10-Q 1 a07-25577_110q.htm 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 


 

FORM 10-Q

 


 

(Mark One)

 

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

OR

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to           

 

Commission file number 0-15360

 


 

BIOJECT MEDICAL TECHNOLOGIES INC.

(Exact name of registrant as specified in its charter)

 

Oregon

 

93-1099680

(State or other jurisdiction of incorporation

 

(I.R.S. Employer Identification No.)

or organization)

 

 

 

 

 

20245 SW 95th Avenue

 

 

Tualatin, Oregon

 

97062

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (503) 692-8001

 


 

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 o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o   Accelerated filer o   Non-accelerated filer x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock without par value

 

15,166,841

(Class)

 

(Outstanding at November 9, 2007)

 

 

 



 

BIOJECT MEDICAL TECHNOLOGIES INC.

FORM 10-Q

INDEX

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets — September 30, 2007 and December 31, 2006 (unaudited)

 

 

 

 

 

Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

 

 

 

 

 

Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2007 and 2006 (unaudited)

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

Item 1A.

Risk Factors

 

 

 

 

Item 6.

Exhibits

 

 

 

 

Signatures

 

 

 

 

1



PART 1 - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

BIOJECT MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2007

 

2006

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

611,190

 

$

1,977,546

 

Short-term marketable securities

 

1,450,000

 

1,675,000

 

Accounts receivable, net of allowance for doubtful accounts of $13,702 and $13,702, respectively

 

859,224

 

1,323,684

 

Inventories

 

636,286

 

1,058,315

 

Other current assets

 

178,569

 

320,580

 

Total current assets

 

3,735,269

 

6,355,125

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $5,860,370 and $5,257,662, respectively

 

2,430,233

 

2,983,925

 

Goodwill

 

94,074

 

94,074

 

Other assets, net

 

1,277,260

 

1,190,997

 

Total assets

 

$

7,536,836

 

$

10,624,121

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term notes payable

 

$

1,535,139

 

$

838,567

 

Current portion of long-term debt

 

250,000

 

333,333

 

Accounts payable

 

718,931

 

583,744

 

Accrued payroll

 

382,503

 

333,304

 

Derivative liabilities

 

1,195,669

 

782,161

 

Accrued severance and related liabilities

 

317,840

 

836,854

 

Other accrued liabilities

 

88,688

 

90,094

 

Deferred revenue

 

304,355

 

1,166,870

 

Total current liabilities

 

4,793,125

 

4,964,927

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

Long-term debt

 

 

166,667

 

Deferred revenue

 

5,216

 

52,088

 

Other long-term liabilities

 

324,056

 

358,389

 

 

 

 

 

 

 

Commitments

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred stock, no par value, 10,000,000 shares authorized; issued and outstanding:

 

 

 

 

 

Series D Convertible - 2,086,957 shares at September 30, 2007 and December 31, 2006, no stated value, liquidation preference of $1.15 per share

 

1,878,768

 

1,878,768

 

Series E Convertible - 3,308,392 shares at September 30, 2007 and December 31, 2006, no stated value, liquidation preference of $1.37 per share

 

5,214,631

 

4,922,233

 

Common stock, no par, 100,000,000 shares authorized; issued and outstanding 15,152,937 shares and 14,492,838 shares at September 30, 2007 and December 31, 2006

 

112,701,254

 

111,653,067

 

Accumulated deficit

 

(117,380,214

)

(113,372,018

)

Total shareholders’ equity

 

2,414,439

 

5,082,050

 

Total liabilities and shareholders’ equity

 

$

7,536,836

 

$

10,624,121

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2



 

BIOJECT MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Net sales of products

 

$

1,713,883

 

$

2,490,896

 

$

5,300,792

 

$

5,871,698

 

Licensing and technology fees

 

83,612

 

512,862

 

1,377,126

 

1,585,785

 

 

 

1,797,495

 

3,003,758

 

6,677,918

 

7,457,483

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Manufacturing

 

1,556,183

 

