 system.
We are aware of other portable, needle-free injectors currently on the market, which are generally focused on subcutaneous self-injection applications of 0.5 mL or less. These products include: the Medi-Jector Vision®, which is manufactured by Antares Pharma; and the SQ/Pen 2, which is manufactured by The Medical House. These products compete primarily with our spring-powered product line. Current list prices for such injectors range from approximately $200 to $665 per injector.
Significant Customers
Product sales to customers accounting for 10% or more of our product sales were as follows:
| | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
Merial | | 38 | % | | 35 | % | | 11 | % |
Serono | | 32 | % | | 16 | % | | 27 | % |
Amgen | | — | | | 15 | % | | 24 | % |
Product Line and Geographic Revenue Information
Revenue by product line was as follows:
| | | | | | | | | |
| | | Year Ended December 31, |
| | | 2008 | | 2007 | | 2006 |
Biojector® 2000 (or CO2 powered) | | $ | 848,495 | | $ | 1,753,956 | | $ | 2,205,649 |
Spring Powered | | | 4,387,806 | | | 3,582,198 | | | 2,942,022 |
Vial Adapters | | | 569,627 | | | 1,436,171 | | | 2,941,871 |
| | | | | | | | | |
| | | 5,805,928 | | | 6,772,325 | | | 8,089,542 |
License and Technology Fees | | | 666,846 | | | 1,575,465 | | | 2,705,810 |
| | | | | | | | | |
| | $ | 6,472,774 | | $ | 8,347,790 | | $ | 10,795,352 |
| | | | | | | | | |
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Geographic revenues were as follows:
| | | | | | | | | |
| | | Year Ended December 31, |
| | | 2008 | | 2007 | | 2006 |
United States | | $ | 4,550,976 | | $ | 6,317,356 | | $ | 8,184,597 |
All other | | | 1,921,798 | | | 2,030,434 | | | 2,610,755 |
| | | | | | | | | |
| | $ | 6,472,774 | | $ | 8,347,790 | | $ | 10,795,352 |
| | | | | | | | | |
All of our long-lived assets are located in the United States.
Patents and Proprietary Rights
We believe that the technology incorporated in our currently marketed Biojector® 2000 and Vitajet® devices and single-dose disposable plastic syringes, as well as the technology of products under development, give us advantages over both the manufacturers of competing needle-free jet injection systems and over prospective competitors seeking to develop similar systems. We attempt to protect our technology through a combination of patents, trade secrets and confidentiality agreements and practices.
| | | | | | | | | | | | | | |
Patent Summary Table | | Trademark Summary Table |
Item | | Issued | | Pending | | Total | | Item | | Issued | | Pending | | Total |
U.S. Patents | | 38 | | 12 | | 50 | | U.S. Trademarks | | 6 | | 2 | | 8 |
Foreign Patents | | 16 | | 15 | | 31 | | Foreign Trademarks | | 10 | | 1 | | 11 |
| | | | | | | | | | | | | | |
Total | | 54 | | 27 | | 81 | | Total | | 16 | | 3 | | 19 |
Our patents expire between 2009 and 2025.
Patent applications have been filed on matters specifically related to single use, disposable devices currently under development. We generally file patent applications in the U.S., Canada, Europe and Japan at the times and under the circumstances that we deem filing to be appropriate in each of those jurisdictions. There can be no assurance that any patents applied for will be granted or that patents held by us will be valid or sufficiently broad to protect our technology or provide a significant competitive advantage. We also rely on trade secrets and proprietary know-how that we seek to protect through confidentiality agreements with our employees, consultants, suppliers and others. There can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known to, or be developed independently by, competitors. In addition, the laws of foreign countries may not protect our proprietary rights to our technology, including patent rights, to the same extent as the laws of the U.S.
We believe that we have independently developed our technology and attempt to assure that our products do not infringe on the proprietary rights of others. However, if infringement of the proprietary rights of others is alleged and proved, there can be no assurance that we could obtain necessary licenses to that technology on terms and conditions that would not have an adverse effect.
Government Regulation
Our products and manufacturing operations are subject to extensive government regulations, both in the U.S. and abroad. In the U.S., the Food and Drug Administration (“FDA”) administers the Federal Food, Drug and Cosmetic Act (“FFDCA”) and has adopted regulations to administer the FFDCA. These regulations include policies that: i) govern the introduction of new medical devices; ii) require observing certain standards and practices in the manufacture and labeling of medical devices; and iii) require medical device companies to maintain certain records and report device-related deaths, serious injuries and certain malfunctions to the FDA. Our manufacturing facilities and certain of our records are also subject to FDA inspection. The FDA has broad discretion to enforce the FFDCA and related regulations. Noncompliance with the FFDCA or its regulations can result in a variety of regulatory actions including warning letters, product detentions, device alerts or field corrections, voluntary and mandatory recalls, seizures, injunctive actions and civil or criminal penalties.
Unless exempted by regulation, the FFDCA provides that medical devices may not be commercially distributed in the U.S. unless they have been cleared by the FDA. The FFDCA provides two basic review
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procedures for pre-market clearance of medical devices. Certain products qualify for a submission authorized by Section 510(k) of the FFDCA. Under Section 510(k), manufacturers provide the FDA with a pre-market notification (“510(k) notification”) of the manufacturer’s intent to begin marketing the product. In the 510(k) notification, the manufacturer must establish, among other things, that the product it plans to market is substantially equivalent to another legally marketed product. To be substantially equivalent, a proposed product must have the similar intended use and be determined to be as safe and effective as a legally marketed device. Further, it may not raise questions of safety and effectiveness that are different from those associated with a legally marketed device. Marketing a medical device may commence when the FDA issues correspondence finding substantial equivalence to such a legally marketed device. The FDA may require, in connection with the 510(k) submission, that it be provided with animal and/or human clinical test results.
A 510(k) notification is required when a device is being introduced into the market for the first time, when the manufacturer makes a change or modification to an already marketed device that could significantly affect the device’s safety or effectiveness, and when there is a major change or modification in the intended use of the device. When any change or modification is made in a device or its intended use, the manufacturer is expected to make the initial determination as to whether the change or modification is of a kind that would require filing a new 510(k) notification. FDA regulations provide only limited guidance in making this determination.
If a medical device does not qualify for the 510(k) procedure, the manufacturer must file a pre-market approval application (“PMA”). A PMA must show that the device is safe and effective and is generally a much more comprehensive submission than a 510(k) notification. A PMA typically requires more extensive testing before filing with the FDA and a longer FDA review process.
We are developing the Iject® Needle-Free Injection System, a single prefilled disposable injector for self injection, and pre-filled Biojector® syringes. We plan to seek arrangements with pharmaceutical and biologics companies that will enable them to provide medications in pre-filled syringes packaged with the injector device. See “Research and Product Development.” Before pre-filled Iject® or Biojector® syringes may be distributed for use in the U.S., the FDA may require tests to prove that the medication will retain its chemical and pharmacological properties when stored in and delivered using a pre-filled needle-free syringe. It will be the pharmaceutical or biotechnology company’s responsibility to conduct these clinical tests. It is current FDA policy that such pre-filled syringes are evaluated by the FDA by submitting a Request for Designation (“RFD”) to the Office of Combination Products, (“OCP”). The pharmaceutical or biotechnology company will be responsible for the submission to the OCP. A pre-filled syringe meets the FDA’s definition of a combination product, or a product comprised of two or more regulated components, i.e. drug/device. The OCP will assign a center with primary jurisdiction for a combination product (CDER, CBER, CDRH) and ensure the timely and effective premarket review. The primary or lead review center often will consult or collaborate with other evaluation centers to obtain all the appropriate materials and requirements to process the submission.
We believe that if a drug intended to be used in one of our pre-filled syringes was already the subject of an approved new drug application (“NDA”) or an abbreviated new drug application (“ANDA”) for intramuscular, subcutaneous or intradermal injection, then the main issues affecting clearance for use in the pre-filled syringe would be: i) the ability of the syringe to store the drug; ii) the ability of the manufacturer to assure the drug’s stability until used; and iii) the ability to demonstrate that the needle-free syringe will perform equivalently to a needle and syringe, or is safe and efficacious in its own right. FDA recommends pre-submission discussions with the OCP to clarify submission requirements. An early Request for Designation can avoid costly delays as the primary requirements and the premarket route (510(k), PMA, NDA) will be determined.
The FDA also regulates and monitors our quality assurance and manufacturing practices. The FDA requires us and our contract manufacturers to demonstrate compliance with current Good Manufacturing Practices (“GMP”) Regulations. These regulations require, among other things, that: i) the manufacturing process be regulated and controlled by the use of written procedures; and ii) the ability to produce devices which meet the manufacturer’s specifications be validated by extensive and detailed testing of
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every aspect of the process. GMPs also require investigating any deficiencies in the manufacturing process or in the products produced and detailed record-keeping. The FDA’s interpretation and enforcement of these requirements has been increasingly strict and will likely continue to be at least as strict in the future. Failure to adhere to GMP requirements would cause the products produced by us to be considered in violation of the FFDCA and subject to enforcement action. The FDA monitors compliance with these requirements by requiring manufacturers to register their establishments with the FDA, and by subjecting their manufacturing facilities to periodic FDA inspections. If the inspector observes conditions that violate the FFDCA or GMP regulations, the manufacturer must correct those conditions or explain them satisfactorily. Otherwise, the manufacturer may face potential regulatory action, which may include warning letters, product detentions, device alerts or field corrections, voluntary and mandatory recalls, seizures, injunctive actions and civil or criminal penalties.
In April 2004, we moved to a larger manufacturing facility and the FDA inspected the facility in August 2004 for compliance with Good Manufacturing Practices, with no observations or official actions were required. The most recent FDA inspection was performed in 2007, with one observation reported. A resolution report to address that observation was sent to the FDA and the matter was resolved.
The FDA’s Medical Device Reporting Regulation requires that we provide information to the FDA if any death or serious injury alleged to have been associated with the use of our products occurs. In addition, any product malfunction that would likely cause or contribute to a death or serious injury if the malfunction were to occur must also be reported. FDA regulations prohibit a device from being marketed for unapproved or uncleared indications. If the FDA believes that we are not in compliance with these regulations, it may institute proceedings to detain or seize products, issue a product recall, seek injunctive relief or assess civil and criminal penalties.
The use and manufacture of our products are subject to OSHA and other federal, state and local laws and regulations that relate to such matters as: i) safe working conditions for healthcare workers and other employees; ii) manufacturing practices; iii) environmental protection and disposal of hazardous or potentially hazardous substances; and iv) the policies of hospitals and clinics relating to complying with these laws and regulations. There can be no assurance that we will not be required to incur significant costs to comply with these laws, regulations or policies in the future, or that such laws, regulations or policies will not increase the costs or restrictions related to the use of our products or otherwise have a materially adverse effect upon our ability to do business.
Laws and regulations regarding the manufacture, sale and use of medical devices are subject to change and depend heavily on administrative interpretation. There can be no assurance that future changes in regulations or interpretations made by the FDA, OSHA or other domestic and international regulatory bodies will not adversely affect us.
Sales of medical devices outside of the U.S. are subject to foreign regulatory requirements. The requirements for obtaining pre-market clearance by a foreign country may differ from those required for FDA clearance. Devices having an effective 510(k) clearance or PMA may be exported without further FDA authorization. However, certain countries require their own certifications and FDA authorization is generally required in order to export non-cleared or non-approved medical devices.
In June 1998, we first received certification to ISO 9001 (Quality management systems — Requirements) and EN 46001 (Application of EN ISO 9001 to the manufacture of medical devices) from TÜV Product Services indicating that we have in place a quality system that conforms to International Standards for medical device manufacturers. Our quality system has maintained continuous certification. In 2005, we changed auditors, to Underwriters Laboratories, and, due to a change in requirements, migrated our quality system certification to the International Standard ISO 13485:2003 (Medical devices — Quality management systems — Requirements for regulatory purposes).
Our quality system is also certified under the Canadian Medical Devices Conformity Assessment System (“CMDCAS”) for compliance to the Canadian Medical Device Regulation (“CMDR”). We first we received certification to the CMDR from TÜV in 2003, in accordance with the Standards Council of Canada (“SCC”)
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standards, and Health Canada’s regulatory requirements. That same certification is currently provided by Underwriters Laboratories. We hold Canadian Medical Devices Licenses and Medical Device Establishment License with Health Canada permitting the importation for sale of some of our medical devices in Canada.
In November 1999, we first received certification from TÜV Product Services to EC-Directive 93/42/EEC Annex. II.3 Medical Device Directive, (MDD), which allows us to label selected products with the CE Mark and sell them in the European Community and various non-European countries that recognize the CE Mark. That certification has been continuously maintained. In January 2009, we passed our most recent MDD re-certification audit with Underwriters Laboratories.
Research and Product Development
Research and product development efforts are focused on enhancing our current product offerings and on developing new needle-free injection products. We use clinical magnetic resonance imaging, tissue studies and proprietary in vitro test methods to determine the reliability and performance of new and existing products.
As of March 11, 2009, our research and product development staff, including clinical and regulatory staff members, consisted of 5 employees. Research and development expense totaled $2.2 million and $3.2 million for the years ended December 31, 2008 and 2007, respectively.
A primary focus of our current research efforts is on clinical research in the area of DNA-based vaccines and medications. Currently, our devices are being used in more than one dozen clinical research projects both within and outside of the U.S., of which, approximately half are DNA-based. These research projects are being conducted by companies engaged in the development of DNA-based medications as well as by universities and governmental institutions conducting research in this area.
Developing DNA-based preventative and therapeutic treatments for a variety of diseases is a very active and growing area of medical research. Researchers hope to develop DNA-based treatments for diseases that have previously not been treatable as well as DNA-based alternatives to therapies currently used in the treatment of other diseases. Most DNA therapies currently being developed require injecting the medication either intramuscularly (into the muscle tissue) or intradermally (just under the skin). We have developed an adapter for the Biojector® syringe to allow the device to consistently deliver intradermal injections. This adapter is being used in clinical studies to deliver intradermal injections. Initial studies show the adapter to be effective. A published trial with the Naval Medical Research Center using a DNA-based malaria vaccine indicated that the adapter consistently delivered intradermal injections. In addition, pre-clinical testing in animals provided consistent data indicating effective intradermal injections. This adapter has not been cleared by the FDA to be marketed for intradermal injections and is not currently submitted to the FDA to gain clearance for those claims. If our jet injection technology is proven to enhance the performance of DNA-based medications, this area of medicine could present a significant opportunity for us to license our products to pharmaceutical and biotechnology companies for use in conjunction with their DNA-based medications. There can be no assurance that further clinical studies will prove conclusively that our technology is more effective in delivering DNA-based medications than alternative delivery systems that are either currently available or that may be developed in the future. Further, there can be no assurance, should our technology prove to be more effective in delivering DNA-based medications, that regulatory clearance will be gained to deliver any DNA-based medications using our products. Further, should intradermal delivery of DNA-based medications be critical to effective delivery of those compounds, there is no assurance that we will gain regulatory clearance for intradermal delivery of DNA-based medications with our products.
During 2008, our product development efforts focused on a next generation spring device with auto-disable syringe. In addition, we continued to work on product improvements to existing devices and the development of products for our strategic partners.
Upon entering into an agreement with a partner, we anticipate completion of a family of Iject® devices, each optimized for the delivery of a specific drug or vaccine, which could be licensed to pharmaceutical
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and biotechnology companies for different non-competing products. In addition, our research and development efforts have focused on the Jupiter Jet for dermal fillers and customization for multi-dose prefilled syringes.
Jupiter Jet
The Jupiter Jet is a pistol-shaped, ergonomic, gas-powered injection device being developed for patient and professional use. It is capable of delivering low doses of injectable (0.03 - 0.2 mL) at subcutaneous and intradermal injection depths. It is loaded using a standard, pre-filled (3 mL, 5 mL or 10 mL) vials or syringes. It is powered by either a gas cartridge (similar to that powering the Biojector® 2000) or from an external CO2 tank that connects to the Jupiter Jet via a hose. The injection nozzle is disposable.
The Jupiter Jet is simple and very easy to use and targets the cosmetic and self-injection markets. To set up the device, the disposables (drug vial and injection nozzle) are removed from the blister pack and attached to the device. A CO2 cartridge is loaded and, after a test-fire and priming, the device is ready to operate.
Unlike the Biojector® 2000, which requires a refill of drug injectable after each injection, the Jupiter Jet is loaded with a standard pre-filled syringe vial allowing for multiple variable-dose injections with a single loading. This feature allows the Jupiter Jet to be well suited for regular self-injection (i.e. insulin therapy) or dermatological procedures with repeat injections. Not only does this design reduce time and effort involved in loading the drug into the device, but also using a standard syringe vial reduces the costs associated with using the Jupiter Jet.
Iject®
The Iject® device is designed to be pre-filled and target the growing market for patients administering their own injections in the home. Benefits of the Iject® are: (i) single use; (ii) fully disposable; (iii) minimal patient interaction; (iv) ready to use and (v) safe.
In order to support the pre-filled Iject® family of devices, and to expand the market opportunities for the Biojector® 2000, we are developing component processing and packaging methods to enable standardized, high-speed, automated filling of Iject® and Biojector® syringes. We intend to outsource the sterile filling process to a contract manufacturing partner.
When the pre-filled technology is perfected, we intend to seek arrangements with pharmaceutical and biotechnology companies under which those companies will sell their medications pre-packaged in Iject® devices or Biojector syringes. Purchasing Iject® devices or Biojector® syringes already filled with medication eliminates the filling and measuring procedures associated with traditional injection of medications and with injections administered with the current Biojector® syringe. Before pre-filled syringes may be distributed for use in the U.S., pharmaceutical and biotechnology companies wishing to use these syringes must commit to packaging and distributing their products in the pre-filled syringes and to the time and financial resources necessary to gain regulatory clearance to package and market their products in this manner. This process could be lengthy. In addition, the companies will have to establish that their drugs will remain chemically and pharmacologically stable when packaged and stored in a Biojector® or Iject® pre-filled syringe and that a drug that is packaged, stored and delivered in this manner is safe and effective for its intended uses. See “Governmental Regulation.”
Manufacturing
We assemble our products and related syringes from components purchased from outside suppliers. Some of these components are currently obtained from single sources, with some components requiring significant production lead times. There can be no assurance that sufficient numbers of qualified manufacturing employees will be available when needed to increase production to meet either foreseen or unforeseen demand for our products. Further, while we believe that we continue to maintain supplier relationships that will provide a sufficient supply of materials to meet demands at full manufacturing capacity, there can be no assurance that such supplier relationships will be sufficient to meet such demand in quantities and at prices and quality levels required for us to operate efficiently and profitably.
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Employees
As of March 11, 2009, we had 33 full-time employees. Of these employees, five were engaged in research and product development, 24 in manufacturing and four in administration. As of March 11, 2009, we also had four per diem nurses on contract. None of our employees are represented by a labor union.
Product Liability
We believe that our products reliably inject medications both subcutaneously and intramuscularly when used in accordance with product guidelines. Our current insurance policies provide coverage at least equal to an aggregate of $5 million with respect to certain product liability claims. We have experienced one product liability claim to date, and did not incur a significant liability. There can be no assurance, however, that we will not become subject to more such claims, that our current insurance would cover such claims, or that insurance will continue to be available to us in the future. Our business may be adversely affected by product liability claims.
In addition to the other information contained in this Form 10-K, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition, or results of operations could be materially adversely affected by any of these risks. Please note that additional risks not presently known to us or that we currently deem immaterial may also impair our business and operations.
We will need additional funding to support our operations during the second quarter of 2009; sufficient funding may not be available to us and, if available, may be subject to conditions, and the unavailability of funding could adversely affect our business and cause us to cease operations.At December 31, 2008, cash and cash equivalents were $1.4 million and we had a working capital deficit of $0.3 million. We continue to monitor our cash and have previously taken measures to reduce our expenditure rate, delay capital and maintenance expenditures and restructure our debt. However, if we do not enter into an adequate number of licensing, development and supply agreements with up-front payments, we may need to do one or more of the following to raise additional resources, or reduce our cash requirements:
| | • | | secure additional short-term debt financing; |
| | • | | secure additional long-term debt financing; |
| | • | | secure additional equity financing; |
| | • | | secure a strategic partner; or |
| | • | | reduce our operating expenditures. |
In September 2008, we entered into an agreement with Ferghana Partners, a global investment banking firm, to assist us as we pursue various strategic alternatives, such as a merger or sale, strategic partnering or fund raising. Ferghana Partners is a leading, global specialist investment banking group focused on Healthcare, with significant expertise in identifying and implementing corporate partnering, fund raising, divestitures, acquisitions and other strategic activities. To date, Ferghana has reached out to third party organizations in an effort to pursue these various strategic alternatives, which, in some cases has led to an initiation of discussions between Bioject management and third parties. The process is ongoing and could result in a potential strategic arrangement in the future. There is no guarantee that this or any other process will result in resources or other alternatives being available to us on terms acceptable to us, or at all, or that resources will be received in a timely manner, if at all, or that we will be able to reduce our expenditure run-rate without materially and adversely affecting our business. The current economic downturn and uncertainties in the capital markets may result in it being more difficult for us to obtain resources or engage in other strategic alternatives. Failure to secure additional resources may result in our defaulting on our debt, resulting in our lender foreclosing on our assets, or may cause us to cease operations, seek bankruptcy protection, turn our assets over to our lender or liquidate. These actions would have a material adverse effect on us and the value of our common stock.
Due to the potential risk of having to cease operations during the second quarter of 2009, management has undertaken measures in an attempt to address our liquidity problem when our $0.6 million convertible
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note becomes due on May 15, 2009, if not extended. We are negotiating directly with current debt holders on potential options, if any, to extend or defer existing debt payments until some time in the future when the economic climate and our prospects improve. Some of the actions undertaken in order to improve our chances of continuing operations include the following:
| | • | | initiated an across the board 10% temporary salary reduction for all employees on February 1, 2009; |
| | • | | executive management voluntarily took a 20% temporary base salary reduction on the same date; |
| | • | | enlisted the services of a debt financing broker as of January 20, 2009, to identify opportunities to potentially restructure our current remaining debt, secure additional new/replacement debt, and increase our cash position; |
| | • | | exploring additional opportunities to increase 2009 sales with current customers, including the military and the recent signing of a three-year extension of our Needle-Free Vial Adapter agreement with Ferring Pharmaceuticals; |
| | • | | conducted an assessment of manufacturing costs to identify opportunities to improve gross margins; |
| | • | | engaged in various potential new strategic partnership discussions with sources identified by company contacts, Ferghana Partners and the debt broker (for new debt financiers/investors); and |
| | • | | pursued various additional opportunities to lower expenses in the short term, such as the extension our rent deferral agreement with the landlord through April 2009. |
While management remains committed to work on a number of strategic options and alternatives to keep us as a going entity, there are no assurances that we will be successful.