2,149,532

 

4,787,249

 

6,090,147

 

Research and development

 

677,869

 

1,053,565

 

2,429,885

 

3,430,060

 

Selling, general and administrative

 

453,084

 

821,128

 

2,383,636

 

3,458,602

 

Total operating expenses

 

2,687,136

 

4,024,225

 

9,600,770

 

12,978,809

 

Operating loss

 

(889,641

)

(1,020,467

)

(2,922,852

)

(5,521,326

)

 

 

 

 

 

 

 

 

 

 

Interest income

 

27,649

 

41,571

 

92,742

 

119,549

 

Interest expense

 

(175,184

)

(212,690

)

(472,180

)

(1,691,146

)

Change in fair value of derivative liabilities

 

413,706

 

728,641

 

(413,508

)

1,162,784

 

 

 

266,171

 

557,522

 

(792,946

)

(408,813

)

Net loss

 

(623,470

)

(462,945

)

(3,715,798

)

(5,930,139

)

Preferred stock dividend

 

(101,475

)

(93,979

)

(292,398

)

(131,542

)

Beneficial conversion on issuance of preferred stock

 

 

 

 

(109,489

)

Net loss allocable to common shareholders

 

$

(724,945

)

$

(556,924

)

$

(4,008,196

)

$

(6,171,170

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share allocable to common shareholders

 

$

(0.05

)

$

(0.04

)

$

(0.27

)

$

(0.43

)

 

 

 

 

 

 

 

 

 

 

Shares used in per share calculations

 

15,149,821

 

14,341,359

 

14,962,750

 

14,215,967

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



 

BIOJECT MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(3,715,798

)

$

(5,930,139

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Compensation expense related to fair value of stock-based awards

 

916,682

 

593,547

 

Stock contributed to 401(k) Plan

 

70,389

 

97,063

 

Depreciation and amortization

 

716,546

 

1,255,101

 

Interest expense exchanged for Series E preferred stock

 

 

32,500

 

Other non-cash interest expense

 

221,231

 

246,032

 

Loss on settlement of debt

 

 

600,731

 

Loss on write-down of property, plant and equipment

 

 

968,871

 

Change in fair value of derivative instruments

 

413,508

 

(1,162,784

)

Change in deferred rent

 

(289

)

9,072

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

464,460

 

686,231

 

Inventories

 

422,029

 

89,496

 

Other current assets

 

162,649

 

64,840

 

Accounts payable

 

135,187

 

(446,075

)

Accrued payroll

 

49,199

 

140,543

 

Accrued severance and related liabilities and other accrued liabilities

 

(520,420

)

191,235

 

Deferred revenue

 

(909,387

)

(1,220,053

)

Net cash used in operating activities

 

(1,574,014

)

(3,783,789

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of marketable securities

 

(25,000

)

(1,670,000

)

Maturity of marketable securities

 

250,000

 

1,020,000

 

Proceeds from sale of fixed assets

 

 

1,061,803

 

Capital expenditures

 

(101,514

)

(155,590

)

Other assets

 

(172,864

)

(128,070

)

Net cash provided by investing activities

 

(49,378

)

128,143

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from (payments on revolving note payable, net)

 

10,065

 

(315,589

)

Proceeds from issuance of short-term notes payable

 

500,000

 

2,750,000

 

Payments made on capital lease obligations

 

(34,044

)

(43,188

)

Payments made on long-term debt

 

(250,000

)

(1,881,583

)

Debt issuance costs

 

 

(152,227

)

Net proceeds from sale of preferred stock

 

 

3,000,000

 

Net proceeds from sale of common stock

 

31,015

 

48,478

 

Net cash provided by financing activities

 

257,036

 

3,405,891

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(1,366,356

)

(249,755

)

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Beginning of period

 

1,977,546

 

1,045,442

 

End of period

 

$

611,190

 

$

795,687

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

77,898

 

$

237,860

 

 

 

 

 

 

 

Supplemental non-cash information:

 

 

 

 

 

Conversion of short-term debt and accrued interest to preferred stock

 

$

 

$

1,532,500

 

Warrant issued in connection with debt financing

 

30,101

 

667,112

 

Severance costs settled in restricted stock

 

501,435

 

83,000

 

Preferred stock dividend to be settled in Series E preferred stock

 

292,398

 

131,542

 

Beneficial conversion on the issuance of Series E preferred stock

 

 

109,489

 

Equipment acquired with capital lease

 

 

48,852

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



 

BIOJECT MEDICAL TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.  Basis of Presentation

The financial information included herein for the three and nine-month periods ended September 30, 2007 and 2006 is unaudited; however, such information reflects all adjustments consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2006 is derived from Bioject Medical Technologies Inc.’s 2006 Annual Report on Form 10-K for the year ended December 31, 2006. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in Bioject’s 2006 Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

 

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, 2006 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 September 30, 2007, we had an accumulated deficit of $117.5 million with total shareholders’ equity of $2.4 million. Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles.

 

In November 2007, Partners For Growth, L.P. (“PFG”) asserted that we are in default under the loan agreements we have with PFG as a result of our not achieving certain revenue covenants in one loan agreement. We have four outstanding loans with PFG and have granted a security interest in all of our assets as collateral for the loans. We are negotiating with PFG with respect to a forbearance agreement under which PFG will agree not to declare us in default under the loan agreements with respect to specified events for an agreed upon time period. In return for this forbearance, we expect to have to pay PFG approximately $550,000, which will be applied to one or more of our loans. We expect that we will also be required to reduce the exercise or conversion price, as applicable, of three warrants and a convertible loan held by PFG to an amount in excess of market value. While we are in negotiations with respect to $500,000 of new debt financing, there is no assurance that we will ultimately receive this financing. We are also attempting to secure additional debt or equity financing. If we are unable to arrange new financing on terms acceptable to us or in a relatively short period of time, the expected payment to PFG will materially and adversely affect our liquidity and ability to continue operations beyond December 31, 2007. In addition, the expected repricing of the warrants and convertible loan will result in dilution to existing shareholders.

 

If we are unable to negotiate a mutually acceptable forbearance agreement with PFG or are otherwise unable to regain or maintain compliance with our credit agreements, whether before or after the forbearance period, PFG could declare us in default under the loan agreements, accelerate all of our outstanding indebtedness and foreclose on our assets, which could have a material and adverse effect on our business and our ability to continue operations.

 

In addition to the approximately $550,000 payment mentioned above, we require cash for operations, debt service and capital expenditures. We had cash, cash equivalents and marketable securities of $2.1 million at September 30, 2007. If we are unable to enter into anticipated licensing agreements with our current partners or enter into new licensing, development and supply agreements, or secure the new $500,000 loan referred to above, we may need to do one or more of the following:

                  reduce our current expenditure run-rate;

                  delay capital and maintenance expenditures;

                  restructure current debt financing;

                  secure additional short-term financing;

                  secure additional long-term debt financing;

 

5



 

                  secure additional equity financing; or

                  secure a strategic partner.

 

There is no guarantee that such resources will be available to us on terms acceptable to us, or at all, or that such 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.

 

Note 2.  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 $725,000 and $694,000, respectively, at September 30, 2007 and December 31, 2006, consisted of the following:

 

 

 

September 30,
2007

 

December 31,
2006

 

Raw materials and components

 

$

355,542

 

$

485,420

 

Work in process

 

52,849

 

75,355

 

Finished goods

 

227,895

 

497,540

 

 

 

$

636,286

 

$

1,058,315

 

 

Note 3. Net Loss Per Common Share

The following common stock equivalents are excluded from diluted loss per common share calculations, as their effect would have been antidilutive:

 

 

Three and Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

Stock options and warrants

 

4,598,526

 

4,892,020

 

Convertible preferred stock

 

5,395,349

 

5,395,349

 

Convertible debt

 

912,409

 

912,409

 

Total

 

10,906,284

 

11,199,778

 

 

Note 4. Creation of Executive Committee to Serve as COO and Reduction in Force

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. Cobbs, Chairman and Interim President and CEO until the hiring of our new President and Chief Executive, Mr. Ralph Makar, as discussed in Note 11. 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 is cash severance and related charges and $40,000 is a non-cash charge for the acceleration of vesting of restricted stock awards. We anticipate these charges to be paid through the first quarter of 2008. We anticipate cost savings of approximately $1.3 million in 2007 and approximately $1.9 million in 2008 related to these actions.