We have previously been out of compliance with the covenants in our loan agreements and, if we default under our loan agreements in the future, our lender could foreclose on our assets, which would adversely affect our business.On November 19, 2007 we entered into Forbearance Agreement No. 1 with Partners for Growth, L.P. (“PFG”) in relation to the three loans that were then outstanding with PFG, which are referred to collectively as the “PFG Loans.” On May 30, 2008, we entered into Forbearance Agreement No. 2 with PFG in relation to the PFG Loans. These forbearance agreements related to financial covenants we were out of compliance with.
If we are unable to make the payments under the remaining PFG loan, or fail to comply with the financial covenants in the remaining loan, PFG could declare an event of default, accelerate the loan and foreclose on our assets, which would have a material adverse effect on our business.
We have a history of losses and may never be profitable. Since our formation in 1985, we have incurred significant annual operating losses and negative cash flow. At December 31, 2008, we had an accumulated deficit of $121.1 million and a net working capital deficit of $0.3 million. Due to our lack of additional committed capital, recurring losses, negative cash flows and accumulated deficit, the report of our independent registered public accounting firm dated March 31, 2009 expressed substantial doubt about our ability to continue as a going concern. We may never be profitable, which could have a negative effect on our stock price, our business and our ability to continue operations. Our revenues are derived from licensing and technology fees and from product sales. We sell our products to strategic partners, who market our products under their brand name, and to end-users such as public health clinics for vaccinations and the military for mass immunizations. We have not attained profitability at these sales levels. We may never be able to generate significant revenues or achieve profitability. In the future, we are likely to require substantial additional financing. Such financing may not be available on terms acceptable to us, or at all, which would have a material adverse effect on our business. Any future equity financing could result in significant dilution to shareholders.
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Our preferred stock has a liquidation preference and, as a result, if we are sold or liquidated, holders of the preferred stock will be entitled to receive approximately $8.4 million, as of December 31, 2008, prior to any payments to the holders of common stock. We have outstanding shares of Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock. Under the terms of the preferred stock, if we are sold or liquidated, the holders of these shares would be entitled to receive approximately $8.4 million, at December 31, 2008, prior to any payments to the holders of common stock. Accordingly, if we are sold or liquidated, holders of common stock could receive nothing.
If our products are not accepted by the market, our business could fail. Our success will depend on market acceptance of our needle-free injection drug delivery systems and on market acceptance of other products under development. If our products do not achieve market acceptance, our business could fail. Currently, the dominant technology used for intramuscular and subcutaneous injections is the hollow-needle syringe, which has a cost per injection that is significantly lower than that of our products. Our products may be unable to compete successfully with needle-syringes.
We may be unable to enter into additional strategic corporate licensing and distribution agreements or maintain existing agreements, which could cause our business to suffer. A key component of our sales and marketing strategy is to enter into licensing and supply arrangements with leading pharmaceutical and biotechnology companies for whose products our technology provides either increased medical effectiveness or a higher degree of market acceptance. If we cannot enter into these agreements on terms favorable to us or at all, our business may suffer.
In prior years, several agreements have been canceled by our partners prior to completion. These agreements were canceled for various reasons, including, but not limited to, costs related to obtaining regulatory approval, unsuccessful pre-clinical vaccine studies, changes in vaccine development and changes in business development strategies. These agreements resulted in significant short-term revenue. However, none of these agreements developed into the long-term revenue stream anticipated by our strategic partnering strategy.
We may be unable to enter into future licensing or supply agreements with major pharmaceutical or biotechnology companies. Even if we enter into these agreements, they may not result in sustainable long-term revenues which, when combined with revenues from product sales, could be sufficient for us to operate profitably.
Our drug+device strategy is new and is subject to a number of risks and uncertainties and, as a result, we may not be successful in implementing the strategy.In 2007, we announced a new component of our business strategy pursuant to which we are attempting to secure rights to injectable medications to sell in combination with our products under our own brand. Successfully implementing this strategy is subject to a number of risks. We may not be successful in securing rights to medications we are interested in combining with our products. Even if successful in securing rights, these products would be subject to FDA approval, and it will be our responsibility to obtain such approval. This approval may not be obtained or may take a significant period of time to obtain. In addition, there is a risk that our device will not work for the new drug indication. We may also need to raise additional funds to finance this new strategy, and there is no assurance such funds will be available to us on acceptable terms or at all. We do not have experience manufacturing or marketing to end-users drug+device combinations. In addition, these new products may not be accepted by the market. Further, due to our current liquidity situation, we have temporarily suspended implementation of this strategy. Accordingly, there is no assurance that our new strategy will be successfully implemented, and failure to successfully implement the strategy could negatively affect our business.
We must retain qualified personnel in a competitive marketplace, or we may not be able to grow our business.Our success depends upon the personal efforts and abilities of our senior management. We may be unable to retain our key employees, namely our management team, or to attract, assimilate or retain other highly qualified employees. Although we have implemented workforce reductions, there remains substantial competition for highly skilled employees. Our key employees are not bound by
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agreements that could prevent them from terminating their employment at any time. If we fail to attract and retain key employees, our business could be harmed.
Our restructuring activities may not result in the expected benefits, which would negatively impact our future results of operations.In March 2007 and 2006, we restructured our operations, which included reducing the size of our workforce. Further headcount reductions were made in January 2008. Despite these efforts, we cannot ensure that we will achieve the operating expense reductions and improvements in operating margins and cash flows currently anticipated from these activities in the periods contemplated, or at all. If we are unable to realize these benefits or appropriately structure our business to meet market conditions, our results of operations could be negatively impacted. As part of our recent activities, we have reduced the workforce in certain portions of our business. This reduction in staffing levels could require us to forego certain future opportunities due to resource limitations, which could negatively affect our long-term revenues. In addition, these workforce reductions could result in a lack of focus and reduced productivity by remaining employees due to changes in responsibilities or concern about future prospects, which in turn may negatively affect our future revenues. Further, we believe our future success depends, in large part, on our ability to attract and retain highly skilled personnel. Our workforce reduction activities could negatively affect our ability to attract such personnel as a result of perceived risk of future workforce reductions. We cannot assure you that we will not be required to implement further restructuring activities or reductions in our workforce based on changes in the markets and industries in which we compete or that any future restructuring or workforce reduction efforts will be successful.
We depend on a few significant customers.Our top two customers for fiscal 2008 accounted for approximately 70% of total product sales in fiscal 2008. Neither of the customers has ongoing purchase obligations. If either one of these customers delays, reduces or ceases ordering our products or services, our business would be negatively affected.
The delisting of our common stock from The NASDAQ Stock Market may impair the price at which our common stock trades, the liquidity of the market for our common stock and our ability to obtain additional funding.In our Current Report on Form 8-K filed July 22, 2008, we reported that we had received a NASDAQ Staff Determination Letter stating that the NASDAQ Hearings Panel had determined to delist our common stock from The NASDAQ Stock Market, and would suspend trading of our shares effective with the open of business on Wednesday, July 23, 2008. Effective with the open of the market on July 23, 2008, trading in our common stock was transferred to the Over-the-Counter Bulletin Board, an electronic quotation service maintained by the Financial Industry Regulatory Authority. As a consequence of the delisting from the NASDAQ Stock Market, the ability of a stockholder to sell our common stock, the price obtainable for our common stock and our ability to obtain additional funding may be materially impaired. Even if we regain compliance with the NASDAQ rules and seek to be relisted, we cannot be certain that NASDAQ will approve any application we may make for relisting or that any other exchange will approve our common stock for listing.
The fair value of accounting for derivative liabilities may materially impact the results of our operations in future periods. We recorded derivative liabilities in connection with our convertible debt and equity financing agreements at inception in 2006. In accordance with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Common Stock” and SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” these derivative liabilities are reported at fair value each reporting period. Changes in the fair value are recorded as a component of earnings. Changes in the value of the derivative liabilities may materially impact results of operations in future periods.
We have limited manufacturing experience, and may be unable to produce our products at the unit costs necessary for the products to be competitive in the market, which could cause our financial condition to suffer. We have limited experience manufacturing our products in commercially viable quantities. We have increased our production capacity for the Biojector® 2000 system and the Vitajet® product line through automation of, and changes in, production methods, in order to achieve savings through higher volumes of production. If we are unable to achieve these savings, our results of operations
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and financial condition could suffer. The current cost per injection of the Biojector® 2000 system and Vitajet® product line is substantially higher than that of traditional needle-syringes, our principal competition. In order to reduce costs, a key element of our business strategy has been to reduce the overall manufacturing cost through automating production and packaging. There can be no assurance that we will achieve sales and manufacturing volumes necessary to realize cost savings from volume production at levels necessary to result in significant unit manufacturing cost reductions. Failure to do so will continue to make competing with needle-syringes on the basis of cost very difficult and will adversely affect our financial condition and results of operations. We may be unable to successfully manufacture devices at a unit cost that will allow the product to be sold profitably. Failure to do so would adversely affect our financial condition and results of operations.
We are subject to extensive government regulation and must continue to comply with these regulations or our business could suffer.Our products and manufacturing operations are subject to extensive government regulation in both the U.S. and abroad. If we cannot comply with these regulations, we may be unable to distribute our products, which could cause our business to suffer or fail. In the U.S., the development, manufacture, marketing and promotion of medical devices are regulated by the Food and Drug Administration (“FDA”) under the Federal Food, Drug, and Cosmetic Act (“FFDCA”). The FFDCA provides that new pre-market notifications under Section 510(k) of the FFDCA are required to be filed when, among other things, there is a major change or modification in the intended use of a device or a change or modification to a legally marketed device that could significantly affect its safety or effectiveness. A device manufacturer is expected to make the initial determination as to whether the change to its device or its intended use is of a kind that would necessitate the filing of a new 510(k) notification. The FDA may not concur with our determination that our current and future products can be qualified by means of a 510(k) submission or that a new 510(k) notification is not required for such products.
Future changes to manufacturing procedures could require that we file a new 510(k) notification. Also, future products, product enhancements or changes, or changes in product use may require clearance under Section 510(k), or they may require FDA pre-market approval (“PMA”) or other regulatory clearances. PMAs and regulatory clearances other than 510(k) clearance generally involve more extensive prefiling testing than a 510(k) clearance and a longer FDA review process. It is current FDA policy that pre-filled syringes are evaluated by the FDA by submitting a Request for Designation (“RFD”) to the Office of Combination Products (“OCP”). The pharmaceutical or biotechnology company with which we partner is responsible for the submission to the OCP, although we will have this responsibility with respect to drug+device combinations produced by us under our new strategy. A pre-filled syringe meets the FDA’s definition of a combination product, or a product comprised of two or more regulated components, i.e. drug/device. The OCP will assign a center with primary jurisdiction for a combination product (CDER, CDRH) to ensure the timely and effective pre-market review of the product. Depending on the circumstances, drug and combination drug/device regulation can be much more extensive and time consuming than device regulation.
FDA regulatory processes are time consuming and expensive. Product applications submitted by us may not be cleared or approved by the FDA. In addition, our products must be manufactured in compliance with Good Manufacturing Practices, as specified in regulations under the FFDCA. The FDA has broad discretion in enforcing the FFDCA, and noncompliance with the FFDCA could result in a variety of regulatory actions ranging from product detentions, device alerts or field corrections, to mandatory recalls, seizures, injunctive actions and civil or criminal penalties.
Sales of our products, including the Iject® pre-filled syringe, are dependent on regulatory approval being obtained for the product’s use with a given drug to treat a specific condition. It is the responsibility of the strategic partner producing the drug to obtain this approval. The failure of a partner to obtain regulatory approval or to comply with government regulations after approval has been received could harm our business. In order for a strategic partner to sell our devices for delivery of its drug to treat a specific condition, the partner must first obtain government approval. This process is subject to extensive government regulation both in the U.S. and abroad. As a result, sales of our products, including the Iject® product, to any strategic partner are dependent on that partner’s ability
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to obtain regulatory approval. Accordingly, delay or failure of a partner to obtain that approval could cause our financial results to suffer. In addition, if a partner fails to comply with governmental regulations after initial regulatory approval has been obtained, sales to that partner may cease, which could cause our financial results to suffer.
If we cannot meet international product standards, we will be unable to distribute our products outside of the United States, which could cause our business to suffer.Distribution of our products in countries other than the U.S. may be subject to regulation in those countries. Failure to satisfy these regulations would impact our ability to sell our products in these countries and could cause our business to suffer.
We have received the following certifications from Underwriters Laboratories (“UL”) that our products and quality systems meet the applicable requirements, which allows us to label our products with the CE Mark and sell them in the European Community and non-European Community countries.
| | | | |
Certificate | | Issue Date | | Date Renewed |
ISO 13485:2003 and CMDCAS | | February 2006 | | January 2009 |
Annex V of the Directive 93/42/EEC on Medical Devices | | March 2007 | | January 2009 |
Annex II, section 3 of the Directive 93/42/EEC on Medical Devices | | March 2007 | | January 2009 |
If we are unable to continue to meet the standards of ISO 9001 or CE Mark certification, it could have a material adverse effect on our business and cause our financial results to suffer.
If the healthcare industry limits coverage or reimbursement levels, the acceptance of our products could suffer.The price of our products exceeds the price of needle-syringe combinations and, if coverage or reimbursement levels are reduced, market acceptance of our products could be harmed. The healthcare industry is subject to changing political, economic and regulatory influences that may affect the procurement practices and operations of healthcare facilities. During the past several years, the healthcare industry has been subject to increased government regulation of reimbursement rates and capital expenditures. Among other things, third party payers are increasingly attempting to contain or reduce healthcare costs by limiting both coverage and levels of reimbursement for healthcare products and procedures. Because the price of the Biojector® 2000 system exceeds the price of a needle-syringe, cost control policies of third party payers, including government agencies, may adversely affect acceptance and use of the Biojector® 2000 system.
We depend on outside suppliers for manufacturing.Our current manufacturing processes for the Biojector® 2000 jet injector and disposable syringes as well as manufacturing processes to produce our modified Vitajets® consist primarily of assembling component parts supplied by outside suppliers. Some of these components are currently obtained from single sources, with some components requiring significant production lead times. In the past, we have experienced delays in the delivery of certain components. To date, such delays have not had a material adverse effect on our operations. We may experience delays or interruptions in the future, including as a result of suppliers suspending or ceasing operations, and these delays or interruptions could have a material adverse effect on our financial condition and results of operations.
If we are unable to manage our growth, our results of operations could suffer.If our products achieve market acceptance or if we are successful in entering into significant product supply agreements with major pharmaceutical or biotechnology companies, we expect to experience rapid growth. Such growth would require expanded customer service and support, increased personnel, expanded operational and financial systems, and implementing new and expanded control procedures. We may be unable to attract sufficient qualified personnel or successfully manage expanded operations. As we expand, we may periodically experience constraints that would adversely affect our ability to satisfy customer demand in a timely fashion. Failure to manage growth effectively could adversely affect our financial condition and results of operations.
We may be unable to compete in the medical equipment field, which could cause our business to fail.The medical equipment market is highly competitive and competition is likely to intensify. If we cannot compete, our business will fail. Our products compete primarily with traditional needle-syringes, “safety
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syringes” and also with other alternative drug delivery systems. In addition, manufacturers of needle-syringes, as well as other companies, may develop new products that compete directly or indirectly with our products. There can be no assurance that we will be able to compete successfully in this market. A variety of new technologies (for example, transdermal patches) are being developed as alternatives to injection for drug delivery. While we do not believe such technologies have significantly affected the use of injection for drug delivery to date, there can be no assurance that they will not do so in the future. Many of our competitors have longer operating histories as well as substantially greater financial, technical, marketing and customer support resources.
We are dependent on a single technology, and if it cannot compete or find market acceptance, our business will suffer.Our strategy has been to focus our development and marketing efforts on our needle-free injection technology. Focus on this single technology leaves us vulnerable to competing products and alternative drug delivery systems. If our technology cannot find market acceptance or cannot compete against other technologies, business will suffer. We perceive that healthcare providers’ desire to minimize the use of the traditional needle-syringe has stimulated development of a variety of alternative drug delivery systems such as “safety syringes,” jet injection systems, nasal delivery systems and transdermal diffusion “patches.” In addition, pharmaceutical companies frequently attempt to develop drugs for oral delivery instead of injection. While we believe that for the foreseeable future there will continue to be a significant need for injections, alternative drug delivery methods may be developed which are preferable to injection.
We rely on patents and proprietary rights to protect our technology.We rely on a combination of trade secrets, confidentiality agreements and procedures and patents to protect our proprietary technologies. We have been granted a number of patents in the U.S. and several patents in other countries covering certain technology embodied in our current jet injection system and certain manufacturing processes. Additional patent applications are pending in the U.S. and certain foreign countries. The claims contained in any patent application may not be allowed, or any patent or our patents collectively may not provide adequate protection for our products and technology. In the absence of patent protection, we may be vulnerable to competitors who attempt to copy our products or gain access to our trade secrets and know-how. In addition, the laws of foreign countries may not protect our proprietary rights to this technology to the same extent as the laws of the U.S. We believe we have independently developed our technology and attempt to ensure that our products do not infringe the proprietary rights of others.
If a dispute arises concerning our technology, we could become involved in litigation that might involve substantial cost. Such litigation might also divert substantial management attention away from our operations and into efforts to enforce our patents, protect our trade secrets or know-how or determine the scope of the proprietary rights of others. If a proceeding resulted in adverse findings, we could be subject to significant liabilities to third parties. We might also be required to seek licenses from third parties in order to manufacture or sell our products. Our ability to manufacture and sell our products might also be adversely affected by other unforeseen factors relating to the proceeding or its outcome.
If our products fail or cause harm, we could be subject to substantial product liability, which could cause our business to suffer.Producers of medical devices may face substantial liability for damages in the event of product failure or if it is alleged the product caused harm. We currently maintain product liability insurance and, to date, have experienced one product liability claim. There can be no assurance, however, that we will not be subject to a number of such claims, that our product liability insurance would cover such claims, or that adequate insurance will continue to be available to us on acceptable terms in the future. Our business could be adversely affected by product liability claims or by the cost of insuring against such claims.
There are a large number of shares eligible for sale into the public market, which may reduce the price of our common stock.The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market, or the perception that such sales could occur. We have a large number of shares of common stock outstanding and available for resale. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price
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that we deem appropriate. There are also a large number of shares of common stock issuable upon conversion of our outstanding preferred stock, convertible debt and exercise of warrants. In addition, as of December 31, 2008, we had approximately 757,000 shares of common stock available for future issuance under our stock incentive plan and our employee share purchase plan combined. As of December 31, 2008, options to purchase approximately 413,000 shares of common stock were outstanding and approximately 678,000 restricted stock units were outstanding and will be eligible for sale in the public market from time to time subject to vesting.
Our stock price may be highly volatile, which increases the risk of securities litigation.The market for our common stock and for the securities of other small market-capitalization companies has been highly volatile in recent years. This increases the risk of securities litigation relating to such volatility. We believe that factors such as quarter-to-quarter fluctuations in financial results, new product introductions by us or our competition, public announcements, changing regulatory environments, sales of common stock by certain existing shareholders, substantial product orders and announcement of licensing or product supply agreements with major pharmaceutical or biotechnology companies could contribute to the volatility of the price of our common stock, causing it to fluctuate dramatically. General economic trends such as recessionary cycles and changing interest rates may also adversely affect the market price of our common stock.
Concentration of ownership could delay or prevent a change in control or otherwise influence or control most matters submitted to our shareholders.Certain funds affiliated with Life Sciences Opportunities Fund II (Institutional), L.P. (collectively, the “LOF Funds”) and its affiliates currently own shares of Series D Preferred Stock, Series E Preferred Stock, convertible debt and warrants to purchase common stock representing in aggregate approximately 32% of our outstanding voting power (assuming conversion of the debt and exercise of the warrants). As a result, the LOF Funds and their affiliates have the potential to control matters submitted to a vote of shareholders, including a change of control transaction, which could prevent or delay such a transaction.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
Our principal manufacturing and support facilities are located in approximately 40,500 square feet of leased office and manufacturing space in Tualatin, Oregon. The manufacturing facilities include a clean room assembly area, assembly line, testing facilities and warehouse area. The lease, which expires October 31, 2014, has one option to extend for an additional five-year term. The rent is approximately $30,000 per month averaged over the life of the lease term. In November 2008, we negotiated a $15,000 rent deferral for each of November 2008, December 2008 and January 2009. In February 2009, we negotiated a rent deferral of $12,000 for each of February, March and April 2009. See Note 16 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for additional information.
We believe that our facilities are sufficient to support our anticipated manufacturing operations and other needs for at least the next ten years. We believe that, if necessary, we will be able to obtain alternative facilities at rates and terms comparable to those of the current leases.
As of the date of filing this Form 10-K, we are not a party to any litigation that could have a material adverse effect on our financial position or results of operations.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
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PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Stock Prices and Dividends
Prior to July 23, 2008 our common stock traded on the NASDAQ Capital Market under the symbol BJCT. Trading in our common stock was transferred to the Over-the-Counter Bulletin Board, effective with the open of the market on July 23, 2008. The symbol remains BJCT. The following table sets forth the high and low closing sale prices of our common stock for each quarter in the two years ended December 31, 2008.
| | | | | | |
Year Ended December 31, 2007 | | High | | Low |
Quarter 1 | | $ | 1.31 | | $ | 1.01 |
Quarter 2 | | | 1.70 | | | 1.15 |
Quarter 3 | | | 1.50 | | | 1.29 |
Quarter 4 | | | 1.41 | | | 0.35 |
| | |
Year Ended December 31, 2008 | | High | | Low |
Quarter 1 | | $ | 0.68 | | $ | 0.40 |
Quarter 2 | | | 0.45 | | | 0.34 |
Quarter 3 | | | 0.45 | | | 0.25 |
Quarter 4 | | | 0.27 | | | 0.07 |
As of February 18, 2009, there were 628 shareholders of record and approximately 3,100 beneficial shareholders.
We have not declared any cash dividends during our history and have no intention of declaring a cash dividend in the foreseeable future. Our term loan agreement prohibits us from paying cash dividends without the lender’s consent.