 

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 $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. The terms of the agreement were substantially agreed upon at March 31, 2007, and, as such, the total severance charge of $381,000 was recognized as a component of selling, general and administrative expense in the first quarter of 2007.

 

6



 

The following table summarizes the activity in the first three quarters of 2007 related to our restructurings:

 

Nine-Month Period Ended September 30, 2007

 

Beginning
Accrued
Liability

 

Charged
to
Expense

 

Expenditures/
Transfer
to Equity

 

Ending
Accrued
Liability

 

Severance and related benefits for terminated employees

 

$

521,770

 

$

483,175

 

$

(687,105

)

$

317,840

 

Acceleration of vesting to be settled in common stock

 

315,084

 

186,351

 

(501,435

)

 

 

 

$

836,854

 

$

669,526

 

$

(1,188,540

)

$

317,840

 

 

Note 5. Product Sales and Concentrations

Product sales to customers accounting for 10% or more of our product sales were as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Merial

 

44

%

5

%

32

%

9

%

Serono

 

3

%

40

%

21

%

25

%

Amgen

 

13

%

19

%

16

%

26

%

BioScrip Inc. (formerly Chronimed Inc.)

 

7

%

14

%

8

%

18

%

Ferring

 

8

%

16

%

7

%

13

%

 

At September 30, 2007, accounts receivable from these customers accounted for approximately 62% of total accounts receivable. In addition, Merial and Amgen individually represented, 38% and 12%, respectively, of the September 30, 2007 accounts receivable balance. No other customers accounted for 10% or more of our accounts receivable as of September 30, 2007.

 

Note 6. Stock-Based Compensation

In the first quarter of 2007, we issued 100,000 restricted stock units (“RSUs”). The RSUs vest as to 50% of the total on each of March 8, 2008 and 2009. The fair value of the RSUs on the date of grant was $122,000 based on the closing price of our common stock on the date of grant, and is being recognized over the two-year vesting period.

 

In June 2007, we issued the following:

                  101,000 RSUs to our non-employee directors. These RSUs vest 50% six months from the grant date and 50% one year from the grant date. The total fair value of the RSUs was $135,340 and is being recognized over the one-year vesting period.

                  174,000 performance based RSUs to officers and employees. These RSUs vest over three years from December 31, 2007, if the performance criteria are met at December 31, 2007. If the performance criteria are not met, the RSUs will be canceled. The total fair value of the RSUs was $233,160 and is being recognized through the vesting period.

                  25,750 performance stock options were granted to employees. These stock options vest over three years from December 31, 2007, if the performance criteria are met at December 31, 2007. If the performance criteria are not met, the stock options will be canceled. The fair value of the stock options granted was $23,292 and is being recognized through the vesting period.

                  74,627 shares of our common stock were issued to our interim CEO as compensation. The fair value of these shares was $100,000 and was recognized immediately.

 

Also, during the first quarter of 2007, in connection with the restructuring activities described in Note 5, we incurred a non-cash charge of $186,000 related to the early vesting of 201,675 RSUs.