Equity Compensation Plan Information
The following table summarizes equity securities authorized for issuance pursuant to compensation plans as of December 31, 2008.
| | | | | | | | |
Plan Category | | Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights (a) | | Weighted average
exercise price of
outstanding options,
warrants and rights (b) | | Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities reflected
in column (a)) (c) | |
Equity compensation plans approved by shareholders | | 412,615 | | $ | 2.01 | | 756,576 | (1) |
Equity compensation plans not approved by shareholders(2) | | 370,362 | | | 1.19 | | 650,000 | (3) |
| | | | | | | | |
Total | | 782,977 | | $ | 1.62 | | 1,406,576 | |
| | | | | | | | |
| (1) | Represents 682,501 shares of common stock available for issuance under our 1992 Stock Incentive Plan and 74,075 shares of common stock available for purchase under our 2000 Employee Stock Purchase Plan. Under the terms of 1992 Stock Incentive Plan, a committee of the Board of Directors may authorize the sales of common stock, grant incentive stock options or non-statutory stock options, and award stock bonuses and stock appreciation rights to eligible employees, officers and directors and eligible non-employee agents, consultants, advisers and independent contractors of Bioject or any parent or subsidiary. |
| (2) | We have issued and outstanding warrants to purchase an aggregate of 370,362 shares of common stock to various non-employee consultants and advisors. The warrants are fully exercisable and have grant dates ranging from November 2004 to October 2008, with four, five and seven year terms and exercise prices ranging from $0.75 to $1.92. |
| (3) | Mr. Makar is entitled to receive up to an additional 650,000 shares of stock pursuant to his employment agreement if certain events or milestones are achieved. These awards are inducement grants made outside of the 1992 Stock Incentive Plan. |
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Recent Sales of Unregistered Securities
On October 31, 2008, we issued a warrant to purchase an aggregate of 8,000 shares of our common stock at an exercise price of $0.75 per share to Andrew S. Forman for services rendered during 2008. The warrant is immediately exercisable and expires four years after the date of grant. The issuance of the warrant was deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering. The purchaser represented his intention to acquire the warrant for investment only and not with a view for sale in connection with any distribution thereof, and appropriate legends were affixed to the warrant. The sale of the warrant was made without general solicitation or advertising and the offering of the warrant was not underwritten.
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements concerning payments to be received under agreements with strategic partners, capital expenditures and cash requirements. Such forward looking statements (often, but not always, using words or phrases such as “expects” or “does not expect,” “is expected,” “anticipates” or “does not anticipate,” “plans,” “estimates” or “intends,” or stating that certain actions, events or results “may,” “could,” “would,” “should,” “might” or “will” be taken, occur or be achieved) involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward looking statements. Such risks, uncertainties and other factors include, without limitation, the risk that we may not enter into anticipated licensing, development or supply agreements, the risk that we may not achieve the milestones necessary for us to receive payments under our development agreements, the risk that our products will not be accepted by the market, the risk that we will be unable to obtain needed debt or equity financing on satisfactory terms, or at all, the risk that we may default on our outstanding debt obligations, risks related to the general economic environment and uncertainties in the financial markets, uncertainties related to our dependence on the continued performance of strategic partners and technology and uncertainties related to the time required for us or our strategic partners to complete research and development and obtain necessary clinical data and government clearances.
Forward-looking statements are based on the estimates and opinions of management on the date the statements are made. We assume no obligation to update forward-looking statements if conditions or management’s estimates or opinions should change, even if new information becomes available or other events occur in the future. See also Item 1A. Risk Factors.
OVERVIEW
We are an innovative developer and manufacturer of needle-free injection therapy systems (“NFITS”).
Our long-term goal is to become the leading supplier of needle-free injection systems to the pharmaceutical and biotechnology industries. During 2007 and 2008, we focused our business development efforts on new and existing licensing and supply agreements with leading pharmaceutical and biotechnology companies, as well as numerous research agreements that could lead to long-term agreements. Our pipeline of prospective new partnerships remains active. We are also actively pursuing additional opportunities both domestically and overseas as we expand our current product line. However, given the current difficult global economic conditions, it will likely take longer to finalize agreements.
Our NFITS work by forcing liquid medication at high speed through a tiny orifice held against the skin. This creates a fine stream of high-pressure medication that penetrates the skin, depositing the medication in the tissue beneath. By bundling customized needle-free delivery systems with partners’ injectable
21
medications and vaccines, we can enhance demand for these products in the healthcare provider and end-user markets.
We began a strategic realignment of our company during 2006 with the singular goal of increasing shareholder value. The realignment has two concurrent phases. Phase One was to focus on our fixed operating expenses, primarily by reducing headcount and related expenses. Along this line, in March 2007 and 2006, we reduced the size of our workforce. In addition, on January 16, 2008, we eliminated an additional 13 positions, incurring approximately $0.1 million of severance and related costs in the first quarter of 2008. Phase Two of our realignment campaign is to increase our revenue by increasing product sales and adding license and development agreements. For example, in October 2007, we entered into a new three-year supply agreement with Serono for the delivery of the cool.click™ and Serojet™ spring-powered needle-free device for use with its recombinant human growth hormone drugs. In June 2008, we signed a new long-term exclusive license, development and supply agreement with Merial, a global animal health company, for a next generation companion animal device, which allows for the delivery of injectables. In addition, in January 2009, we extended our supply agreement with Ferring Pharmaceuticals to deliver the vial adapter for Ferring’s proprietary products. We have also initiated new discussions with a number of potential new partners, as well as with past partners.
We completed a business assessment for strategic targeting and focusing on the most promising potential partnership opportunities, including opportunities to secure injectable indications allowing us to partner with a pharmaceutical or biotech company or create our own drug+device combinations for the market. We are committed to working with our current partners and assessing ways to ensure continued beneficial long-term partner relationships. We continue to initiate discussions with new potential partners within the large pharmaceutical market, the biotechnology market, the specialty pharmaceutical market and other markets.
We do not expect to report net income in 2009.
GOING CONCERN AND CASH REQUIREMENTS FOR THE NEXT TWELVE-MONTH PERIOD
See Note 1 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
CONTRACTUAL PAYMENT OBLIGATIONS
A summary of our contractual commitments and obligations as of December 31, 2008 was as follows:
| | | | | | | | | | | | | | | |
| | | Payments Due By Period |
Contractual Obligation | | Total | | 2009 | | 2010 and
2011 | | 2012 and
2013 | | 2014 and
beyond |
December 2007 $600,000 LOF convertible note | | $ | 600,000 | | $ | 600,000 | | $ | — | | $ | — | | $ | — |
$1.25 million PFG term loan(1) | | | 810,000 | | | 660,000 | | | 150,000 | | | — | | | — |
Interest on all debt facilities | | | 38,088 | | | 36,063 | | | 2,025 | | | — | | | — |
Operating leases | | | 2,381,163 | | | 388,348 | | | 805,459 | | | 829,364 | | | 357,992 |
Capital leases | | | 56,047 | | | 32,239 | | | 23,808 | | | — | | | — |
Purchase order commitments | | | 452,992 | | | 452,992 | | | — | | | — | | | — |
| | | | | | | | | | | | | | | |
| | $ | 4,338,290 | | $ | 2,169,642 | | $ | 981,292 | | $ | 829,364 | | $ | 357,992 |
| | | | | | | | | | | | | | | |
| (1) | The entire accreted value of $633,782 of our $1.25 million term loan is classified as current on our consolidated balance sheet as of December 31, 2008 due to the fact that the agreement contains subjective acceleration clauses, which could result in the debt becoming due at any time. However, since none of the subjective acceleration clauses have been triggered to date, it is included in this table according to its contractual maturity. The unpaid principal amount of the $1.25 million term loan was $810,000 at December 31, 2008. |
Purchase order commitments relate to future raw material inventory purchases, research and development projects and other operating expenses.
See Note 16 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
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NASDAQ DELISTING
See Note 3 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
CONVERSION OF $615,000 CONVERTIBLE NOTE
See Note 13 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
OUTSTANDING DEBT
$1.25 Million Convertible Loan
We have outstanding a term loan agreement with PFG for convertible debt financing (the “Debt Financing”). At December 31, 2008, $0.8 million was outstanding under this loan. This loan is due in March 2010, with principal payments of $55,000 due per month, at PFG’s option, beginning October 1, 2008. If PFG elects to forgo any of the principal payments, the latest this loan will be due is March 2011. However, due to certain subjective acceleration clauses contained in the Debt Financing agreement, the accreted value of the Debt Financing is reflected as current on our balance sheet. The loan bears interest at the Prime Rate plus 3% per annum and is convertible at any time by PFG into our common stock at $0.90 per share. In addition, if our common stock trades at a price of $4.11 per share or higher for 20 consecutive trading days, we can force PFG to convert the debt to common stock, subject to certain limitations on trading volume. If we prepay this loan, we will issue PFG a warrant to purchase a number of shares of common stock equal to what it would have received upon conversion of the remaining outstanding principal balance that was prepaid at a price of $0.90 per share. As a result of the derivative accounting prescribed by EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Common Stock,” at December 31, 2008, this debt was recorded on our balance sheet at $634,000 and is being accreted on the effective interest method to its face value of $0.8 million over the 18-month contractual term of the debt. See also Note 11 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
$600,000 Convertible Notes
On December 5, 2007, we entered into Convertible Note Purchase and Warrant Agreements with each of Life Science Opportunities Fund II, L.P. (“LOF II”) and Life Sciences Opportunities Fund II (Institutional) L.P. (“LOF Institutional” and, together with LOF II, the “Purchasers”) pursuant to which we issued Convertible Promissory Notes and warrants to purchase our common stock. Pursuant to the agreements, we sold a note in the principal amount of $91,104 to LOF II and a note in the principal amount of $508,896 to LOF Institutional. The notes bear interest at the rate of 8% per annum with all principal and interest due May 15, 2009 and may not be prepaid without the written consent of the purchaser holding a given note. The notes are convertible at any time by the purchasers into our common stock at the rate of $0.75 per share. The notes will be automatically converted upon a qualified financing, as defined in the purchase agreement, at a price equal to the financing price.
The warrants are exercisable for an aggregate of 80,000 shares of our common stock at an exercise price of $0.75 per share. Each warrant is immediately exercisable and expires four years from the date of issuance.
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RESULTS OF OPERATIONS
The consolidated financial data for the years ended December 31, 2008 and 2007 are presented in the following table:
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | |
Revenue: | | | | | | | | |
Net sales of products | | $ | 5,805,928 | | | $ | 6,772,325 | |
Licensing and technology fees | | | 666,846 | | | | 1,575,465 | |
| | | | | | | | |
| | | 6,472,774 | | | | 8,347,790 | |
Operating expenses: | | | | | | | | |
Manufacturing | | | 4,195,318 | | | | 5,857,016 | |
Research and development | | | 2,173,229 | | | | 3,180,454 | |
Selling, general and administrative | | | 2,601,648 | | | | 3,185,204 | |
| | | | | | | | |
Total operating expenses | | | 8,970,195 | | | | 12,222,674 | |
| | | | | | | | |
Operating loss | | | (2,497,421 | ) | | | (3,874,884 | ) |
Interest income | | | 39,771 | | | | 116,917 | |
Interest expense | | | (510,575 | ) | | | (632,840 | ) |
Loss on extinguishment of debt | | | (597,525 | ) | | | — | |
Change in fair value of derivative liabilities | | | 522,084 | | | | 352,468 | |
| | | | | | | | |
| | | (546,245 | ) | | | (163,455 | ) |
| | | | | | | | |
Net loss | | | (3,043,666 | ) | | | (4,038,339 | ) |
Preferred stock dividend | | | (209,180 | ) | | | (393,873 | ) |
| | | | | | | | |
Net loss allocable to common shareholders | | $ | (3,252,846 | ) | | $ | (4,432,212 | ) |
| | | | | | | | |
Basic and diluted net loss per common share allocable to common shareholders | | $ | (0.20 | ) | | $ | (0.29 | ) |
| | | | | | | | |
Shares used in per share calculations | | | 15,933,486 | | | | 15,025,255 | |
| | | | | | | | |
Revenue
The $1.0 million, or 14.3%, decrease in product sales in 2008 compared to 2007 was due primarily to the following:
| | • | | B2000 sales to BioScrip and Roche/Trimeris decreased from $684,000 to $131,000, or 81%, primarily as a result of the October 2007 announcement from Hoffmann-La Roche Inc. and Trimeris Inc. that they were discontinuing their FDA submission for Fuzeon® to be administered with the B2000; |
| | • | | there were no sales to Amgen in 2008 compared to sales of $990,000 in 2007. Since our agreement with Amgen has expired, we do not anticipate any significant sales to Amgen in future periods; and |
| | • | | a decrease in sales to Merial from $2.4 million to $2.2 million, or 8%, in 2008 compared to 2007, primarily due to the timing of orders. |
These factors were partially offset by the following:
| | • | | an increase in sales to Serono from $1.1 million to $1.9 million, or 76%, in 2008 compared to 2007 due to the timing of orders from Serono; and |
| | • | | an increase in sales to Ferring from $421,000 to $467,000, or 11%, in 2008 compared to 2007. |
We currently have significant supply agreements or commitments with Serono, Merial and Ferring Pharmaceuticals Inc.
License and technology fees decreased $909,000, or 57.7%, in 2008 compared to 2007, in accordance with the terms of our current agreements. Revenue from agreements that existed in 2007 but did not exist in 2008 totaled $902,000 in 2007. Payments from Serono increased $104,000 in 2008 compared to 2007 in connection with their October 2007 supply agreement. Payments from Merial increased $107,000 in 2008 compared to 2007 in connection with their June 2008 agreement.
We currently have active licensing and/or development agreements, which often include commercial product supply provisions, with Merial, the Centers for Disease Control and Prevention and Vical.
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Manufacturing Expense
Manufacturing expense is made up of the cost of products sold and manufacturing overhead expense related to excess manufacturing capacity.
The $1.7 million, or 28.4%, decrease in manufacturing expense in 2008 compared to 2007 was primarily due to product volume and mix and reduced indirect manufacturing headcount. The 2008 expense included a $94,000 non-cash charge to fully write-off our goodwill balance. See Notes 2 and 7 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for additional information.
Research and Development Expense
Research and development costs include labor, materials and costs associated with clinical studies incurred in the research and development of new products and modifications to existing products.
The $1.0 million, or 31.7%, decrease in research and development expense in 2008 compared to 2007 was primarily due to the timing of expenses related to on-going projects and reduced headcount. These factors were partially offset in 2008 by $92,000 of restructuring and severance expense compared to $38,000 of restructuring and severance expense in 2007.
Current significant projects include the next generation spring-powered device with an auto disable feature.
Selling, General and Administrative Expense
Selling, general and administrative costs include labor, travel, outside services and overhead incurred in our sales, marketing, management and administrative support functions.
The $0.6 million, or 18.3%, decrease in selling, general and administrative expense in 2008 compared to 2007 was due primarily to a decrease in restructuring and severance expense, partially offset by the hiring of our CEO in October 2007. Restructuring and severance expense included in selling, general and administrative expense totaled $1,000 in 2008 compared to $576,000 in 2007.
Restructuring and Severance
Restructuring and severance charges were included as a component of operating expenses as follows:
| | | | | | |
| | | Year Ended December 31, |
| | | 2008 | | 2007 |
Manufacturing | | $ | 12,330 | | $ | 55,229 |
Research and development | | | 92,135 | | | 38,277 |
Selling, general and administrative | | | 764 | | | 576,020 |
| | | | | | |
Total | | $ | 105,229 | | $ | 669,526 |
| | | | | | |
Our accrued liability for past restructuring and severance activities totaled $0 and $129,000 at December 31, 2008 and 2007, respectively.
Interest Expense
Interest expense included the following:
| | | | | | |
| | | Year Ended December 31, |
| | | 2008 | | 2007 |
Contractual interest expense | | $ | 149,091 | | $ | 282,069 |
Amortization of debt issuance costs | | | 144,690 | | | 102,099 |
Accretion of PFG and LOF convertible debt | | | 216,794 | | | 248,672 |
| | | | | | |
| | $ | 510,575 | | $ | 632,840 |
| | | | | | |
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In addition to contractual interest expense, in future periods, interest expense will include the following:
| | • | | amortization of unamortized debt issuance costs, which totaled $7,000 at December 31, 2008 and are being amortized at the rate of $4,000 per quarter; and |
| | • | | accretion of the $0.8 million outstanding convertible debt at the rate of approximately $24,000 per quarter. |
Loss on Extinguishment of Debt
The amendment of the Convertible Loan, as described in Note 11 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K, was accounted for as an extinguishment of debt in accordance with EITF 96-19 “Debtor’s Accounting for a Modification or Exchange of Debt Instruments.” We determined that the net present value of the cash flows under the terms of the amendment was more than 10% different from the present value of the remaining cash flows under the terms of the original Convertible Loan. Due to the substantial difference, we determined an extinguishment of debt had occurred with the amendment, and, as such, it was necessary to reflect the Convertible Loan at its fair market value and record a loss on extinguishment of debt of approximately $0.6 million in 2008. The amount of the loss was determined based on the following:
| | • | | The difference between the Black-Scholes value of the Convertible Loan on September 15, 2008 and the unaccreted value on that date, which totaled $470,175; plus |
| | • | | The difference between the fair value of the derivative liability for the conversion feature, which totaled $17,212; plus |
| | • | | $110,138 of unamortized debt issuance costs. |
Change in Fair Value of Derivative Liabilities
Our derivative liabilities are recorded at fair value and are marked to market each period. The fair value of each of these instruments is determined using the Black-Scholes valuation model.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception in 1985, we have financed our operations, working capital needs and capital expenditures primarily from private placements of securities, the exercise of warrants, loans, proceeds received from our initial public offering in 1986, proceeds received from a public offering of common stock in 1993, licensing and technology revenues and revenues from sales of products.
Total cash, cash equivalents and short-term marketable securities at December 31, 2008 were $1.4 million compared to $2.4 million at December 31, 2007. We had a working capital deficit of $0.3 million at December 31, 2008 compared to working capital of $0.4 million at December 31, 2007. Going forward, we anticipate debt retirement costs to be approximately $165,000 per quarter in 2009 for our Convertible Loan, and, unless converted into common stock or deferred, our outstanding $600,000 convertible debt plus accrued interest will be due in May 2009. Given our current cash and cash equivalents, our debt repayment obligations and our current rate of cash usage, if no new licensing, development or supply agreements with up-front payments are entered into or we do not raise debt or equity financing or restructure our existing debt obligations during the second quarter of 2009, we anticipate that we will be unable to continue operations. We are addressing this issue by engaging the services of Ferghana Partners to assist us as we pursue various strategic alternatives, as well as by pursuing additional debt financing options.
The overall decrease in cash, cash equivalents and short-term marketable securities during 2008 resulted from $47,000 used for capital expenditures, $154,000 used for other investing activities, primarily patent applications, and $1.0 million used for principal payments on short and long-term debt and capital leases, partially offset by $161,000 provided by operations, as discussed in more detail below.
Net accounts receivable decreased $0.3 million to $0.5 million at December 31, 2008 compared to $0.8 million at December 31, 2007. Receivables from five different customers accounted for a total of 97% of our net accounts receivable balance at December 31, 2008, with individual accounts totaling 45%, 13%,
26
10%, 10% and 9%, respectively. Of the accounts receivable due at December 31, 2008, $489,000 was collected prior to the filing of this Form 10-K. Historically, we have not had collection problems related to our accounts receivable.
Inventories increased $0.2 million to $1.0 million at December 31, 2008 compared to $0.8 million at December 31, 2007, primarily due to a build-up of inventory based on forecasted sales for the first quarter of 2009.
Capital expenditures of $47,000 in 2008 were primarily for the purchase of manufacturing tooling. We anticipate spending up to a total of $50,000 in 2009 for production molds for current research and development projects.
Accounts payable decreased $0.4 million to $0.7 million at December 31, 2008 compared to $1.1 million at December 31, 2007 primarily due to payments to vendors for first quarter forecasted sales.
Derivative liabilities of $23,000 at December 31, 2008 reflect the fair value of the derivative liabilities associated with certain of our debt and equity transactions. The fair value of the derivative liabilities is adjusted on a quarterly basis using the Black-Scholes valuation model, with changes in fair value being recorded as a component of earnings.
Deferred revenue totaled $1.8 million at December 31, 2008 compared to $0.4 million at December 31, 2007. The balance at December 31, 2008 included $1.6 million received from Merial, $217,000 received from Serono and $17,000 received from Vical. See Note 2 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for a discussion of our 2008 agreement with Merial.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 19 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this Annual Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Our critical accounting policies and estimates include the following:
| | • | | revenue recognition for product development and license fee revenues; |
| | • | | goodwill and other long-lived asset impairment; |
| | • | | stock-based compensation; and |
| | • | | fair value of derivative liabilities. |
Revenue Recognition for Product Development and License Fee Revenues
In accordance with Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition,” product development revenue is recognized, to the extent of cash received, on a percentage of completion basis as qualifying expenditures are incurred. Licensing revenues, if separable, are recognized over the term of the license agreement. The FASB’s Emerging Issues Task Force (“EITF”) 00-21 “Accounting for Multiple Element
27
Arrangements” requires arrangements with multiple elements to be broken out as separate units of accounting based on their relative fair values. Revenue for a separate unit of accounting should be recognized only if the amount due can be reliably measured and the earnings process is substantially complete. Any units that can not be separated must be accounted for as a combined unit. Our accounting policy is consistent with EITF 00-21. Should agreements be terminated prior to completion, or our estimates of percentage of completion be incorrect, we could have unanticipated fluctuations in our revenue on a quarterly basis. Amounts received prior to meeting recognition criteria are recorded on our balance sheet as deferred revenues and are recognized according to the terms of the associated agreements. At December 31, 2008, deferred revenues totaled approximately $1.8 million and included amounts received from Merial, Serono and Vical.
Inventory Valuation
We evaluate the realizability of inventory values based on a combination of factors, including the following: historical and forecasted sales and usage rates, anticipated technology improvements and product upgrades, as well as other factors. All inventories are reviewed quarterly to determine if inventory carrying costs exceed market selling prices and if certain components have become obsolete. We record valuation adjustments for inventory based on the above factors. If circumstances related to our inventories change, our estimates of the realizability of inventory values could materially change.
Goodwill and Other Long-Lived Asset Impairment
Pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” we are required to test our goodwill for impairment at least annually or more frequently if conditions indicate that an impairment may have occurred. In the second quarter of 2008, our common stock was delisted from The NASDAQ Stock Market and now trades on the OTCBB. This may impair the price at which our common stock trades and the liquidity of the market for our common stock, which may negatively affect our ability to obtain additional funding. We tested our goodwill for impairment in the second quarter of 2008 and determined that an impairment had occurred. Accordingly, we recorded a non-cash charge of $94,074 as a component of manufacturing expense in the second quarter of 2008 to fully write-off our goodwill balance, which was related to manufacturing assets. At December 31, 2008, we did not have any goodwill recorded on our balance sheet.
We evaluate our other long-lived assets and certain identified intangible assets for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable utilizing an undiscounted cash flow analysis. We did not recognize any impairment of our other long-lived assets during 2008 or 2007. If circumstances related to our long-lived assets change, we may record additional impairment charges in the future.
Stock-Based Compensation
SFAS No. 123R which requires the measurement and recognition of compensation expense for all share based payment awards granted to our employees and directors, including employee stock options, restricted stock and stock purchases related to our ESPP based on the estimated fair value of the award on the grant date. We utilize the Black-Scholes valuation model for valuing our stock-based awards.
The use of the Black-Scholes valuation model to estimate the fair value of stock option awards requires us to make judgments and assumptions regarding the risk-free interest rate, expected dividend yield, expected term and expected volatility over the expected term of the award. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the actual amount of expense could be materially different in the future.
Compensation expense is only recognized on awards that ultimately vest. Therefore, for both stock option awards and restricted stock awards, we have reduced the compensation expense to be recognized over the vesting period for anticipated future forfeitures. Forfeiture estimates are based on historical forfeiture patterns. We update our forfeiture estimates annually and recognize any changes to
28
accumulated compensation expense in the period of change. If actual forfeitures differ significantly from our estimates, our results of operations could be materially impacted.
Fair Value of Derivative Liabilities
We recorded derivative liabilities in connection with our convertible debt and equity financing agreements entered into in 2006. Derivative liabilities are presented at fair value each reporting period and changes in fair value are recorded in earnings as a component of interest expense. The fair value of derivative liabilities is determined using the Black-Scholes valuation model.
The use of the Black-Scholes valuation model to estimate fair value requires us to make judgments and assumptions regarding the risk-free interest rate, expected dividend yield, expected term and expected volatility of the instrument over the expected term. The assumptions used in calculating the fair value of derivative liabilities represent management’s best estimates, but these estimates involve inherent uncertainties. Changes in the fair value of these instruments could materially impact the results of operations in future periods.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The information required by this item begins on the following page.
29
Report of Independent Registered Public Accounting Firm
To the Board of Directors and shareholders
Bioject Medical Technologies Inc.
We have audited the accompanying consolidated balance sheets of Bioject Medical Technologies Inc. (“the Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bioject Medical Technologies Inc. as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses, has had significant recurring negative cash flows from operations, and has an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result form this uncertainty.
/s/ Moss Adams LLP
Portland, Oregon
March 31, 2009
30
BIOJECT MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 1,351,892 | | | $ | 1,722,705 | |
Short-term marketable securities | | | — | | | | 666,534 | |
Accounts receivable, net of allowance for doubtful accounts of $5,133 and $13,702 | | | 477,329 | | | | 847,382 | |
Inventories | | | 1,007,423 | | | | 777,151 | |
Other current assets | | | 74,675 | | | | 323,824 | |
| | | | | | | | |
Total current assets | | | 2,911,319 | | | | 4,337,596 | |
Property and equipment, net of accumulated depreciation of $6,787,613 and $6,052,600 | | | 1,608,761 | | | | 2,297,262 | |
Goodwill | | | — | | | | 94,074 | |
Other assets, net | | | 1,276,521 | | | | 1,240,319 | |
| | | | | | | | |
Total assets | | $ | 5,796,601 | | | $ | 7,969,251 | |
| | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Short-term notes payable | | $ | 688,782 | | | $ | 827,621 | |
Current portion of long-term debt | | | 650,761 | | | | 166,667 | |
Accounts payable | | | 673,023 | | | | 1,052,364 | |
Accrued payroll | | | 161,622 | | | | 178,851 | |
Derivative liabilities | | | 22,778 | | | | 527,650 | |
Accrued severance and related liabilities | | | — | | | | 129,123 | |
Other accrued liabilities | | | 518,412 | | | | 719,882 | |
Deferred revenue | | | 489,993 | | | | 316,031 | |
| | | | | | | | |
Total current liabilities | | | 3,205,371 | | | | 3,918,189 | |
Long-term liabilities: | | | | | | | | |
Convertible notes payable | | | — | | | | 1,224,081 | |
Deferred revenue | | | 1,348,417 | | | | 102,083 | |
Other long-term liabilities | | | 309,996 | | | | 315,591 | |
Commitments | | | | | | | | |
Shareholders’ equity: | | | | | | | | |
Preferred stock, no par value, 10,000,000 shares authorized: | | | | | | | | |
Series D Convertible - 2,086,957 shares issued and outstanding at December 31, 2008 and 2007, liquidation preference of $1.15 per share | | | 1,878,768 | | | | 1,878,768 | |
Series E Convertible - 3,308,392 shares issued and outstanding at December 31, 2008 and 2007, liquidation preference of $1.37 per share | | | 5,478,466 | | | | 5,316,106 | |
Series F Convertible - 8,314 and 0 shares issued and outstanding at December 31, 2008 and 2007, liquidation preference of $75 per share | | | 670,134 | | | | — | |
Common stock, no par value, 100,000,000 shares authorized; 16,436,420 shares and 15,403,705 shares issued and outstanding at December 31, 2008 and 2007 | | | 113,962,525 | | | | 113,018,663 | |
Accumulated deficit | | | (121,057,076 | ) | | | (117,804,230 | ) |
| | | | | | | | |
Total shareholders’ equity | | | 932,817 | | | | 2,409,307 | |
| | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 5,796,601 | | | $ | 7,969,251 | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
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BIOJECT MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | |
| | | For the year ended December 31, | |
| | | 2008 | | | 2007 | |
Revenue: | | | | | | | | |
Net sales of products | | $ | 5,805,928 | | | $ | 6,772,325 | |
Licensing and technology fees | | | 666,846 | | | | 1,575,465 | |
| | | | | | | | |
| | | 6,472,774 | | | | 8,347,790 | |
Operating expenses: | | | | | | | | |
Manufacturing | | | 4,195,318 | | | | 5,857,016 | |
Research and development | | | 2,173,229 | | | | 3,180,454 | |
Selling, general and administrative | | | 2,601,648 | | | | 3,185,204 | |
| | | | | | | | |
Total operating expenses | | | 8,970,195 | | | | 12,222,674 | |
| | | | | | | | |
Operating loss | | | (2,497,421 | ) | | | (3,874,884 | ) |
Interest income | | | 39,771 | | | | 116,917 | |
Interest expense | | | (510,575 | ) | | | (632,840 | ) |
Loss on extinguishment of debt | | | (597,525 | ) | | | — | |
Change in fair value of derivative liabilities | | | 522,084 | | | | 352,468 | |
| | | | | | | | |
| | | (546,245 | ) | | | (163,455 | ) |
| | | | | | | | |
Net loss | | | (3,043,666 | ) | | | (4,038,339 | ) |
Preferred stock dividend | | | (209,180 | ) | | | (393,873 | ) |
| | | | | | | | |
Net loss allocable to common shareholders | | $ | (3,252,846 | ) | | $ | (4,432,212 | ) |
| | | | | | | | |
Basic and diluted net loss per common share allocable to common shareholders | | $ | (0.20 | ) | | $ | (0.29 | ) |
| | | | | | | | |
Shares used in per share calculations | | | 15,933,486 | | | | 15,025,255 | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
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BIOJECT MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Preferred Stock | | Common Stock | | | | | Total
Shareholders’
Equity | |
| | | Series D | | Series E | | Series F | | | | | | Accumulated
Deficit | | |
| | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | |
Balance at December 31, 2006 | | 2,086,957 | | $ | 1,878,768 | | 3,308,392 | | $ | 4,922,233 | | — | | $ | — | | 14,492,838 | | $ | 111,653,067 | | $ | (113,372,018 | ) | | $ | 5,082,050 | |
Compensation expense related to fair value of stock-based awards | | — | | | — | | — | | | — | | — | | | — | | — | | | 1,119,681 | | | — | | | | 1,119,681 | |
Stock issued in connection with 401(k) and ESPP | | — | | | — | | — | | | — | | — | | | — | | 172,960 | | | 138,185 | | | | | | | 138,185 | |
Stock issued in connection with option and warrant exercises | | — | | | — | | — | | | — | | — | | | — | | 1,600 | | | 1,616 | | | — | | | | 1,616 | |
Restricted stock awards earned pursuant to stock plans | | — | | | — | | — | | | — | | — | | | — | | 736,307 | | | — | | | — | | | | — | |
Series E Preferred Stock dividends | | — | | | — | | — | | | 393,873 | | — | | | — | | — | | | — | | | — | | | | 393,873 | |
Issuance of warrants in connection with debt financings | | — | | | — | | — | | | — | | — | | | — | | — | | | 106,114 | | | — | | | | 106,114 | |
Net loss allocable to common shareholders | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | (4,432,212 | ) | | | (4,432,212 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2007 | | 2,086,957 | | | 1,878,768 | | 3,308,392 | | | 5,316,106 | | — | | | — | | 15,403,705 | | | 113,018,663 | | | (117,804,230 | ) | | | 2,409,307 | |
Conversion of $615,000 convertible note and accrued interest | | — | | | — | | — | | | — | | 8,314 | | | 623,550 | | — | | | — | | | — | | | | 623,550 | |
Compensation expense related to fair value of stock- based awards | | — | | | — | | — | | | — | | — | | | — | | 272,433 | | | 824,925 | | | — | | | | 824,925 | |
Stock issued in connection with 401(k) and ESPP | | — | | | — | | — | | | — | | — | | | — | | 421,267 | | | 87,802 | | | — | | | | 87,802 | |
Issuance of warrants in exchange for services | | — | | | — | | — | | | — | | — | | | — | | — | | | 31,135 | | | — | | | | 31,135 | |
Restricted stock awards earned pursuant to stock plans | | — | | | — | | — | | | — | | — | | | — | | 339,015 | | | — | | | — | | | | — | |
Series E Preferred Stock dividends | | — | | | — | | — | | | 162,360 | | — | | | — | | — | | | — | | | — | | | | 162,360 | |
Series F Preferred Stock dividends | | — | | | — | | — | | | — | | — | | | 46,584 | | | | | — | | | — | | | | 46,584 | |
Net loss allocable to common shareholders | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | (3,252,846 | ) | | | (3,252,846 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2008 | | 2,086,957 | | $ | 1,878,768 | | 3,308,392 | | $ | 5,478,466 | | 8,314 | | $ | 670,134 | | 16,436,420 | | $ | 113,962,525 | | $ | (121,057,076 | ) | | $ | 932,817 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
33
BIOJECT MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | |
| | | Year ended December 31, | |
| | | 2008 | | | 2007 | |
Cash flows from operating activities: | | | | | | | | |
Net loss | | $ | (3,043,666 | ) | | $ | (4,038,339 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | |
Compensation expense related to fair value of stock-based awards | | | 824,925 | | | | 1,119,681 | |
Stock contributed to 401(k) Plan | | | 66,334 | | | | 88,325 | |
Contributed capital for services | | | 31,135 | | | | — | |
Depreciation and amortization | | | 840,910 | | | | 1,002,693 | |
Goodwill impairment | | | 94,074 | | | | — | |
Other non-cash interest expense | | | 411,478 | | | | 349,664 | |
Change in fair value of derivative instruments | | | (522,084 | ) | | | (254,511 | ) |
Loss on extinguishment of debt | | | 597,525 | | | | — | |
Change in deferred revenue | | | 1,420,296 | | | | (800,844 | ) |
Change in deferred rent | | | 21,001 | | | | (288 | ) |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable, net | | | 370,053 | | | | 476,302 | |
Inventories | | | (230,272 | ) | | | 281,164 | |
Other current assets | | | 6,029 | | | | 51,636 | |
Accounts payable | | | (379,341 | ) | | | 473,189 | |
Accrued payroll | | | (17,229 | ) | | | (154,453 | ) |
Accrued severance and related liabilities and other accrued liabilities | | | (330,593 | ) | | | (77,943 | ) |
| | | | | | | | |
Net cash provided by (used in) operating activities | | | 160,575 | | | | (1,483,724 | ) |
Cash flows from investing activities: | | | | | | | | |
Purchase of marketable securities | | | — | | | | — | |
Maturity of marketable securities | | | 666,534 | | | | 1,008,466 | |
Capital expenditures | | | (46,512 | ) | | | (108,274 | ) |
Other assets | | | (153,807 | ) | | | (270,632 | ) |
| | | | | | | | |
Net cash provided by investing activities | | | 466,215 | | | | 629,560 | |
Cash flows from financing activities: | | | | | | | | |
Proceeds from (payments on) revolving note payable, net | | | (52,475 | ) | | | (592,951 | ) |
Proceeds from term loan | | | — | | | | 500,000 | |
Proceeds from issuance of convertible notes | | | — | | | | 1,215,000 | |
Payments made on short and long-term debt | | | (940,000 | ) | | | (500,000 | ) |
Debt issuance costs | | | — | | | | (27,996 | ) |
Payments made on capital lease obligations | | | (26,596 | ) | | | (47,079 | ) |
Net proceeds from sale of warrants | | | — | | | | 873 | |
Net proceeds from sale of common stock | | | 21,468 | | | | 51,476 | |
| | | | | | | | |
Net cash provided by (used in) financing activities | | | (997,603 | ) | | | 599,323 | |
| | | | | | | | |
Increase (decrease) in cash and cash equivalents | | | (370,813 | ) | | | (254,841 | ) |
Cash and cash equivalents: | | | | | | | | |
Beginning of period | | | 1,722,705 | | | | 1,977,546 | |
| | | | | | | | |
End of period | | $ | 1,351,892 | | | $ | 1,722,705 | |
| | | | | | | | |
Cash paid for interest | | $ | 98,759 | | | $ | 282,069 | |
Supplemental non-cash information: | | | | | | | | |
Warrants issued in exchange for services and debt financings | | $ | 31,135 | | | $ | 106,114 | |
Severance costs settled in restricted stock | | | 40,536 | | | | 501,435 | |
Preferred stock dividend to be settled in Series E preferred stock | | | 162,596 | | | | 393,873 | |
Preferred stock dividend to be settled in Series F preferred stock | | | 46,584 | | | | — | |
Issuance of Series F preferred stock in exchange for note payable and accrued interest | | | 623,550 | | | | — | |
The accompanying notes are an integral part of these consolidated financial statements.
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BIOJECT MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY:
General
The consolidated financial statements of Bioject Medical Technologies Inc. include the accounts of Bioject Medical Technologies Inc., an Oregon corporation, and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated.
We commenced operations in 1985 for the purpose of developing, manufacturing and distributing needle-free injection therapy systems (“NFITS”). Since our formation, we have been engaged principally in organizational, financing, research and development and marketing activities. Our revenues to date have been derived primarily from licensing and technology fees for the jet injection technology and from product sales of the B-2000, Vial Adapter and spring-powered Vitajet® devices and syringes.
Going Concern and Cash Requirements
Due to our limited amount of additional committed capital, recurring losses, negative cash flows and accumulated deficit, the report of our independent registered public accounting firm for the year ended December 31, 2008 expressed substantial doubt about our ability to continue as a going concern.
We have historically suffered recurring operating losses and negative cash flows from operations. As of December 31, 2008, we had an accumulated deficit of $121.1 million with total shareholders’ equity of $0.9 million. Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, assuming that we will continue as a going concern.
At December 31, 2008, cash and cash equivalents were $1.4 million and we had a working capital deficit of $0.3 million. During the second quarter of 2008, we received an upfront non-refundable payment of $1.4 million from Merial Limited (“Merial”) for a new long-term exclusive license, development and supply agreement for a next generation companion animal device which allows for the delivery of injectables. We also received a $0.2 million milestone payment in December 2008 and expect to receive additional payments as milestones are met.
During 2008, we paid off the remaining $166,667 on our December 2006 term loan, the remaining $333,333 on our August 2007 term loan and the remaining $52,475 on our line of credit. No balances remained outstanding on any of these loans at December 31, 2008. In addition, we paid $440,000 in principal on our $1.25 million outstanding convertible loan (the “Convertible Loan”) during 2008.
We continue to monitor our cash and have previously taken measures to reduce our expenditure rate, delay capital and maintenance expenditures and restructure our debt. However, if we do not enter into an adequate number of licensing, development and supply agreements with up-front payments, we may need to do one or more of the following to raise additional resources, or reduce our cash requirements:
| | • | | secure additional short-term debt financing; |
| | • | | secure additional long-term debt financing; |
| | • | | secure additional equity financing; |
| | • | | secure a strategic partner; or |
| | • | | reduce our operating expenditures. |
In September 2008, we entered into an agreement with Ferghana Partners, a global investment banking firm, to assist us as we pursue various strategic alternatives, such as a merger or sale of the company, strategic partnering or fund raising. Ferghana Partners is a leading, global specialist investment banking group focused on Healthcare, with significant expertise in identifying and implementing corporate partnering, fund raising, divestitures, acquisitions and other strategic activities. To date, Ferghana has reached out to third party organizations in an effort to pursue these various strategic alternatives, which, in some cases has led to an initiation of discussions between Bioject management and third parties. The process is ongoing and could result in a potential strategic arrangement in the future. There is no
35
guarantee that this or any other process will result in resources or other alternatives being available to us on terms acceptable to us, or at all, or that resources will be received in a timely manner, if at all, or that we will be able to reduce our expenditure run-rate without materially and adversely affecting our business. The current economic downturn and uncertainties in the capital markets may result in it being more difficult for us to obtain resources or engage in other strategic alternatives. Failure to secure additional resources may result in our defaulting on our debt, resulting in our lender foreclosing on our assets, or may cause us to cease operations, seek bankruptcy protection, turn our assets over to our lender or liquidate. These actions would have a material adverse effect on us and the value of our common stock.
Due to the potential risk of having to cease operations during the second quarter of 2009, management has undertaken measures in an attempt to address our liquidity problem when our $0.6 million convertible note becomes due on May 15, 2009, if not extended. We are negotiating directly with current debt holders on potential options, if any, to extend or defer existing debt payments until some time in the future when the economic climate and our prospects improve. Some of the actions undertaken in order to improve our chances of continuing operations include the following:
| | • | | initiated an across the board 10% temporary salary reduction for all employees on February 1, 2009; |
| | • | | executive management voluntarily took a 20% temporary base salary reduction on the same date; |
| | • | | enlisted the services of a debt financing broker as of January 20, 2009, to identify opportunities to potentially restructure our current remaining debt, secure additional new/replacement debt, and increase our cash position; |
| | • | | exploring additional opportunities to increase 2009 sales with current customers, including the military and the recent signing of a three-year extension of our Needle-Free Vial Adapter agreement with Ferring Pharmaceuticals; |
| | • | | conducted an assessment of manufacturing costs to identify opportunities to improve gross margins; |
| | • | | engaged in various potential new strategic partnership discussions with sources identified by company contacts, Ferghana Partners and the debt broker (for new debt financiers/investors); and |
| | • | | pursued various additional opportunities to lower expenses in the short term, such as the extension our rent deferral agreement with the landlord through April 2009. |
While management remains committed to work on a number of strategic options and alternatives to keep us as a going entity, there are no assurances that we will be successful.
2. SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents and Marketable Securities
Cash equivalents consist of highly liquid investments with maturities at the date of purchase of 90 days or less. We had $0 and $0.7 million of cash equivalents as of December 31, 2008 and 2007, respectively.
We account for our marketable securities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” All of our marketable securities are classified as “available-for-sale” and, accordingly, are recorded at fair market value, with unrealized gains and losses recorded as a separate component of shareholders’ equity. We had $0 and $0.7 million of short-term marketable securities as of December 31, 2008 and 2007, respectively. We did not have any unrealized gains or losses as of December 31, 2008 or 2007. See Note 3.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We do not have any off-balance sheet credit exposure related to our customers.
36
Historically, we have not had significant write-offs related to our accounts receivable. Our bad debt reserve totaled $5,000 and $14,000, respectively at December 31, 2008 and 2007 and activity related to the bad debt reserve was immaterial in 2008 and 2007. Bad debt expense totaled $8,700 and $0 in 2008 and 2007, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined in a manner which approximates the first-in, first out (FIFO) method. Costs utilized for inventory valuation purposes include labor, materials and manufacturing overhead. Inventories, net of valuation reserves of $612,000 and $736,000, respectively, at December 31, 2008 and 2007, consisted of the following:
| | | | | | |
| | | December 31, |
| | | 2008 | | 2007 |
Raw materials and components | | $ | 729,850 | | $ | 502,763 |
Work in process | | | 38,760 | | | 83,546 |
Finished goods | | | 238,813 | | | 190,842 |
| | | | | | |
| | $ | 1,007,423 | | $ | 777,151 |
| | | | | | |
We evaluate the realizability of inventory values based on a combination of factors, including the following: historical and forecasted sales and usage rates, anticipated technology improvements and product upgrades, as well as other factors. All inventories are reviewed quarterly to determine if inventory carrying costs exceed market selling prices and if certain components have become obsolete. We record valuation adjustments for inventory based on the above factors. If circumstances related to our inventories change, our estimates of the realizability of inventory values could materially change.
Property and Equipment
Property and equipment are stated at cost. Expenditures for repairs and maintenance are expensed as incurred. We do not accrue for planned major maintenance expenditures. Expenditures that increase useful life or value are capitalized. For financial statement purposes, depreciation expense on property and equipment is computed on the straight-line method using the following lives:
| | |
Furniture and Fixtures | | 5 years |
Machinery and Equipment | | 7 years |
Computer Equipment | | 3 years |
Production Molds | | 5 years |
Leasehold improvements are amortized on the straight-line method over the shorter of the remaining term of the related lease or the estimated useful lives of the assets.
Goodwill
Pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” we are required to test our goodwill for impairment at least annually or more frequently if conditions indicate that an impairment may have occurred. We tested our goodwill for impairment in the second quarter of 2008 and determined that an impairment had occurred. Accordingly, we recorded a non-cash charge of $94,074 as a component of manufacturing expense in the second quarter of 2008 to fully write-off our goodwill balance. At December 31, 2008, we did not have any goodwill recorded on our balance sheet.