 

Note 7.  Fair Value of Derivative Liabilities

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

 

7



 

model. The following table summarizes the Black-Scholes assumptions used to determine fair value and certain other fair value information for each of the instruments as of September 30, 2007:

 

 

 

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

 

4.1

%

4.1

%

4.1

%

Expected dividend yield

 

0

%

0

%

0

%

Contractual term (years)

 

3.02

 

3.52

 

0.50

 

Expected volatility

 

75.78

%

74.81

%

59.36% - 86.05

%

 

 

 

 

 

 

 

 

Certain Other Information

 

 

 

 

 

 

 

Fair value at December 31, 2006

 

$

300,626

 

$

459,614

 

$

21,921

 

Fair value at September 30, 2007

 

479,916

 

704,369

 

11,384

 

Change in fair value from December 31, 2006 to September 30, 2007

 

(179,290

)

(244,755

)

10,537

 

 

Note 8. Adoption of Interpretation No. 48

In July 2006, the Financial Accounting Standards Board (“FASB”) issued 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 Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” We adopted Interpretation No. 48 on January 1, 2007. There was no adjustment required to be made to our opening retained earnings balance upon adoption of Interpretation No. 48. Also, we do not expect any significant increases or decreases to our unrecognized tax benefits within the next 12 months.

 

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.

 

We file tax returns in the U.S. and in various state and local taxing jurisdictions. With few exceptions, we are no longer subject to U.S., state or local income tax examinations for years prior to 2003.

 

Note 9. New Accounting Pronouncements

 

EITF 07-3

In June 2007, the Emerging Issues 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. We do not expect the adoption of EITF 07-3 to have a material effect on our financial position or results of operations.

 

EITF Abstracts, Topic No. D-98

In June 2007, the SEC announced revisions to EITF Topic No. D-98 related to the release of SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” The revisions indicated that liability classification for financial instruments that meet the conditions for temporary equity classification is no longer acceptable. As a consequence, the fair value option under SFAS No. 159 may not be applied to any financial instrument that qualifies as temporary equity. Registrants that do not choose retrospective application should apply EITF Topic No. D-98 prospectively to all affected instruments entered into, modified or otherwise subject to a remeasurement event in the first fiscal quarter beginning after September 15, 2007. We do not expect the adoption of EITF 07-3 to have a material effect on our financial position or results of operations.

 

8



 

Note 10. Debt Financing

On August 31, 2007, we entered into a 2007 Term Loan and Security Agreement (the “Loan Agreement”) with PFG for a $500,000 term loan (the “Loan”). The Loan is due in twelve equal monthly installments of $41,666.67 commencing October 1, 2007 and ending September 1, 2008.  Interest accrues at the rate of the prime rate of Silicon Valley Bank plus 2% per annum and is due on the first day of each month for interest accrued during the prior month. Under the Loan Agreement, we are obligated to pay PFG a collateral handling fee of 0.55% per month on the average amount borrowed during that month. If the closing price of our common stock is between $2.00 and $4.00 per share for 30 consecutive trading days, the fee will be reduced to 0.38% per month. If the closing price of our common stock is at or above $4.00 per share for 30 consecutive trading days, the fee will be reduced to 0.22% per month. Under the Loan Agreement, we granted a security interest in substantially all of our assets to PFG to secure our obligations under the Loan Agreement. The Loan Agreement contains certain revenue and working capital covenants. At September 30, 2007, $500,000 was outstanding on this Loan at an interest rate of 9.75%. We were in compliance with the revenue and working capital requirements at September 30, 2007. See also Note 1 for a discussion of an alleged covenant default subsequent to September 30, 2007.

 

In connection with the Loan Agreement, we issued a warrant to PFG to purchase 71,429 shares of our common stock at a price of $1.40 per share. The warrant is immediately exercisable and expires on August 30, 2014 and grants PFG piggy-back registration rights. The value of the warrant was determined to be $30,101 using the Black-Scholes valuation model and the following assumptions:

 

Risk-free interest rate

 

4.9

%

Expected dividend yield

 

0.0

%

Contractual term

 

7 years

 

Expected volatility

 

80.58

%

 

The value of the warrant was allocated to common stock and is being amortized as additional interest expense over the one-year life of the loan.

 

Note 11. Subsequent Events

 

Hiring of New President and Chief Executive Officer

In October 2007, we hired Mr. Ralph Makar to serve as our President and Chief Executive Officer. Mr. Makar was also appointed as a Class I member of our Board of Directors.