Other Assets
Other assets include costs incurred in the patent application process and debt issuance costs, including amounts related to the value of warrants issued in connection with certain debt facilities (see Note 15). Pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” identifiable intangible assets with definite useful lives are amortized over the estimated useful life. We amortize our patent costs on a straight-line basis over the expected life of the patent, not to exceed the statutory life of 17 or 20 years. Our patents are evaluated for impairment as discussed below in “Accounting for Long-Lived Assets.” The debt issuance costs, including the value of the warrants, are being amortized to interest expense over the lives of the related debt.
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Accounting for Long-Lived Assets
Our long-lived assets include property, plant and equipment and patents. We account for and review our long-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires us to review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable, utilizing an undiscounted cash flow analysis. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is only recognized to the extent the carrying amount exceeds the fair value of the asset. No impairment charges related to our long-lived assets were recorded during 2008 or 2007.
Fair Value of Financial Assets and Liabilities
Effective January 1, 2008, we adopted the provisions of SFAS No. 157, “Fair Value Measurements,” for our financial assets and liabilities. We estimate the fair value of our monetary assets and liabilities, including, but not limited to, accounts receivable, accounts payable and debt, based upon comparison of such assets and liabilities to the current market values for instruments of a similar nature and degree of risk. We estimate that the recorded value of all our monetary assets and liabilities approximates fair value as of December 31, 2008 and 2007. See also Note 5.
Fair Value of Derivative Liabilities
We recorded derivative liabilities in connection with our convertible debt and equity financing agreements entered into in 2006. Derivative liabilities are presented at fair value each reporting period and changes in fair value are recorded in earnings. The fair value of derivative liabilities is determined using the Black-Scholes valuation model as described in Note 5.
Revenue Recognition
Product Sales and Concentrations
We record revenue from sales of our products upon delivery, which is when title and risk of loss have passed to the customer, the price is fixed or determinable and collectibility is assured.
Product sales to customers accounting for 10% or more of our product sales were as follows:
| | | | | | |
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | |
Merial | | 38 | % | | 35 | % |
Serono | | 32 | % | | 16 | % |
Amgen | | — | | | 15 | % |
At December 31, 2008 and 2007, accounts receivable from Merial accounted for approximately 45% and 34%, respectively, of our gross accounts receivable. Four additional customers accounted for a total of 42% of our gross accounts receivable as of December 31, 2008. Four additional customers accounted for a total of 40% of our gross accounts receivable as of December 31, 2007.
License and Development Fees
In accordance with Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition,” product development revenue is recognized, to the extent of cash received, on a percentage-of-completion basis as qualifying expenditures are incurred. Licensing revenues, if separable, are recognized over the term of the license agreement. The FASB’s Emerging Issues Task Force (“EITF”) 00-21 requires arrangements with multiple elements to be broken out as separate units of accounting based on their relative fair values. Revenue for a separate unit of accounting should be recognized only if the amount due can be reliably measured and the earnings process is substantially complete. Any units that cannot be separated must be accounted for as a combined unit. Our accounting policy is consistent with EITF 00-21. Should agreements be terminated prior to completion, or should we change our estimates of percentage of completion, we could have unanticipated fluctuations in our revenue on a quarterly basis. Amounts received prior to meeting recognition criteria are recorded on our balance sheet as deferred revenues and are recognized according to the terms of the associated agreements. At December 31, 2008, deferred revenues totaled approximately $1.8 million and included amounts received from Merial, Serono and Vical.
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Licensing and Development Agreements
During 2008, we had licensing and/or development agreements, which often included commercial product supply provisions, with Merial, an undisclosed pharmaceutical company, the Centers for Disease Control and Prevention and Vical. A detailed summary of the agreements follows:
MerialIn August 2002, we entered into an exclusive license and supply agreement with Merial, the world’s leading animal health company, for delivery of Merial’s veterinary pharmaceuticals and vaccines utilizing a veterinary-focused needle-free injector system for production animals, which is currently in development. The agreement had an original term of five years and was extended in August 2007 through December 2009. Commercialization was achieved in February 2007.
In March 2004, we signed a second license and supply agreement with Merial. Under terms of this agreement, we provided Merial with an exclusive license for use of a modified version of our Vitajet® needle-free injector system for use in veterinary clinics to administer vaccines for the companion animal market. The agreement has a five-year term with a three-year automatic renewal. This product was commercialized in 2005.
The August 2002 and March 2004 agreements may be terminated by Merial for any reason and all of the agreements may be terminated by either party for failure to meet contractual obligations or for bankruptcy.
In May 2006, we signed an additional agreement with Merial to deliver a modified Vitajet® 3 for delivery of one of their proprietary vaccines for use in the companion animal market. This agreement was terminated upon entering into the June 2008 agreement discussed below.
In June 2008, we signed a new long-term exclusive license, development and supply agreement with Merial, a global animal health company, for a next generation companion animal device, which allows for the delivery of injectables. The agreement included a non-refundable, up-front license payment of $1.4 million, $172,000 of which was recognized as license and technology fee revenue in 2008, with the balance to be recognized over the term of the agreement. The agreement also includes development milestones with associated payments, provisions for capital equipment and a supply agreement extending up to 10 years. In December 2008, we received a development milestone payment totaling $0.2 million.
We are also entitled to receive royalty payments on Merial’s vaccine sales, if and when they occur, which utilize the needle-free injector systems. Any additional indications or drugs will have separately negotiated terms. At December 31, 2008 and 2007, total deferred revenue related to Merial was $1.6 million and $0, respectively. We recognized product and development revenue of $172,000 and $65,000 pursuant to these and other agreements that expired in 2007 during 2008 and 2007, respectively.
Agreement with European Biotechnology CompanyIn July 2005, we entered into a development agreement with a leading European biotechnology company under which we developed a new needle-free drug delivery system utilizing our B2000 technology exclusively for an undisclosed indication. We received non-refundable development fees of $1.4 million. We do not have a current agreement and we do not expect an agreement in the future. We have negotiated retaining certain rights with respect to the device and indication.
At both December 31, 2008 and 2007, deferred revenue related to this agreement was $0 and we recognized revenue of $0 and $0.6 million, respectively, pursuant to this agreement in 2008 and 2007.
Agreement with an Undisclosed U.S. Pharmaceutical CompanyIn December 2005, we entered into a feasibility study, option and license agreement with an undisclosed pharmaceutical company to design and develop a reliable, cost-effective, pre-filled disposable version of our Iject® device. We received non-refundable development fees of $1.1 million. We completed Phase I in the second quarter of 2008 and do not anticipate this agreement to move forward into Phase II. We have the right to explore other potential opportunities.
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At both December 31, 2008 and 2007, we did not have any deferred revenue related to this agreement. Revenue recognized pursuant to this agreement was $78,000 and $0.4 million, respectively, in 2008 and 2007.
Centers for Disease Control and Prevention In October 2005, we received a Small Business Innovation Research Grant (“SBIR”) from the Centers for Disease Control and Prevention (“CDC”) for the Phase I development of a single-dose injection delivery system. Terms of the agreement included progress billings over the six-month term, which were offset against project costs. In October 2006, we received a Phase II SBIR contract from the CDC for further development of a Disposable Cartridge Jet Injection device for safer, needle-free global immunizations. This Phase II funding is for a two-year period for improvements in product design and the continued development of a spring-powered prototype, which was designed and built in Phase I.
At both December 31, 2008 and 2007, we did not have any deferred revenue related to these agreements. Revenue recognized pursuant to these agreements was $32,000 and $0.2 million, respectively, in 2008 and 2007. In addition, we were reimbursed for $293,000 of expenses incurred in 2008.
Vical Inc.In November 2006, we entered into an agreement with Vical Inc. for an option to license our needle-free technology for use with certain of Vical’s DNA-based vaccines. The agreement includes the payment of an upfront fee to us, payments to extend the option term and license additional targets, payments upon the achievement of specific milestones, commercialization terms, transfer pricing and royalties.
The agreement may be terminated by either party for breach of any material provision in the agreement by the other party if not cured within sixty days. Vical may also terminate this Agreement at any time upon sixty (60) days’ written notice to us.
In November 2008, the agreement was extended for an additional six months. All other terms remained the same.
At December 31, 2008 and 2007, deferred revenue related to this agreement was $17,000 and $52,000, respectively. Revenue recognized pursuant to the agreement was $60,000 and $63,000, respectively, in 2008 and 2007.
Supply Agreements
In addition to agreements with Merial, Vical and the CDC as described above, we currently have significant supply agreements or commitments with Serono and Ferring Pharmaceuticals Inc.
SeronoIn October 2007, we entered into a three-year, non-exclusive supply agreement with Serono for the delivery of the cool.click™ and Serojet™ spring-powered needle-free device for use with its recombinant human growth hormone drugs. We believe that the terms of this agreement are more favorable to us than previous agreements with Serono in that it is non-exclusive and the economic terms are more favorable. In accordance with this agreement, Serono prepays us to maintain certain inventory levels in order to have flexibility in its forecasting and ordering. Prepaid inventory totaled $0.4 million and $0.6 million at December 31, 2008 and 2007, respectively, and was included as a component of other accrued liabilities. At December 31, 2008 and 2007, deferred revenue related to Serono was $217,000 and $319,000, respectively. We recognized revenue related to this and previous agreements with Serono totaling $2.0 million and $1.1 million in 2008 and 2007, respectively.
Ferring Pharmaceuticals Inc.We had a 30-month agreement with Ferring for Vial Adapters for use with one of its drugs, which was extended in January 2007 by Ferring for two consecutive 12-month periods. In January 2009, we extended our agreement with Ferring for an additional three years with two, one-year options. Revenue recognized pursuant to this agreement and other product sales totaled $0.5 million and $0.4 million in 2008 and 2007, respectively.
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Amgen Inc. We had a two-year agreement with Amgen for Vial Adapters for use with one of its drugs. This agreement, which expired in March 2005, was extended to July 2006. In addition, Amgen continued to purchase product in 2007. We recognized revenue of $1.0 million and $2.0 million in 2007 and 2006, respectively, related to Amgen’s purchases.
BioScrip Inc. (formerly Chronimed Inc.) We had a one-year supply agreement with BioScrip Inc. for B2000® devices and syringes, which expired December 31, 2005. While we do not have a current agreement with BioScrip Inc., we continue to receive purchase orders for our B2000® devices and syringes from BioScrip Inc. Revenue recognized related to BioScrip totaled $0.1 million and $0.5 million in 2008 and 2007, respectively.
In addition to the above agreements and commitments, we sell our needle-free injection system, the Biojector® 2000, or B2000, directly to the military under a federal supply agreement and solicited healthcare professionals, which allows clinicians to inject medications through the skin, both intramuscularly and subcutaneously, without a needle. Currently, our Biojector® 2000 is being utilized by the National Institutes of Health in human trials of vaccines for HIV and the Ebola virus.
Other Revenue Recognition Policies
We provide volume discounts to our customers, which are recorded as a reduction to revenue upon the sale of the related products.
Our return policy allows for unopened merchandise to be returned within 60 days of purchase for a 20% restocking fee. Returns have historically been immaterial and we do not maintain a reserve for returns. Returns are recorded as a reduction to revenue upon receipt and the 20% restocking fee is recorded as revenue at the same time.
We recognize revenue related to products being developed pursuant to license and development agreements upon customer acceptance.
Research and Development
Expenditures for research and development are charged to expense as incurred.
Income Taxes
We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Under the asset and liability method specified by SFAS No. 109, deferred tax assets and liabilities are recognized for the future consequences of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases (temporary differences). Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are recovered or settled. Valuation allowances for deferred tax assets are established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. At December 31, 2008 and 2007, our deferred tax assets had a 100% valuation allowance.
On January 1, 2007, we also adopted the provisions of Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” which defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. Interpretation No. 48 applies to all tax positions accounted for under SFAS No. 109, “Accounting for Income Taxes.” There was no adjustment required to be made to our opening retained earnings balance upon adoption of Interpretation No. 48. In accordance with paragraph 19 of Interpretation No. 48, we elected to treat interest and penalties accrued on unrecognized tax benefits as tax expense within our financial statements.
Product Warranty
We have a one-year warranty policy for defective products with options to purchase extended warranties for additional years for our B2000 product line and an 18-month warranty policy for the cool.click™ and SeroJet™. We review our accrued warranty on a quarterly basis utilizing recent return rates and sales
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levels. The estimated warranty is recorded as a reduction of product sales and is reflected on the accompanying consolidated balance sheet in other accrued liabilities. Our warranty accrual totaled $5,000 and $83,000, respectively, at December 31, 2008 and 2007. We have not experienced significant warranty issues at any time in the past and we do not expect significant warranty issues in the future.
Taxes Assessed by a Governmental Authority
We account for all taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction (i.e., sales, use, value added) on a net (excluded from revenues) basis.
Shipping and Handling Costs
Shipping and handling costs are included as a component of manufacturing costs.
Segment Reporting and Enterprise-Wide Disclosures
We comply with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Based upon definitions contained within SFAS No. 131 and the fact that our chief operating decision maker does not review disaggregated financial information, we have determined that we operated in one segment during 2008 and 2007.
Revenue by product line was as follows:
| | | | | | |
| | | Year Ended December 31, |
| | | 2008 | | 2007 |
Biojector® 2000 (or CO2 powered) | | $ | 848,495 | | $ | 1,753,956 |
Spring Powered | | | 4,387,806 | | | 3,582,198 |
Vial Adapters | | | 569,627 | | | 1,436,171 |
| | | | | | |
| | | 5,805,928 | | | 6,772,325 |
License and Technology Fees | | | 666,846 | | | 1,575,465 |
| | | | | | |
| | $ | 6,472,774 | | $ | 8,347,790 |
| | | | | | |
In 2008 and 2007, we sold previously fully reserved inventory of B2000 devices for approximately $24,000 and $115,000, respectively.
Geographic revenues were as follows:
| | | | | | |
| | | Year Ended December 31, |
| | | 2008 | | 2007 |
United States | | $ | 4,550,976 | | $ | 6,317,356 |
All other | | | 1,921,798 | | | 2,030,434 |
| | | | | | |
| | $ | 6,472,774 | | $ | 8,347,790 |
| | | | | | |
All of our long-lived assets are located in the United States.
Comprehensive Income Reporting
SFAS No. 130, “Reporting Comprehensive Income,” establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. The objective of SFAS No. 130 is to report a measure of all changes in the equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. Comprehensive loss did not differ from currently reported net loss in the periods presented. In future periods, comprehensive income (loss) could include unrealized gains and losses, if any, on our available-for-sale securities.
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Net Loss Per Share
Basic loss per common share is computed using the weighted average number of shares of common stock outstanding for the period. Diluted loss per common share is computed using the weighted average number of shares of common stock and dilutive common equivalent shares outstanding during the year. Common equivalent shares from stock options and other common stock equivalents are excluded from the computation when their effect is antidilutive.
We were in a loss position for all periods presented and, accordingly, there is no difference between basic loss per share and diluted loss per share since the common stock equivalents and the effect of convertible preferred stock and convertible debt under the “if-converted” method would be antidilutive.
Potentially dilutive securities that were not included in the diluted net loss per share calculations because they would be antidilutive were as follows:
| | | | |
| | | Year Ended December 31, |
| | | 2008 | | 2007 |
Stock options, restricted stock units and warrants | | 3,626,679 | | 4,559,789 |
Convertible preferred stock | | 6,226,749 | | 5,395,349 |
Series E Payment-in-kind dividends | | 550,516 | | 452,097 |
Series F Payment-in-kind dividends | | 62,112 | | — |
$1.25 million convertible debt | | 900,000 | | 1,388,889 |
$600,000 convertible debt | | 800,000 | | 800,000 |
$615,000 convertible debt | | — | | 820,000 |
Accrued interest on $600,000 convertible debt | | 93,512 | | 4,555 |
Accrued interest on $615,000 convertible debt | | — | | 7,548 |
| | | | |
Total | | 12,259,568 | | 13,428,227 |
| | | | |
Stock-Based Compensation
We account for stock-based compensation pursuant to SFAS No. 123R, “Share-Based Payment,” which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS No. 123R, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award).
See Note 14 for additional information regarding stock-based compensation and our stock-based incentive plans.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, valuation allowances for receivables, inventory and deferred income taxes, the valuation of stock-based compensation and derivative liabilities and revenue recognition. Actual results could differ from those estimates.
3. NASDAQ DELISTING
On November 19, 2007, we received a NASDAQ Staff Deficiency Letter stating that we had failed to comply with the minimum bid price requirement for continued listing set forth in Marketplace Rule 4310(c)(4) because for 30 consecutive business days the bid price of Bioject’s common stock had closed below the minimum $1.00 bid requirement. The letter stated that we were provided 180 calendar days, or until May 19, 2008, to regain compliance with the minimum bid price requirement.
We did not regain compliance with the minimum bid price requirement by May 19, 2008 and, accordingly, on July 21, 2008, the NASDAQ Panel determined to delist our common stock from The NASDAQ Stock Market, and suspended trading of our common stock effective with the open of business on July 23,
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2008. Trading in our common stock was transferred to the Over-the-Counter Bulletin Board (“OTCBB”), an electronic quotation service maintained by the Financial Industry Regulatory Authority, effective with the open of the market on July 23, 2008. On October 6, 2008, we received official notification of delisting from NASDAQ. The symbol remains BJCT.
4. MARKETABLE SECURITIES:
We classify all of our marketable securities as available-for-sale. Available-for-sale securities are recorded at fair value with unrealized gains and losses reported as a separate component of shareholders’ equity.
Certain information regarding our marketable securities was as follows:
| | | | | | |
| | | December 31, |
| | | 2008 | | 2007 |
Available-for-Sale | | | | | | |
Fair market value | | $ | — | | $ | 666,534 |
| | | | | | |
Cost: | | | | | | |
Federal Government, State & Local municipalities | | $ | — | | $ | 666,534 |
| | | | | | |
Maturity Information: | | | | | | |
Less than one year | | $ | — | | $ | 666,534 |
| | | | | | |
Gains and losses on the sale of marketable securities are calculated using the specific identification method. We did not have any realized gains or losses on our available-for-sale securities during 2008 or 2007. We record, as a separate component of shareholders’ equity, any unrealized gains and losses on available-for-sale securities. At December 31, 2008 and 2007, we did not have any unrealized gains or unrealized losses included in our available-for-sale securities balance.
5. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES:
Pursuant to SFAS No. 157, various inputs are used in determining the fair value of our financial assets and liabilities and are summarized into three broad categories:
| | • | | Level 1 – quoted prices in active markets for identical securities; |
| | • | | Level 2 – other significant observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.; and |
| | • | | Level 3 – significant unobservable inputs, including our own assumptions in determining fair value. |
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
Certain of our convertible debt and equity agreements include derivative liabilities as defined under EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Common Stock.” These instruments were recorded at fair value and are marked to market each period. The fair value of each of these instruments is determined using the Black-Scholes valuation model. Following are the disclosures related to our financial assets and (liabilities) as of December 31, 2008 pursuant to SFAS No. 157 (in thousands):
| | | | | | |
| | | December 31, 2008 |
| | | Fair Value | | | Input Level |
Warrants issued in connection with $1.5 million bridge loan | | $ | (8,926 | ) | | Level 3 |
$1.25 million convertible debt conversion feature | | $ | (13,852 | ) | | Level 3 |
$1.25 million convertible debt convertible interest feature | | | — | | | Level 3 |
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| | | | | | | | | | | | |
| | | Warrants issued
in connection with
March 2006 $1.5
million bridge loan | | | $1.25 million
convertible debt
conversion
feature | | | $1.25 million
convertible debt
convertible
interest feature | |
Black- Scholes Assumptions | | | | | | | | | | | | |
Risk-free interest rate | | | 1.55 | % | | | 1.55 | % | | | — | |
Expected dividend yield | | | 0.00 | % | | | 0.00 | % | | | — | |
Contractual term (years) | | | 1.68 years | | | | 1.16 years | | | | — | |
Expected volatility | | | 154.88 | % | | | 178.72 | % | | | — | |
Certain Other Information | | | | | | | | | | | | |
Fair value at December 31, 2007 | | $ | (127,823 | ) | | $ | (400,139 | ) | | $ | 312 | |
Fair value at December 31, 2008 | | | (8,926 | ) | | | (13,852 | ) | | | — | |
| | | | | | | | | | | | |
Change in fair value from December 31, 2007 to December 31, 2008 | | $ | 118,897 | | | $ | 386,287 | | | $ | (312 | ) |
| | | | | | | | | | | | |
The change in the fair value of the $1.25 million convertible debt conversion feature derivative liability also included an expense of $17,212 included as a component of loss on extinguishment of debt.
The convertible interest feature of the $1.25 million convertible debt expired as of December 31, 2008.
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following:
| | | | | | | | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
Machinery and equipment | | $ | 4,852,178 | | | $ | 4,852,178 | |
Production molds | | | 2,994,890 | | | | 2,955,352 | |
Furniture and fixtures | | | 351,719 | | | | 351,719 | |
Leasehold improvements | | | 142,052 | | | | 142,052 | |
Assets in process | | | 55,535 | | | | 48,561 | |
| | | | | | | | |
| | | 8,396,374 | | | | 8,349,862 | |
Less – accumulated depreciation | | | (6,787,613 | ) | | | (6,052,600 | ) |
| | | | | | | | |
| | $ | 1,608,761 | | | $ | 2,297,262 | |
| | | | | | | | |
Depreciation expense was $735,000 and $795,000, respectively, in 2008 and 2007.
Assets in process include capital assets that are not yet ready for production. Assets in process are not depreciated until they are substantially complete and ready to be put into production. We have not recorded any capitalized interest related to our assets in process at December 31, 2008 or 2007. At December 31, 2008 and 2007, assets in process primarily included assets related to manufacturing equipment and tooling.
7. OTHER ASSETS:
Other assets consist of patent costs and debt issuance costs, including amounts related to the value of warrants issued in connection with debt financings (see Note 15). The gross amount of patents and debt issuance costs and the related accumulated amortization were as follows:
| | | | | | | | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
Patents | | $ | 2,224,623 | | | $ | 2,070,816 | |
Accumulated amortization | | | (948,102 | ) | | | (842,205 | ) |
| | | | | | | | |
| | $ | 1,276,521 | | | $ | 1,228,611 | |
| | | | | | | | |
Debt issuance costs | | $ | 1,302,550 | | | $ | 1,302,550 | |
Accumulated amortization | | | (1,295,760 | ) | | | (1,040,934 | ) |
| | | | | | | | |
| | $ | 6,790 | | | $ | 261,616 | |
| | | | | | | | |
Of the debt issuance costs, $6,790 and $249,908 were included as a component of other current assets at December 31, 2008 and 2007, respectively.
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Amortization expense, including $28,887 and $113,608 for the write-off of abandoned patents in 2008 and 2007, respectively, was as follows:
| | | | | | |
Year Ended December 31, | | Patents | | Debt
Issuance
Costs |
2007 | | $ | 207,756 | | $ | 92,938 |
2008 | | | 105,897 | | | 144,690 |
In addition, debt issuance costs of $110,138 were written off as a component of loss on early extinguishment of debt during 2008.
Debt issuance costs are amortized over the life of the related debt and patents are amortized over their useful lives of 17 years with no residual value. Amortization is as follows over the next five years and thereafter:
| | | | | | |
Year Ending December 31, | | Patents | | Debt
Issuance
Costs |
2009 | | $ | 111,600 | | $ | 6,790 |
2010 | | | 120,000 | | | — |
2011 | | | 120,000 | | | — |
2012 | | | 120,000 | | | — |
2013 | | | 120,000 | | | — |
Thereafter | | | 684,921 | | | — |
8. OTHER CURRENT LIABILITIES:
Included in other current liabilities was $417,000 and $633,000 at December 31, 2008 and 2007, respectively, related to prepaid inventory for Serono.
9. 401(K) RETIREMENT BENEFIT PLAN:
We have a 401(k) Retirement Benefit Plan for our employees. All employees, subject to certain age and length of service requirements, are eligible to participate. The plan permits certain voluntary employee contributions to be excluded from the employees’ current taxable income under provisions of the Internal Revenue Code Section 401(k). We match 62.5% of employee contributions up to 6% of salary with our common stock and may make discretionary profit sharing contributions to all employees, which may either be made in cash or common stock. Participants are allowed to sell our common stock held in their account and reinvest it in other plan options. We issued 311,931 and 85,833 shares, respectively, and recorded an expense of approximately $66,000 and $88,000, respectively, related to employer matches of our stock under the 401(k) Plan related to the years ended December 31, 2008 and 2007. The Board of Directors has reserved up to 700,000 shares of common stock for these voluntary employer matches, of which 750,134 shares have been issued, or were committed to be issued, at December 31, 2008. On March 11, 2009, the Board of Directors consented to increasing the shares by 400,000 to 1.1 million
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10. INCOME TAXES:
The income tax provision differs from the amount computed by applying the statutory federal income tax rate to pretax income as a result of the following differences:
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | |
Statutory tax rate | | $ | (1,034,846 | ) | | $ | (1,373,035 | ) |
State taxes, net of federal tax | | | (89,505 | ) | | | (158,810 | ) |
Permanent and other items | | | 122,590 | | | | 1,226,539 | |
Stock-based compensation | | | 112,986 | | | | 104,096 | |
Expiration of net operating losses | | | 2,033,179 | | | | 1,515,273 | |
Valuation allowance | | | (1,144,404 | ) | | | (1,314,063 | ) |
| | | | | | | | |
| | $ | — | | | $ | — | |
| | | | | | | | |
We had the following deferred tax assets and (liabilities):
| | | | | | | | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
Deferred tax assets: | | | | | | | | |
Inventory | | $ | 265,613 | | | $ | 312,160 | |
Deferred revenue | | | 706,233 | | | | 160,179 | |
Other accrued liabilities | | | 270,652 | | | | 330,116 | |
Net operating loss carryforwards and credits | | | 36,545,052 | | | | 38,201,882 | |
| | | | | | | | |
| | | 37,787,550 | | | | 39,004,337 | |
Deferred tax liabilities: | | | | | | | | |
Depreciation and amortization | | | (315,103 | ) | | | (387,486 | ) |
| | | | | | | | |
Total deferred tax assets, net | | | 37,472,447 | | | | 38,616,851 | |
Less valuation allowance | | | (37,472,447 | ) | | | (38,616,851 | ) |
| | | | | | | | |
Net deferred tax assets | | $ | — | | | $ | — | |
| | | | | | | | |
A full valuation allowance has been recorded against the deferred tax assets because of the uncertainty regarding the realizability of these benefits due to our historical operating losses. The net change in the valuation allowance for deferred tax assets was a decrease of $1.1 million and a decrease of $1.3 million for the years ended December 31, 2008 and 2007, respectively, mainly due to the change in net operating loss carryforwards. As of December 31, 2008, we had net operating loss carryforwards of approximately $96.4 million and $63.7 million available to reduce future federal and state taxable income, respectively, which expire in 2009 through 2029. Approximately $1.9 million of our carryforwards were generated as a result of deductions related to exercises of stock options. When utilized, this portion of our carryforwards, as tax effected, will be accounted for as a direct increase to contributed capital rather than as a reduction of that year’s provision for income taxes.
As of December 31, 2008, we had unused research tax credits of approximately $1.5 million available to reduce future federal income taxes. If unutilized, the credits begin to expire between 2011 and 2028.
We did not have any unrecognized tax benefits or associated interest at December 31, 2008 or 2007 and we do not expect any significant changes to our unrecognized tax benefits within the next 12 months. We file federal U.S. tax returns, as well as tax returns in various state and local taxing jurisdictions. With few exceptions, we are no longer subject to federal, state or local income tax examinations for years prior to 2004.
We have not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since our formation due to the complexity and cost associated with such a study, and the fact that there may be additional such ownership changes in the future. If we have experienced an ownership change at any time since our formation, utilization of net operating loss or research and development credit carryforwards would be subject to an annual limitation under Section 382 of the Internal Revenue Code, which is determined by first multiplying the value of our stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the net operating loss or research and development credit carryforwards before utilization. Further, until a study is
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completed and any limitation known, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit. Due to the existence of the valuation allowance, future changes in our unrecognized tax benefits will not impact our effective tax rate. Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance.
11. FORBEARANCE AGREEMENTS AND AMENDMENT TO $1.25 MILLION CONVERTIBLE LOAN
On November 19, 2007 we entered into Forbearance Agreement No. 1 with Partners for Growth, L.P. (“PFG”) in relation to the three loans that were then outstanding with PFG, which are referred to collectively as the “PFG Loans.” On May 30, 2008, we entered into Forbearance Agreement No. 2 with PFG in relation to the PFG Loans.
Forbearance Agreement No. 1 expired June 1, 2008. Pursuant to Forbearance Agreement No. 2, PFG agreed to forbear, through no later than September 15, 2008 (the “Forbearance Period”), and not declare an Event of Default or exercise other remedies under the PFG Loans for a Permitted Default, as defined in Forbearance Agreement No. 2.
Forbearance Agreement No. 2 provided that the $1.25 million convertible loan (the “Convertible Loan”) may be restructured as follows if we complied with the terms of Forbearance Agreement No. 2 and no defaults occurred under the PFG Loans:
| | • | | If we consummated an equity financing raising not less than $5.0 million in net proceeds by the end of the Forbearance Period, PFG would have amended the Convertible Loan to include a minimum liquidity financial covenant to the effect that our ratio of (i) cash and cash equivalents, plus eligible accounts receivable to (ii) outstanding monetary obligations to PFG, would equal or exceed 2:1, tested on a calendar monthly basis; or |
| | • | | If we were unable to consummate (or abandoned the active pursuit of) an equity financing raising not less than $5.0 million in net proceeds by the end of the Forbearance Period, PFG would amend the Convertible Loan to apply a monthly borrowing base formula to the Convertible Loan equal to 100% of Eligible Accounts plus 100% of Eligible Inventory (as defined in Forbearance Agreement No. 2). Any excess of outstanding monetary obligations under the Convertible Loan over the formula-eligible borrowings would be required to be immediately repaid to PFG upon notice from PFG, at PFG’s sole option and would not be eligible for re-borrowing. A minimum liquidity financial covenant, as defined above, would apply, but at a ratio of 1.25:1. The interest rate on the Convertible Loan would be at the Prime Rate plus 3%. Any reduction of principal amount due to repayment as required by these terms would reduce the amount of the Convertible Loan eligible for PFG to convert into our common stock. |
During the Forbearance Period, the PFG Loans, other than the Convertible Loan, were amended by reducing the interest rate specified in each PFG Loan by 3%.
At the end of the Forbearance Period, the only monetary obligation remaining outstanding with PFG was the Convertible Loan. The term loan matured September 1, 2008. Our revolving loan with PFG and our December 2006 $500,000 term loan with PFG both matured June 11, 2008 and no amounts remained outstanding under any of these loans at December 31, 2008.
Since we did not consummate an equity financing raising not less than $5.0 million by the end of the Forbearance Period, effective September 15, 2008, we entered into a Waiver and Amendment to Loan and Security Agreement (the “Amendment”) with PFG related to the Convertible Loan. As of September 15, 2008, $1.25 million remained outstanding pursuant to the Convertible Loan and we were out of compliance with certain financial covenants.
For the Amendment to be effective, we were to satisfy certain conditions, including, but not limited to, the following:
| | • | | Make a principal payment of $137,500 on September 15, 2008; |
| | • | | Make a principal payment of $137,500 on October 1, 2008; and |
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| | • | | Make principal payments of $55,000 per month, at PFG’s option, beginning October 1, 2008. |
At December 31, 2008, $0.8 million was outstanding under the Convertible Loan and all of the above payments were made as scheduled through the date of this filing.
Assuming satisfaction of the conditions of the Amendment, PFG agreed to waive the non-compliance with the financial covenants up through and including September 15, 2008 and not to exercise remedies under the Convertible Loan as a result thereof.
In addition, a minimum liquidity ratio was added to the Loan Agreement and the interest rate was changed from the Prime Rate to the Prime Rate plus 3% per annum.
The amendment of the Convertible Loan, as described above, was accounted for as an extinguishment of debt in accordance with EITF 96-19 “Debtor’s Accounting for a Modification or Exchange of Debt Instruments.” We determined that the net present value of the cash flows under the terms of the amendment was more than 10% different from the present value of the remaining cash flows under the terms of the original Convertible Loan. Due to the substantial difference, we determined an extinguishment of debt had occurred with the amendment, and, as such, it was necessary to reflect the Convertible Loan at its fair market value and record a loss on extinguishment of debt of approximately $0.6 million in 2008. The amount of the loss was determined based on the following:
| | • | | The difference between the Black-Scholes value of the Convertible Loan on September 15, 2008 and the unaccreted value on that date, which totaled $470,175; plus |
| | • | | The difference between the fair value of the derivative liability for the conversion feature, which totaled $17,212; plus |
| | • | | $110,138 of unamortized debt issuance costs associated with the original $1.25 million convertible debt. |
Any unpaid principal and accrued interest, if any, on the original due date of the Convertible Loan in March 2011 will be due and payable in full at that time.
12. OUTSTANDING DEBT:
$1.25 Million Convertible Loan
We have outstanding a term loan agreement with PFG for $1.25 million of convertible debt financing. This Convertible Loan is due in March 2010, with principal payments of $55,000 due per month, at PFG’s option, beginning October 1, 2008. If PFG elects to forgo any of the principal payments, the latest this loan will be due is March 2011. However, due to certain subjective acceleration clauses contained in the Convertible Loan agreement, the accreted value of the Convertible Loan is reflected as current on our balance sheet. The loan bears interest at the Prime Rate plus 3% per annum and is convertible at any time by PFG into our common stock at $0.90 per share. In addition, if our common stock trades at a price of $4.11 per share or higher for 20 consecutive trading days, we can force PFG to convert the debt to common stock, subject to certain limitations on trading volume. If we prepay this loan, we will issue PFG a warrant to purchase a number of shares of common stock equal to what it would have received upon conversion of the remaining outstanding principal balance that was prepaid at a price of $0.90 per share. As a result of the derivative accounting prescribed by EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Common Stock,” at December 31, 2008, this debt was recorded on our balance sheet at $689,000 and is being accreted on the effective interest method to its remaining face value of $0.8 million over the 18-month contractual term of the debt. See also Note 11.
$600,000 Convertible Notes
On December 5, 2007, we entered into Convertible Note Purchase and Warrant Agreements with each of Life Science Opportunities Fund II, L.P. (“LOF II”) and Life Sciences Opportunities Fund II (Institutional) L.P. (“LOF Institutional” and, together with LOF II, the “Purchasers”) pursuant to which we issued Convertible Promissory Notes and warrants to purchase our common stock. Pursuant to the agreements, we sold a note in the principal amount of $91,104 to LOF II and a note in the principal amount of
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$508,896 to LOF Institutional. The notes bear interest at the rate of 8% per annum with all principal and interest due May 15, 2009 and may not be prepaid without the written consent of the purchaser holding a given note. The notes are convertible at any time by the purchasers into our common stock at the rate of $0.75 per share. The notes will be automatically converted upon a qualified financing, as defined in the purchase agreement, at a price equal to the financing price.
The warrants are exercisable for an aggregate of 80,000 shares of our common stock at an exercise price of $0.75 per share. Each warrant is immediately exercisable and expires four years from the date of issuance.
Principal Payments on Short-Term and Long-Term Debt Over the Next Five Years
Scheduled principal payments at December 31, 2008 were as follows:
| | | |
Year Ending December 31, | | |
2009 | | $ | 1,260,000 |
2010 | | | 150,000 |
2011 | | | — |
2012 | | | — |
2013 | | | — |
Thereafter | | | — |
| | | |
| | $ | 1,410,000 |
| | | |
13. CONVERSION OF $615,000 CONVERTIBLE NOTE:
On January 22, 2008, we entered into a Purchase Agreement with each of Edward Flynn, Ralph Makar, David Tierney, Richard Stout and Christine Farrell (each a “Purchaser” and collectively, the “Purchasers”) for the purchase of an aggregate of 8,314 shares (convertible at 100 common shares to one Preferred share) of our Series F Preferred Stock at a price of $75 per share. Gross proceeds from the sale were $623,550, payable by cancellation of the outstanding $615,000 principal amount of, and accrued interest on, promissory notes issued by us to each of the Purchasers in November 2007.
14. SHAREHOLDERS’ EQUITY:
Shareholder Rights Plan
On July 1, 2002, we adopted a shareholder rights agreement in order to obtain maximum value for shareholders in the event of an unsolicited acquisition attempt. To implement the agreement, we issued a dividend of one right for each share of our common stock held by shareholders of record as of the close of business on July 19, 2002.
Each right initially entitles shareholders to purchase a fractional share of our preferred stock for $50.00. However, the rights are not immediately exercisable and will become exercisable only if certain events related to an unsolicited acquisition attempt occur. For example, unless earlier redeemed for $0.001 per right, when a person or group acquires 15% or more of our common stock (other than affiliates of Sanders Morris Harris (“SMH”)), all rights holders (except the person or group who acquired the triggering amount of shares) will be able to exercise their rights for our shares having a value of twice the right’s then-current exercise price.
The shareholder rights agreement was amended in March 2006 to exempt shareholders affiliated with Life Science Opportunity Fund II (Institutional), L.P. (“LOF”), which are affiliates of SMH, from the definition of “Acquiring Person” under the rights agreement.
The shareholder rights agreement was also amended as of November 2007 to exempt shareholders affiliated with PFG from the definition of “Acquiring Person” under the rights agreement so long as they do not own more than 19.9% of the shares of our common stock then outstanding.
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Preferred Stock
We have authorized 10 million shares of preferred stock to be issued from time to time with such designations and preferences and other special rights and qualifications, limitations and restrictions thereon, as permitted by law and as fixed from time to time by resolution of the Board of Directors.
Series D Preferred Stock
On November 15, 2004, we entered into a Purchase Agreement with Life Sciences Opportunities Fund II, L.P. and Life Sciences Opportunities Fund II (Institutional), L.P. (collectively, the “Investors”) in connection with our sale and issuance to the Investors of an aggregate of 2,086,957 shares of our Series D convertible Preferred Stock and warrants to purchase an aggregate of 626,087 shares of our common stock at $1.15 per share. The issuance price of the Series D Preferred Stock was $1.15 per share at an initial conversion rate of one share of Series D Preferred Stock for one share of common stock, subject to adjustment under certain circumstances. The warrants expired unexercised on November 14, 2008. The net proceeds from the sale of the Series D Preferred Stock totaled $2.3 million. The value of the warrant, $514,000, was allocated on a pro rata basis to Series D Preferred Stock and common stock.
We entered into a Registration Rights Agreement with the Investors, pursuant to which we filed a registration statement under the Securities Act of 1933 to register the underlying common stock issued or issuable upon conversion of the Series D Preferred Stock and exercise of the warrants.
The Purchase Agreement provides that one representative of the Investors has the right to attend our board meetings. In addition, the Series D Preferred Stock has the following rights and preferences:
| | • | | Series D Preferred Stock holders are entitled to receive, pro rata among such holders and on a pari passu basis with the holders of common stock, as if the Series D Preferred Stock had been converted into common stock, cash dividends at the same rate and in the same amount per share as any and all dividends declared and paid upon the then outstanding shares of our common stock. |
| | • | | In the event of any voluntary or involuntary liquidation, dissolution, or winding up of Bioject, Series D Preferred Stock holders are entitled to receive a pro rata distribution of the assets available for distribution to our shareholders, before any payment is made in respect of the common stock or any series of Preferred Stock or other equity securities with rights junior to the Series D Preferred Stock with respect to liquidation preference, in an amount equal to $1.15 per share plus all accrued but unpaid dividends. |
| | • | | The Series D Preferred Stock may be converted into common stock. The initial conversion rate is one share of Series D Preferred Stock convertible into one share of common stock, subject to adjustment in the event of: |
| | • | | any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event; |
| | • | | any dividend or other distribution to the common stock holders of cash, other assets, or of notes or other indebtedness, or any other of our securities; |
| | • | | any acquisition or asset transfer that is not deemed to be a liquidation; |
| | • | | any stock splits of common stock or stock dividends payable in shares of common stock; or |
| | • | | any issuance to all common stock holders of rights, options or warrants to subscribe for or purchase shares of common stock. |
| | • | | Series D Preferred Stock holders have the right to one vote for each share of common stock into which Series D Preferred Stock could then be converted, and, with respect to such vote, the Series D Preferred Stock holders have full voting rights and powers equal to the voting rights and powers of the holders of common stock; provided, however, that for purposes of determining these voting rights, each share of Series D Preferred Stock will be deemed to be converted into a number of shares equal to $1.15 divided by $1.30. |
| | • | | We may not, without obtaining the approval of a majority of the outstanding Series D Preferred Stock: |
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| | • | | take any action that adversely affects the rights, privileges and preferences of the Series D Preferred Stock; |
| | • | | amend, alter or repeal any provision of, or add any provision to, our Articles of Incorporation or bylaws to change the rights, powers, or preferences of the Series D Preferred Stock; |
| | • | | declare or pay dividends on shares of common stock or Preferred Stock that is junior to the Series D Preferred Stock, subject to limited exceptions; |
| | • | | create any new series or class of preferred stock or other security having a preference or priority as to dividends or upon liquidation senior or pari passu with that of the Series D Preferred Stock; |
| | • | | reclassify any class or series of preferred stock into shares with a preference or priority as to dividends or assets superior to or on a parity with that of the Series D Preferred Stock; |
| | • | | apply any of our assets to the redemption or acquisition of shares of common stock or preferred stock, which is redeemable by its terms, junior to the Series D Preferred Stock, subject to limited exceptions; |
| | • | | increase or decrease the number of authorized shares of any series of preferred stock or our common stock; |
| | • | | agree to an acquisition of, or sale of all or substantially all of, our assets; |
| | • | | materially change the nature of our business; or |
| | • | | liquidate, dissolve or wind up Bioject’s affairs. |
Series E Preferred Stock and Related $1.5 Million Convertible Debt Financing
On March 8, 2006, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with LOF and several of its affiliates (collectively, the “LOF Affiliates”). Under the Securities Purchase Agreement, upon receiving shareholder approval at our annual meeting in May 2006, and the satisfaction of customary and other closing conditions, the LOF Affiliates purchased approximately $3.0 million of our Series E Preferred Stock at $1.37 per share. Each share of Series E Preferred Stock is convertible into one share of common stock. The Series E Preferred Stock also includes an 8% annual payment-in-kind dividend for 24 months. The Series E Preferred Stock was recorded at fair value on the date of issuance, approximately $3.1 million, and the difference of $109,000 was charged to net loss allocable to common shareholders as a beneficial conversion.
At the same time, we also entered into a Note and Warrant Purchase Agreement with certain of the LOF Affiliates for $1.5 million of convertible debt financing (the “Agreement”). Under the terms of this Agreement, we received $1.5 million of debt financing on March 8, 2006. The debt was due April 1, 2007, but was automatically converted, along with $32,500 of accrued interest, to Series E Preferred Stock, at a conversion rate of $1.37 per share, upon shareholder approval and the closing of our offering of Series E Preferred Stock under the Securities Purchase Agreement. Interest on debt outstanding under the Agreement was 10% per annum.
For the $3.0 million purchase and the conversion of the $1.5 million convertible debt, along with the $32,500 of accrued interest, a total of 3,308,392 shares of Series E Preferred Stock were issued to the LOF Affiliates.
In connection with the Agreement, we issued warrants to purchase an aggregate of 656,934 shares of our common stock at $1.37 per share to the lenders. The warrants expire in September 2010. Certain provisions contained in the Agreement precluded equity classification for the warrants under EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Common Stock.”As a result, the fair value of the warrants, which was determined to be $667,000, was recorded as a derivative liability. See Note 15.
The remaining proceeds from the issuance of the convertible debt, totaling $833,000, were recorded as short-term borrowings and were to be accreted to the $1.5 million face amount over the term of the debt. However, upon the closing of the Series E Preferred Stock as discussed above, the convertible debt under the Agreement was settled and converted to $1.6 million of Series E Preferred Stock. A settlement loss of $601,000 was recorded as a component of interest expense related to the accelerated accretion of the debt and a beneficial conversion component associated with the conversion of the debt.
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The Series E Preferred Stock has the following additional significant rights and preferences:
| | • | | In the event of any voluntary or involuntary liquidation, dissolution, or winding up of Bioject (a “Liquidation”), subject to the rights of any series of Preferred Stock with senior liquidation preferences, issued, or outstanding, the holders of Series E Preferred Stock then outstanding shall be entitled to receive, out of the assets of Bioject available for distribution to its shareholders (if any), before any payment shall be made in respect of the common stock, the Series D Preferred Stock or any other series of preferred stock or other equity securities of Bioject with rights junior to the Series E Preferred Stock with respect to liquidation preference, and pro rata based on the respective liquidation preferences with holders of preferred stock with a liquidation preferencepari passu with the Series E Preferred Stock, an amount per share of Series E Preferred Stock equal to the Series E stated value, plus all accrued but unpaid dividends thereon to the date fixed for distribution, including specifically and without limitation, the payment-in-kind dividends to the extent not previously issued. |
| | • | | If, prior to the conversion of all of the Series E Preferred Stock (including the payment-in-kind dividends), there shall be: |
| | • | | any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Bioject’s common stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of Bioject or another entity; |
| | • | | any dividend or other distribution of cash, other assets, or of notes or other indebtedness of Bioject, any other securities of Bioject (except common stock), or rights to the holders of its common stock; or |
| | • | | any acquisition or asset transfer that does not constitute a Liquidation, |
then the holders of Series E Preferred Stock shall thereafter have the right to receive upon conversion of Series E Preferred Stock, upon the basis and upon the terms and conditions specified herein and in lieu of shares of common stock, immediately theretofore issuable upon conversion, such cash, stock, securities, rights, and/or other assets that the holder would have been entitled to receive in such transaction had the Series E Preferred Stock been converted immediately prior to such transaction.
| | • | | If at any time after the date of the first issuance of Series E Preferred Stock, Bioject shall subdivide or split-up the outstanding shares of common stock, or shall declare a dividend or other distribution on its outstanding common stock payable in shares of common stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of common stock that are not distributed to the holders of Series E Preferred Stock, without payment of any consideration by such holder for the additional shares of common stock or common stock equivalents (including the additional shares of common stock issuable upon conversion or exercise thereof), the conversion price in effect immediately prior to such subdivision or the declaration of such dividend shall be proportionately decreased so that the number of shares of common stock issuable on conversion of each share of Series E Preferred Stock shall be increased in proportion to the increase of the aggregate of shares of common stock outstanding and those issuable with respect to such common stock equivalents with the number of shares issuable with respect to common stock equivalents determined from time to time, and in case Bioject shall at any time combine the outstanding shares of common stock, the conversion price in effect immediately prior to such combination shall be proportionately increased, effective at the close of business on the date of such subdivision, dividend or combination, as the case may be. |
| | • | | Each holder of Series E Preferred Stock shall have the right to one vote for each share of common stock into which Series E Preferred Stock could then be converted (excluding any payment-in-kind dividends), and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of common stock, and shall be entitled, notwithstanding any provision hereof, to notice of any shareholders’ meeting in accordance with our bylaws, and shall be entitled to vote, together with the holders of common |
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| | stock, with respect to any question upon which holders of common stock have the right to vote and shall vote as a series where required by law or as provided below. Shares of Series E Preferred Stock shall be entitled to vote as a class or series, separate and apart from any other series of preferred stock or any holders of shares of common stock, on any matter as to which class voting (or series voting, as applicable) is required under applicable law. For purposes of determining the number of shares of common stock into which each share of Series E Preferred Stock could be converted for purposes of determining voting rights, the conversion price shall initially be the greater of (i) $1.37 or (ii) the closing bid price of the common stock on the Nasdaq Capital Market on the trading day immediately prior to the date that the share of Series E Preferred Stock was issued. |
| | • | | So long as any of the originally issued shares of Series E Preferred Stock (subject to adjustment for any stock splits, stock dividends, combinations, recapitalizations, and the like and excluding payment-in-kind dividends) are outstanding as a single class, and except as otherwise mandated by applicable law or the terms of the Articles of Incorporation, Bioject shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of not less than a majority of the then outstanding Series E Preferred Stock, voting as a class: |
| | • | | take any action (by reclassification, merger, consolidation, reorganization, or otherwise) that adversely affects the rights, preferences and privileges of the holders of the Series E Preferred Stock; |
| | • | | amend, alter, or repeal any provision of, or add any provision to the Articles of Incorporation and/or the Articles of Amendment (whether by reclassification, merger, consolidation, reorganization or otherwise) or bylaws of Bioject; |
| | • | | declare or pay dividends on shares of common stock or preferred stock that is junior to the Series E Preferred Stock; |
| | • | | create any new series or class of preferred stock or other security having a preference or priority as to dividends or upon liquidation senior to orpari passu with that of the Series E Preferred Stock (by reclassification, merger, consolidation, reorganization or otherwise); |
| | • | | reclassify any class or series of preferred stock into shares with a preference or priority as to dividends or assets superior to or on a parity with that of the Series E Preferred Stock (by reclassification, merger, consolidation, reorganization, or otherwise); |
| | • | | apply any of its assets to the redemption or acquisition of shares of common stock or preferred stock, except pursuant to any agreement granting Bioject a right of first refusal or similar rights, and except in connection with purchases at fair market value from employees, advisors, officers, directors, consultants, and service providers of Bioject upon termination of employment or service; |
| | • | | increase or decrease the number of authorized shares of any series of preferred stock or common stock of Bioject; |
| | • | | agree to an acquisition or asset transfer; |
| | • | | materially change the nature of Bioject’s business; or |
| | • | | liquidate, dissolve or windup the affairs of Bioject. |
Series F Convertible Preferred Stock
On January 22, 2008, we amended our Articles of Incorporation to designate 9,645 shares of our authorized preferred stock as Series F Convertible Preferred Stock (the “Series F Preferred Stock”). A description of the material rights and preferences of the Series F Preferred Stock is as follows:
| | • | | Receive 8% annual payment-in-kind dividends (“PIK Dividends”) for 24 months following January 22, 2008 (while these dividends will accrue, they will only be paid in connection with certain liquidation events or conversion of the Series F Preferred Stock); |
| | • | | Receive on a pari passu basis with the holders of common stock, as if the Series F Preferred Stock had been converted into common stock immediately before the applicable record date, cash dividends at the same rate and in the same amount per share as any and all dividends declared and paid upon the then outstanding shares of common stock; |
| | • | | Receive, in the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Company and before any payment is made in respect of the common stock, the Series E Convertible Preferred Stock or the Series D Convertible Preferred Stock, an amount per share of |
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| | Series F Preferred Stock equal to $75 (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like), plus all accrued but unpaid dividends thereon to the date fixed for distribution, including, without limitation, the PIK Dividends to the extent not previously issued (if our assets available for distribution to shareholders are insufficient to pay the holders of Series F Preferred Stock the full amount to which they are entitled, then all the assets available for distribution to our shareholders shall be distributed ratably first to the holders of the Series F Preferred Stock); |
| | • | | Be convertible, at any time at the option of the holder, into common stock at a conversion rate of one share of Series F Preferred Stock being convertible into one hundred (100) shares of common stock (subject to anti-dilution adjustments); |
| | • | | One vote for each share of common stock into which Series F Preferred Stock could then be converted (excluding any PIK Dividends), and with respect to such vote, full voting rights and powers equal to the voting rights and powers of the holders of common stock; |
| | • | | Consent rights with respect to certain extraordinary transactions; and |
| | • | | Registration rights with respect to the shares of common stock issuable upon conversion of such shares of Series F Preferred Stock. |
There is no restriction on the repurchase or redemption of the Series F Preferred Stock while there is an arrearage in the payment of dividends.
Common Stock
Holders of common stock are entitled to one vote for each share held on all matters to be voted on by shareholders. No shares have been issued subject to assessment, and there are no preemptive or conversion rights and no provision for redemption, purchase or cancellation, surrender or sinking or purchase funds. Holders of common stock are not entitled to cumulate their shares in the election of directors. Certain holders of common stock have certain demand and piggyback registration rights enabling them to register their shares for sale under the 1933 Securities Act.
Stock Plans
Stock-Based Compensation
Certain information regarding our stock-based compensation was as follows:
| | | | | | |
| | | Year Ended December 31, |
| | | 2008 | | 2007 |
Grant-date fair value of share options granted | | $ | 4,882 | | $ | 38,868 |
Stock-based compensation recognized in results of operations | | | 824,925 | | | 1,119,681 |
Fair value of restricted stock units that vested during the period | | | 192,445 | | | 982,181 |
Cash received upon exercise of stock options | | | — | | | 1,616 |
There was no stock-based compensation capitalized in fixed assets, inventory or other assets during the years ended December 31, 2008 or 2007.
The stock-based compensation was included in our statement of operations as follows:
| | | | | | |
| | | Year Ended December 31, |
| | | 2008 | | 2007 |
Manufacturing | | $ | 103,937 | | $ | 95,145 |
Research and development | | | 200,546 | | | 126,629 |
Selling, general and administrative | | | 520,442 | | | 897,907 |
| | | | | | |
| | $ | 824,925 | | $ | 1,119,681 |
| | | | | | |
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To determine the fair value of stock-based awards granted during the periods presented, we used the Black-Scholes option pricing model and the following weighted average assumptions:
| | | | | | |
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | |
Stock Incentive Plan | | | | | | |
Risk-free interest rate | | 2.82 | % | | 4.90 | % |
Expected dividend yield | | 0 | % | | 0 | % |
Expected term | | 5 years | | | 5 years | |
Expected volatility | | 78-83 | % | | 80 | % |
Employee Stock Purchase Plan | | | | | | |
Risk-free interest rate | | 2.41-3.12 | % | | 4.80 | % |
Expected dividend yield | | 0 | % | | 0 | % |
Expected term | | 6 months | | | 6 months | |
Expected volatility | | 110-205 | % | | 57%-74 | % |
The risk-free rate used is based on the U.S. Treasury yield over the estimated term of the options granted. Our option pricing model utilizes the simplified method accepted under Staff Accounting Bulletin No. 107 to estimate the expected term. The expected volatility is calculated based on the actual volatility of our common stock over a 5 year period. The option pricing model assumes no dividend payments will be made through the expected term.
We amortize stock-based compensation on a straight-line basis over the vesting period of the individual award with estimated forfeitures considered. Shares to be issued upon the exercise of stock options will come from newly issued shares.
Restated 1992 Stock Incentive Plan
Options may be granted to our directors, officers and employees and eligible non-employee agents, consultants, advisers and independent contractors by the Board of Directors under terms of the Bioject Medical Technologies Inc. Restated 1992 Stock Incentive Plan (the “Plan”). The Plan expires June 30, 2010. Under the terms of the Plan, eligible employees may receive statutory and nonstatutory stock options, stock bonuses, stock appreciation rights and restricted stock for purchase of shares of our common stock at prices and vesting as determined by the Board or a committee of the Board. As amended, a total of up to 3,900,000 shares of our common stock, including options outstanding at the date of initial shareholder approval of the Plan, may be granted under the Plan. At December 31, 2008, we had option or restricted share grants covering 683,000 shares of our common stock available for grant and a total of 1.8 million shares of our common stock reserved for issuance.
Stock option activity for the year ended December 31, 2008 was as follows:
| | | | | | |
| | | Options | | | Weighted
Average
Exercise Price |
Outstanding at December 31, 2007 | | 1,445,216 | | | $ | 5.25 |
Granted | | 49,440 | | | | 0.47 |
Exercised | | — | | | | — |
Forfeited | | (1,082,041 | ) | | | 6.26 |
| | | | | | |
Outstanding at December 31, 2008 | | 412,615 | | | | 2.01 |
| | | | | | |
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Certain information regarding options outstanding as of December 31, 2008 was as follows:
| | | | | | |
| | | Options
Outstanding | | Options
Exercisable |
Number | | | 412,615 | | | 319,974 |
Weighted average exercise price | | $ | 2.01 | | $ | 2.34 |
Aggregate intrinsic value | | | — | | | — |
Weighted average remaining contractual term | | | 3.10 years | | | 3.5 years |
The aggregate intrinsic value in the table above is based on our closing stock price of $0.07 per share on December 31, 2008. No optionees had options with exercise prices less than $0.07 per share at December 31, 2008.
Restricted stock unit activity was as follows:
| | | | | | |
| | | Restricted
Stock Units | | | Weighted Average
Per Share
Grant Date
Fair Value |
Balances, December 31, 2007 | | 460,134 | | | $ | 1.27 |
Granted | | 964,328 | | | | 0.41 |
Vested | | (611,448 | ) | | | 0.89 |
Forfeited | | (134,675 | ) | | | 1.10 |
| | | | | | |
Balances, December 31, 2008 | | 678,339 | | | | 0.61 |
| | | | | | |
In addition, we granted 272,433 shares of our common stock to employees during 2008, with a weighted average grant date fair value of $0.42 per share.
As of December 31, 2008, unrecognized stock-based compensation related to outstanding, but unvested options and restricted stock units was $116,000, which will be recognized over the weighted average remaining vesting period of 2.2 years.
Employee Stock Purchase Plan
Our 2000 Employee Stock Purchase Plan, as amended (the “ESPP”), allows for the issuance of 750,000 shares of our common stock. The ESPP is intended to qualify as an “Employee Stock Purchase Plan” under Section 423 of the Internal Revenue Code of 1986, as amended, and is administered by our Board of Directors. The purchase price for shares purchased under the ESPP is 85% of the lesser of the fair market value at the beginning or end of the purchase period. A total of 109,336 shares were issued pursuant to the ESPP in 2008 at a weighted average price of $0.20 per share, which represented a $0.03 weighted average per share discount from the fair market value. At December 31, 2008, 110,928 shares were available for purchase under the ESPP.
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Warrants
Warrant activity is summarized as follows:
| | | | | | |
| | | Shares | | | Exercise Price |
Balances, December 31, 2006 | | 2,380,383 | | | $ | 0.90 - $1.92 |
Warrant issued to PFG in connection with August 2007 $500,000 term loan, expiring August 31, 2014 | | 71,429 | | | | 0.90 |
Warrants issued to Mr. Ed Flynn and others in connection with $615,000 convertible note issuance, expiring November 19, 2011 | | 82,000 | | | | 0.75 |
Warrant issued to LOF in connection with December 2007 $600,000 convertible note issuance, expiring December 5, 2011 | | 80,000 | | | | 0.75 |
Warrant issued to The Strategic Choice in connection with services provided in 2007, expiring December 30, 2011 | | 40,625 | | | | 0.75 |
| | | | | | |
Balances, December 31, 2007 | | 2,654,437 | | | | 0.75 – 1.92 |
Warrant issued to The Strategic Choice in connection with services provided in 2008, expiring February 8, 2012 | | 31,875 | | | | 0.75 |
Warrant issued to The Strategic Choice in connection with services provided in 2008, expiring March 31, 2012 | | 59,375 | | | | 0.75 |
Warrant issued to The Strategic Choice in connection with services provided in 2008, expiring June 30, 2012 | | 18,125 | | | | 0.75 |
Warrant issued to Andrew S. Forman in connection with services provided in 2008, expiring June 30, 2012 | | 16,000 | | | | 0.75 |
Warrant issued to Andrew S. Forman in connection with services provided in 2008, expiring September 30, 2012 | | 24,000 | | | | 0.75 |
Warrant issued to Andrew S. Forman in connection with services provided in 2008, expiring October 31, 2012 | | 8,000 | | | | 0.75 |
Warrant expired November 8, 2008 - Life Sciences Opportunities Funds | | (626,087 | ) | | | 1.15 |
| | | | | | |
Balances, December 31, 2008 | | 2,185,725 | | | $ | 0.75 – 1.92 |
| | | | | | |
All of the warrants issued in 2008 were immediately exercisable and expire four years from the date of grant. The value of the warrants issued to The Strategic Choice in 2007 and 2008 and to Andrew Forman in 2008 were determined using the Black-Scholes valuation model with the following assumptions and were expensed as a component of selling, general and administrative on the date of issue:
| | | | | | | | | | | | |
Issue date | | The Strategic
Choice, LLC
December 2008 | | | The Strategic
Choice, LLC
February 2008 | | | The Strategic
Choice, LLC
March 2008 | |
Fair value | | $ | 3,290 | | | $ | 8,158 | | | $ | 11,192 | |
Risk-free interest rate | | | 3.26 | % | | | 2.69 | % | | | 2.46 | % |
Expected dividend yield | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % |
Contractual term (years) | | | 4 years | | | | 4 years | | | | 4 years | |
Expected volatility | | | 89.44 | % | | | 89.55 | % | | | 81.44 | % |
| | | |
Issue date | | Andrew Forman
June 2008 | | | Andrew Forman
September 2008 | | | Andrew Forman
October 2008 | |
Fair value | | $ | 7,678 | | | $ | 3,392 | | | $ | 713 | |
Risk-free interest rate | | | 3.50 | % | | | 2.46 | % | | | 2.73 | % |
Expected dividend yield | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % |
Contractual term (years) | | | 4 years | | | | 4 years | | | | 4 years | |
Expected volatility | | | 93.78 | % | | | 103.93 | % | | | 105.89 | % |
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15. DERIVATIVE LIABILITIES:
Derivative Liabilities Related to $1.25 Million Convertible Debt
As certain provisions of the PFG $1.25 million convertible debt preclude equity classification for the conversion feature under EITF 00-19, the conversion feature was recorded at fair value at inception, as a derivative liability, and is marked to market on a quarterly basis through earnings, as a component of interest expense, until the debt is settled. The fair value of the derivative liability was determined to be $1.1 million, at inception, using the Black-Scholes valuation model with the following assumptions:
| | | |
Risk-free interest rate | | 4.82 | % |
Expected dividend yield | | 0.0 | % |
Contractual term (years) | | 5.0 | |
Expected volatility | | 75.36 | % |
In addition, the convertible interest feature represented an embedded derivative that did not qualify for equity classification under EITF 00-19. As a result, the convertible interest feature was recorded at fair value at inception, as a derivative liability, and was marked to market on a quarterly basis through earnings, as a component of interest expense. The convertible interest feature expired as of December 31, 2008. The fair value at inception was determined to be approximately $130,000 using the Black-Scholes valuation model with the following assumptions:
| | | |
Risk-free interest rate | | 4.65%-4.9 | % |
Expected dividend yield | | 0.0 | % |
Contractual term (years) | | 0.08 – 2.0 | |
Expected volatility | | 61.0%-75.0 | % |
Derivative Liability Related to Series E Preferred Stock and $1.5 Million Convertible Debt
Certain provisions contained in the Agreement precluded equity classification for the warrants issued in connection with the $1.5 million convertible debt under EITF 00-19. As a result, the fair value of the warrants was recorded as a derivative liability at inception, and is marked to market through earnings as a component of interest expense until the warrants are settled with common stock or expire.
Upon inception, the warrants were valued at $667,000 using the Black-Scholes valuation model with the following assumptions:
| | | |
Risk-free interest rate | | 4.82 | % |
Expected dividend yield | | 0.0 | % |
Contractual term (years) | | 4.5 | |
Expected volatility | | 76.11 | % |
See Note 5 for additional fair value information.
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16. COMMITMENTS:
Leases
In October 2003, we entered into a 10-year facility lease for space to house our Tualatin, Oregon based research and development, manufacturing and administration functions. This lease has one, five-year renewal option. We also lease office equipment under operating leases for periods up to five years and certain equipment under capital leases. At December 31, 2008, future minimum payments under noncancellable operating and capital leases with terms in excess of one year were as follows:
| | | | | | | |
For the year ending December 31, | | Operating | | Capital | |
2009 | | $ | 388,348 | | $ | 32,239 | |
2010 | | | 397,856 | | | 17,435 | |
2011 | | | 407,603 | | | 6,373 | |
2012 | | | 409,564 | | | — | |
2013 | | | 419,800 | | | — | |
Thereafter | | | 357,992 | | | — | |
| | | | | | | |
Total minimum lease payments | | $ | 2,381,163 | | | 56,047 | |
| | | | | | | |
Less amounts representing interest and maintenance fees | | | | | | (8,980 | ) |
| | | | | | | |
Present value of future minimum lease payments | | | | | $ | 47,067 | |
| | | | | | | |
At December 31, 2008 and 2007, the gross amount of assets on our balance sheet under capital leases was $56,000 and $261,000, respectively. Lease expense for the years ended December 31, 2008 and 2007 totaled $205,000 and $371,000, respectively.
Our 2003 facility lease includes deferred rent related to leasehold improvements made by the landlord. In addition, in November 2008, we negotiated a $15,000 rent deferral for each of November 2008, December 2008 and January 2009. The deferrals, plus accrued interest at 9% per annum, are due within 60 days upon the earlier to occur of (i) a sale of all or substantially all of the assets of Bioject; (ii) the raising of capital or equity of $3.0 million or more; (iii) the entering into of a strategic partnership with up-front payments over $300,000; or (iv) a default under the lease. If none of these events have occurred by December 31, 2010, the deferred amounts will become due in 12 equal monthly installments beginning January 1, 2011. At December 31, 2008 and 2007, deferred rent totaled $289,000 and $268,000, respectively, and was included as a component of other long-term liabilities on our consolidated balance sheets. See Note 20 for information regarding an additional rent deferral negotiated in February 2009.
Purchase Order Commitments
At December 31, 2008, we had open purchase order commitments totaling approximately $0.5 million through 2008, primarily related to inventory purchases for firm customer orders.
17.RESTRUCTURING AND REORGANIZATION:
2007 Activities
In March 2007, we restructured our corporate organization and created an executive committee consisting of Dr. Richard Stout, Executive Vice President and Chief Medical Officer, and Christine Farrell, Vice President of Finance, which reported to Mr. Jerald Cobbs, Chairman and Interim President and CEO until the hiring of our new President and Chief Executive, Mr. Ralph Makar, in October 2007. The Executive Committee now reports to Mr. Makar. In connection with the restructuring, on March 23, 2007, our Board of Directors authorized the elimination of 13 positions to reduce expenses and streamline operations. We recorded a charge of $289,000 in the first quarter of 2007 related to these actions. Of the $289,000, $249,000 was cash severance and related charges and $40,000 was a non-cash charge for the acceleration of vesting of restricted stock awards. These charges were paid through the first quarter of 2008. We realized cost savings of approximately $1.3 million in 2007.
In addition, on April 12, 2007, we entered into a Separation Agreement with Mr. J. Michael Redmond, our Senior Vice President of Business Development, wherein his employment with us terminated effective May 1, 2007. Pursuant to Mr. Redmond’s previously existing employment agreement, he received cash severance benefits of $217,350, which is equal to 12 months of his current base pay, plus approximately
60
$17,000 for certain other benefits, to be paid over a 12 month period. In addition, 163,508 outstanding, but unvested, restricted stock units vested, resulting in a non-cash charge of $147,000.
2008 Activities
On January 16, 2008, we eliminated an additional 13 positions. We incurred approximately $0.1 million for severance and related costs in the first quarter of 2008 related to these actions.
Summary
Restructuring charges were included as a component of our operating expenses as follows:
| | | | | | |
| | | Year Ended December 31, |
| | | 2008 | | 2007 |
Manufacturing | | $ | 12,330 | | $ | 55,229 |
Research and development | | | 92,135 | | | 38,277 |
Selling, general and administrative | | | 764 | | | 576,020 |
| | | | | | |
Total | | $ | 105,229 | | $ | 669,526 |
| | | | | | |
Our accrued liability for past restructuring and severance activities totaled $0 and $129,000 at December 31, 2008 and 2007, respectively.
18. RELATED PARTY TRANSACTIONS:
At December 31, 2008, Mr. Jerald Cobbs, a member of our Board of Directors, was the Managing Director of Signet Healthcare Partners (formerly Sanders Morris Harris) (“Signet”). LOF and several of its affiliates are affiliates of Signet. As of December 31, 2008, LOF and several of its affiliates held 3,998,880 shares of our Series E Preferred Stock, including accrued payment-in-kind dividends. The 3,998,880 shares of our Series E Preferred Stock held by LOF and several of its affiliates are convertible into 3,998,880 shares of our common stock. The Series E Preferred Stock included an 8% annual payment-in-kind dividend for 24 months, which expired in the second quarter of 2008.
Certain funds affiliated with LOF and several of its affiliates also own 2,086,957 shares of our Series D Preferred Stock. The 2,086,957 shares of our Series D Preferred Stock held by LOF and several of its affiliates are convertible into 2,086,957 shares of our common stock.
In addition LOF and its affiliates hold a $600,000 convertible note due May 15, 2009. The $600,000 convertible note, along with accrued interest of approximately $51,000 at December 31, 2008, is convertible into 867,681 shares of our common stock.
In connection with the preferred stock and note issuances, LOF and several of its affiliates have warrants outstanding to purchase an aggregate of 656,934 shares of our common stock at $1.37 per share and 80,000 shares of our common stock at $0.75 per share. The warrants expire in September 2010 and December 2011, respectively.
The transactions with LOF were all deemed to be made at arms-length rates.
19. NEW ACCOUNTING PRONOUNCEMENTS:
FSP No. APB 14-1
In May 2008, the Financial Accounting Standards Board (“FASB”) issued Staff Position (“FSP”) No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement),” which clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 12, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.” Additionally, this FSP specifies that such instruments should separately account for the liability and equity components in a manner that reflects the entity’s non-convertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP is effective for financial statements issued for fiscal years
61
beginning after December 15, 2008, and interim periods within those fiscal years. We believe that the adoption of this FSP will not have a material effect on our financial position or results of operations.
SFAS No. 162
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS No. 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 4311, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” We believe that our accounting principles and practices are consistent with the guidance in SFAS No. 162, and, accordingly, we do not expect the adoption of SFAS No. 162 to have a material effect on our financial position or results of operations.
SFAS No. 161
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which requires certain disclosures related to derivative instruments. SFAS No. 161 is effective prospectively for interim periods and fiscal years beginning after November 15, 2008. We do not have any derivative instruments that fall under the guidance of SFAS No. 161 and, accordingly, the adoption of SFAS No. 161 will not have a material effect on our financial position or results of operations.
EITF 07-3
In June 2007, the Emerging Issus Task Force (“EITF”) issued EITF 07-3, “Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities,” which states that non-refundable advance payments for services that will be consumed or performed in a future period in conducting research and development activities on behalf of the company should be recorded as an asset when the advance payment is made and then recognized as an expense when the research and development activities are performed. EITF 07-3 is applicable prospectively to new contractual arrangement entered into in fiscal years beginning after December 15, 2007. The adoption of EITF 07-3 effective January 1, 2008 did not have a material effect on our financial position or results of operations.
SFAS No. 159
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The adoption of SFAS No. 159 effective January 1, 2008 did not have a material effect on our financial position or results of operations.
20. SUBSEQUENT EVENT:
Rent Deferral
In March 2009, we negotiated a rent deferral for our Tualatin, Oregon facility lease of $12,000 for each of February, March and April 2009. See Note 16 for information regarding a separate rent deferral negotiated in November 2008 and the repayment terms, which apply to both the November 2008 and March 2009 deferrals.
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| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a –15(f). Under the supervision and with the participation of our management, including our President and Chief Executive Officer and our principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.
Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our President and Chief Executive Officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our President and Chief Executive Officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our President and Chief Executive Officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
On November 18, 2008, we entered into a second amendment to our lease agreement with our landlord pursuant to which we deferred $15,000 of rent for each of November 2008, December 2008 and January 2009. The deferrals, plus accrued interest at 9% per annum, are due within 60 days upon the earlier to occur of (i) a sale of all or substantially all of the assets of Bioject; (ii) the raising of capital or equity of $3.0 million or more; (iii) the entering into of a strategic partnership with up-front payments over $300,000; or (iv) a default under the lease. If none of these events have occurred by December 31, 2010, the deferred amounts will become due in 12 equal monthly installments beginning January 1, 2011.
63
PART III
We have omitted from Part III the information that will appear in our definitive proxy statement for our 2009 Annual Meeting of Shareholders (the “Proxy Statement”), which will be filed within 120 days after the end of our year ended December 31, 2008 pursuant to Regulation 14A.
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this item will be included in our Proxy Statement for our 2009 Annual Meeting of Shareholders and is incorporated herein by reference.
| ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this item will be included in our Proxy Statement for our 2009 Annual Meeting of Shareholders and is incorporated herein by reference.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
See Item 5. for Equity Compensation Plan Information.
Additional information required by this item is included in our Proxy Statement for our 2009 Annual Meeting of Shareholders and is incorporated herein by reference.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this item will be included in our Proxy Statement for our 2009 Annual Meeting of Shareholders and is incorporated herein by reference.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this item will be included in our Proxy Statement for our 2009 Annual Meeting of Shareholders and is incorporated herein by reference.
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PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
Financial Statements and Schedules
The Consolidated Financial Statements, together with the report thereon of Moss Adams LLP, are included on the pages indicated below:
There are no schedules required to be filed herewith.
Exhibits
The following exhibits are filed herewith and this list is intended to constitute the exhibit index. Exhibit numbers marked with an asterisk (*) represent management or compensatory arrangements.
| | |
Exhibit No. | | Description |
| |
| 3.1 | | 2002 Restated Articles of Incorporation of Bioject Medical Technologies Inc., as amended. Incorporated by reference to Form 8-K dated November 15, 2004 and filed November 19, 2004. |
| |
| 3.1.1 | | Articles of Amendment to 2002 Restated Articles of Incorporation. Incorporated by reference to Form 8-K dated May 30, 2006 and filed June 5, 2006. |
| |
| 3.1.2 | | Articles of Amendment to 2002 Restated Articles of Incorporation. Incorporated by reference to Exhibit 3.1 in the Form 8-K filed January 23, 2008. |
| |
| 3.2 | | Second Amended and Restated Bylaws of Bioject Medical Technologies, Inc. Incorporated by reference to Form 8-K filed July 5, 2007. |
| |
| 4.1 | | Form of Rights Agreement dated as of July 1, 2002 between the Company and American Stock Transfer & Trust Company, including Exhibit A, Terms of the Preferred Stock, Exhibit B, Form of Rights Certificate, and Exhibit C, Summary of the Right To Purchase Preferred Stock. Incorporated by reference to Form 8-K dated July 2, 2002. |
| |
| 4.1.1 | | First Amendment, dated October 8, 2002, to Rights Agreement dated July 1, 2002 between Bioject and American Stock Transfer & Trust Company. Incorporated by reference to registration statement on Form 8-A/A filed with the Commission on October 8, 2002. |
| |
| 4.1.2 | | Second Amendment, dated November 15, 2004, to Rights Agreement dated July 1, 2002 between Bioject and American Stock Transfer & Trust Company. Incorporated by reference to Form 8-K dated November 15, 2004. |
| |
| 4.1.3 | | Third Amendment to Rights Agreement, dated March 8, 2006, between Bioject Medical Technologies Inc. and American Stock Transfer & Trust Company. Incorporated by reference to Form 8-K dated March 3, 2006 and filed March 9, 2006. |
| |
| 4.1.4 | | Fourth Amendment to Rights Agreement, dated November 20, 2007, between Bioject Medical Technologies Inc. and American Stock Transfer & Trust Company. Incorporated by reference to Form 8-K dated December 19, 2007 and filed December 20, 2007. |
| |
| 10.1* | | Executive employment agreement, dated March 13, 2003, between Bioject Medical Technologies Inc. and J. Michael Redmond. Incorporated by reference to Form 8-K dated April 13, 2005 and filed April 19, 2005. |
| |
| 10.1.1* | | Amendment, dated April 13, 2005, to executive employment agreement, dated March 13, 2003, between Bioject Medical Technologies Inc. and J. Michael Redmond. Incorporated by reference to Form 8-K dated April 13, 2005 and filed April 19, 2005. |
| |
| 10.2* | | Standard Employment with Christine Farrell, dated January 21, 1997. Incorporated by reference to Form 10-K for the year ended December 31, 2005. |
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| 10.2.1* | | First Amendment to Standard Employment Agreement with Christine Farrell, dated November 2004. Incorporated by reference to Form 10-K for the year ended December 31, 2005. |
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| 10.2.2* | | Second Amendment to Standard Employment Agreement, dated December 31, 2008, between Bioject Medical Technologies Inc. and Christine Farrell. Incorporated by reference to Exhibit 10.1 to Form 8-K dated December 31, 2008 and filed January 5, 2009. |
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Exhibit No. | | Description |
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| 10.3* | | Restated 1992 Stock Incentive Plan, as amended. Incorporated by reference to Form 8-K dated June 9, 2005 and filed June 13, 2005. |
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| 10.3.1* | | Standard Form of Stock Option Agreement. Incorporated by reference to Form 10-K for the year ended December 31, 2007. |
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| 10.3.2* | | Form of Restricted Stock Unit Grant Agreement. Incorporated by reference to Form 8-K dated March 11, 2005 and filed March 17, 2005. |
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| 10.3.3* | | Form of Restricted Stock Unit Award Agreement for January 19, 2006 grants (time-based vesting and performance-based vesting). Incorporated by reference to Form 8-K dated January 19, 2006 and filed on June 15, 2006. |
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| 10.3.4* | | Form of Restricted Stock Unit Award Agreement for June 1, 2006 grants (time-based vesting if performance measures achieved). Incorporated by reference to Form 8-K dated January 19, 2006 and filed on June 15, 2006. |
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| 10.3.5* | | Form of Restricted Stock Unit Award Agreement for May 24, 2006 grants (time-based vesting). Incorporated by reference to Form 8-K dated January 19, 2006 and filed on June 15, 2006. |
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| 10.4* | | 2000 Employee Stock Purchase Plan, as amended. Incorporated by reference to Form 8-K dated June 9, 2005 and filed June 13, 2005. |
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| 10.5 | | Industrial Lease dated October 2003 between Multi-Employer Property Trust, and Bioject Medical Technologies, Inc., an Oregon corporation. Incorporated by reference to Form 10-K for the nine-month transition period ended December 31, 2002. |
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| 10.5.1 | | First Amendment to Lease dated December 2003 by and between the Multi-Employer Property Trust and Bioject Medical Technologies Inc. |
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| 10.5.2 | | Second Amendment to Lease dated November 18, 2008 by and between the NewTower Trust Multi-Employer Property Trust and Bioject Medical Technologies Inc. |
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| 10.5.3 | | Third Amendment to Lease dated March 25, 2009 by and between the NewTower Trust Multi-Employer Property Trust and Bioject Medical Technologies Inc. |
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| 10.6 | | License and Distribution Agreement dated December 21, 1999 between Bioject, Inc. and Serono Laboratories, Inc. Incorporated by reference to Form 10-Q for the quarter ended December 31, 1999. (1) |
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| 10.6.1 | | Amendment dated March 15, 2000 to License and Distribution Agreement dated December 21, 1999 between Bioject, Inc. and Serono Laboratories, Inc. Incorporated by reference to Form 10-K for the year ended March 31, 2000. |
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| 10.7 | | Registration Rights Agreement dated November 15, 2004 between Bioject Medical Technologies Inc., Life Sciences Opportunities Fund II, L.P. and Life Sciences Opportunities Fund II (Institutional), L.P. Incorporated by reference to our Form 8-K dated November 15, 2004. |
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| 10.8 | | Form of Series “BB” Warrant, dated November 15, 2004, issued to Life Sciences Opportunities Fund II, L.P. and Life Sciences Opportunities Fund II (Institutional), L.P. Incorporated by reference to Form 8-K dated November 15, 2004. |
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| 10.9 | | Loan and Security Agreement dated December 11, 2006 between Bioject Medical Technologies Inc., Bioject, Inc. and Partners for Growth, L.P. Incorporated by reference to Form 8-K dated December 11, 2006 and filed on December 15, 2006. |
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| 10.10 | | Warrant, dated December 11, 2006, issued to Partners for Growth, L.P. Incorporated by reference to Form 8-K dated December 11, 2006 and filed on December 15, 2006. |
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| 10.11 | | Warrant, dated December 15, 2004, issued to Partners for Growth, L.P. Incorporated by reference to Form 8-K dated December 15, 2004. |
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| 10.12 | | Series “DD” Common Stock Purchase Warrant, dated June 20, 2005, issued to the Maxim Group. Incorporated by reference to Form 8-K dated June 20, 2005 and filed June 21, 2005. |
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| 10.13 | | Series “EE-1” Common Stock Purchase Warrant, dated June 20, 2005, issued to RCC Ventures, LLC. Incorporated by reference to Form 8-K dated June 20, 2005 and filed June 21, 2005. |
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| 10.14 | | Series “EE-2” Common Stock Purchase Warrant, dated July 26, 2005, issued to RCC Ventures, LLC. Incorporated by reference to Exhibit 10.15 in the Form 10-K filed April 2, 2007. |
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| 10.15 | | Series “EE-3” Common Stock Purchase Warrant, dated August 21, 2006, issued to RCC Ventures, LLC. Incorporated by reference to Exhibit 10.16 in the Form 10-K filed April 2, 2007. |
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| 10.16 | | Agreement of Sale between Bioject Medical Technologies Inc. and Stickel Investments, LLC, dated January 31, 2006. Incorporated by reference to Form 8-K dated January 31, 2006 and filed February 2, 2006. |
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| 10.17 | | Note and Warrant Purchase Agreement dated March 8, 2006, by and among Bioject Medical Technologies Inc. and the Purchasers Listed on Schedule I thereto. Incorporated by reference to Form 8-K dated March 3, 2006 and filed March 9, 2006. |
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| 10.18 | | Form of Warrant related to Note and Warrant Purchase Agreement dated March 8, 2006. Incorporated by reference to Form 8-K dated March 3, 2006 and filed March 9, 2006. |
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| 10.19 | | Securities Purchase Agreement dated March 8, 2006, by and among Bioject Medical Technologies Inc. and the Purchasers listed on Exhibit A thereto. Incorporated by reference to Form 8-K dated March 3, 2006 and filed March 9, 2006. |
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| 10.20 | | Indemnity Agreement between Bioject Medical Technologies Inc. and Jerald S. Cobbs dated as of March 8, 2006. Incorporated by reference to Form 10-K for the year ended December 31, 2005. |
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Exhibit No. | | Description |
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| 10.21 | | 2006 $1.25 Million Term Loan and Security Agreement dated March 29, 2006 between the Company, Bioject, Inc. and Partners for Growth, L.P. Incorporated by reference to Form 8-K dated March 29, 2006 and filed on April 3, 2006. |
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| 10.21.1 | | Waiver and Amendment to Loan and Security Agreement dated September 15, 2008, by and among Bioject Medical Technologies, Inc., Bioject, Inc., and Partners for Growth, L.P. Incorporated by reference to Form 8-K dated and filed September 19, 2008. |
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| 10.22 | | 2007 Term Loan and Security Agreement dated August 31, 2007 between Bioject Medical Technologies Inc., Bioject, Inc. and Partners for Growth, L.P. Incorporated by reference to Form 8-K dated August 31, 2007 and filed September 7, 2007. |
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| 10.22.1 | | Warrant, dated August 31, 2007, issued to Partners For Growth, L.P. Incorporated by reference to Form 8-K dated August 31, 2007 and filed September 7, 2007. |
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| 10.23 | | Forbearance No. 1, Limited Waiver and Modification to Loan and Security Agreement dated November 19, 2007 between Bioject Medical Technologies Inc. and Partners For Growth II, L.P. Incorporated by reference to Exhibit 10.1 in the Form 8-K filed November 21, 2007. |
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| 10.24 | | Forbearance No. 2, Limited Waiver and Modification to Loan and Security Agreement dated November 19, 2007 between Bioject Medical Technologies Inc. and Partners For Growth II, L.P. Incorporated by reference to Form 8-K dated May 30, 2008 and filed June 5, 2008. |
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| 10.25 | | Convertible Note Purchase and Warrant Agreement dated November 19, 2007 between Bioject Medical Technologies Inc. and Edward Flynn. Incorporated by reference to Exhibit 10.2 in the Form 8-K filed November 21, 2007. |
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| 10.25.1 | | Form of Convertible Note Purchase and Warrant Agreement between Bioject Medical Technologies Inc. and each of Ralph Makar, David Tierney, Richard Stout and Christine Farrell. Incorporated by reference to Exhibit 10.3 in the Form 8-K filed November 21, 2007. |
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| 10.25.2 | | Form of Warrant issued by Bioject Medical Technologies Inc. to the Purchasers. Incorporated by reference to Exhibit 10.4 in the Form 8-K filed November 21, 2007. |
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| 10.25.3 | | Form of Convertible Promissory Note issued by Bioject Medical Technologies Inc. to the Purchasers. Incorporated by reference to Exhibit 10.5 in the Form 8-K filed November 21, 2007. |
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| 10.25.4 | | Form of Registration Rights Agreement between Bioject Medical Technologies Inc. and the Purchasers. Incorporated by reference to Exhibit 10.6 in the Form 8-K filed November 21, 2007. |
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| 10.26 | | Form of Convertible Note Purchase and Warrant Agreement dated December 5, 2007 between Bioject Medical Technologies Inc. and the Purchasers. Incorporated by reference to Exhibit 10.1 in the Form 8-K filed December 11, 2007. |
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| 10.26.1 | | Form of Warrant issued by Bioject Medical Technologies Inc. to the Purchasers. Incorporated by reference to Exhibit 10.2 in the Form 8-K filed December 11, 2007. |
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| 10.26.2 | | Form of Convertible Promissory Note issued by Bioject Medical Technologies Inc. to the Purchasers. Incorporated by reference to Exhibit 10.3 in the Form 8-K filed December 11, 2007. |
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| 10.26.3 | | Form of Registration Rights Agreement between Bioject Medical Technologies Inc. and the Purchasers. Incorporated by reference to Exhibit 10.5 in the Form 8-K filed November 21, 2007. |
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| 10.27 | | Series F Convertible Preferred Stock Purchase Agreement between Bioject Medical Technologies Inc. and Edward Flynn, Ralph Makar, David Tierney, Richard Stout and Christine Farrell. Incorporated by reference to Exhibit 10.1 in the Form 8-K filed January 23, 2008. |
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| 10.27.1 | | Registration Rights Agreement dated January 22, 2008 between the Company, Edward Flynn, Ralph Makar, David Tierney, Richard Stout and Christine Farrell. Incorporated by reference to Exhibit 10.2 in the Form 8-K filed January 23, 2008. |
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| 10.28* | | Employment Agreement, dated October 1, 2007, between Bioject Medical Technologies Inc. and Ralph Makar. Incorporated by reference to Exhibit 10.29 to Form 10-K filed March 28, 2008.(1) |
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| 10.28.1* | | Amendment to Executive Employment Agreement, dated November 13, 2007 between Bioject Medical Technologies Inc. and Ralph Makar. Incorporated by reference to Exhibit 10.29.1 to Form 10-K filed March 28, 2008. |
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| 10.29* | | Rick Stout Employment Agreement. Incorporated by reference to Exhibit 10.1 to Form 10-Q filed May 15, 2008. Incorporated by reference to Exhibit 10.30 to Form 10-K filed March 28, 2008. |
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| 10.29.1* | | Amendment to Employment Agreement, dated December 31, 2008, between Bioject Medical Technologies Inc. and Dr. Richard Stout. Incorporated by reference to Exhibit 10.1 to Form 8-K dated December 31, 2008 and filed January 5, 2009. |
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Exhibit No. | | Description |
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| 10.30 | | Standard Form of Warrant. Incorporated by reference to Exhibit 10.2 to Form 10-Q filed August 14, 2008. |
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| 14 | | Code of Ethics. Incorporated by reference to Form 10-K for the year ended December 31, 2003. |
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| 21 | | List of Subsidiaries. Incorporated by reference to Form 10-K for the year ended March 31, 1999. |
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| 23 | | Consent of Moss Adams LLP, Independent Registered Public Accounting Firm |
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| 31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934. |
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| 31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934. |
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| 32.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |
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| 32.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |
| (1) | Certain portions of this exhibit have been omitted based on a request for confidential treatment; these portions have been filed separately with the Securities and Exchange Commission. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Bioject Medical Technologies Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 31, 2009:
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BIOJECT MEDICAL TECHNOLOGIES INC. (Registrant) |
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| By: | | /s/ RALPH MAKAR |
| Ralph Makar |
President and Chief Executive Officer (Principal Executive Officer) |
Pursuant to the request of the Securities Exchange Act of 1934, this report has been signed below on behalf of the Registrant and in the capacities indicated on March 31, 2009.
| | | | |
SIGNATURE | | TITLE | | |
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/s/ RALPH MAKAR Ralph Makar | | Director and President and Chief Executive Officer (Principal Executive Officer) | | |
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/s/ CHRISTINE M. FARRELL Christine M. Farrell | | Vice President of Finance (Principal Financial and Accounting Officer) | | |
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/s/ DAVID S. TIERNEY David S. Tierney | | Chairman of the Board | | |
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/s/ JOSEPH F. BOHAN III Joseph F. Bohan III | | Director | | |
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/s/ RANDAL D. CHASE Randal D. Chase | | Director | | |
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/s/ JERALD S. COBBS Jerald S. Cobbs | | Director | | |
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/s/ EDWARD L. FLYNN Edward L. Flynn | | Director | | |
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/s/ BRIGID A. MAKES Brigid A. Makes | | Director | | |
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/s/ JOHN RUEDY, M.D. John Ruedy, M.D. | | Director | | |
69