 

In connection with the hiring of Mr. Makar, we issued the following:

                  a non-qualified stock option outside of, but on terms and conditions substantially identical to, the terms and conditions of our Restated 1992 Stock Incentive Plan, as amended (the “Plan”), to purchase 150,000 shares of our common stock at an exercise price of $1.38 per share. The option vests as to 1/3 of the options annually on each of the first three anniversaries of the grant date and has a term of 10 years. The fair value of this option grant was $185,000 and will be recognized over the three-year vesting period; and

                  a RSU grant of 100,000 units, with each unit representing the right to receive one share of our common stock, subject to certain vesting conditions and forfeiture provisions.  The RSU grant was made outside of, but on terms and conditions substantially identical to, the Plan. The RSU grant vests as to 1/3 of the units annually on each of the first three anniversaries of the grant date. The fair value of the RSU grant was $133,000 and will be recognized over the three-year vesting period.

 

Hoffmann-La Roche Inc. and Trimeris Inc.

In October 2007, Hoffmann-La Roche Inc. and Trimeris Inc. announced that it was not going to continue with its FDA submission for Fuzeon® to be administered with the B2000. At September 30, 2007, we had $237,500 in non-refundable fees in deferred revenue and we anticipate that we will recognize the revenue in the fourth quarter of 2007.

 

9



 

Agreement with Serono

In October 2007, we entered into a 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.

 

PFG Loan Covenant Default

See Note 1 for a discussion of our alleged loan covenant default and related consequences.

 

ITEM 2.                     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward Looking Statements

 

This Quarterly Report on Form 10-Q 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, new licensing agreements, 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, 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. See also Part II, Item 1A, Risk Factors.

 

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.

 

Overview

 

We develop needle-free injection systems that improve the way patients receive medications and vaccines.

 

Our long-term goal is to become the leading supplier of needle-free injection systems to the pharmaceutical and biotechnology industries. In 2007, we are continuing to focus our business development efforts on new and existing licensing and supply agreements with leading pharmaceutical and biotechnology companies. Our pipeline of prospective new partnerships remains strong.  We are also actively pursuing additional opportunities both domestic and overseas as we expand our current product line.

 

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.

 

In 2007, our clinical research efforts continue to be aimed primarily at collaborations in the areas of vaccines and drug delivery. Currently, we are involved in collaborations with 12 institutions.  Further, we continue research efforts in dose sparing and intradermal delivery in collaboration with the World Health Organization (“WHO”) and the Centers for Disease Control and Prevention (“CDC”). We recently

 

10



 

presented our intradermal data from Inactivated Polio Vaccine studies in Cuba and Oman with the WHO and influenza study in the Dominican Republic with the CDC.

 

In 2007, our research and development efforts are focusing on the Iject® single use disposable product and the next generation spring device with auto-disable syringe. In addition, we continue to work on product improvements to existing devices and development of products for our strategic partners. We have completed stage one of our current project with PATH and the concept phase with our undisclosed European biotech partner. We have also completed several projects with Merial with the launch of Merial’s Derma-Vac™ needle-free device for swine and the Vitajet3 device for canine melanoma. We are also working with the National Institutes of Health on a program in which we will fill our current polycarbonate B2000 syringe with a DNA vaccine for delivery as a pre-filled syringe.

 

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; and vi) the timing of new product introductions by us and our competitors.

 

We began a strategic realignment of our company six months ago with a singular goal of increasing shareholder value. The realignment has two concurrent phases. Phase One was to focus on our fixed operating expenses. Phase Two of our realignment campaign is to increase our top line with profitable revenue. We are pleased to announce that we have successfully completed key milestones with a number of our current partners. Further, we believe that these existing programs will progress to the next phase of development and ultimately contribute significantly to our bottom line.  In October 2007, we entered into a 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. We have also initiated new discussions with a number of potential new partners, as well as with past partners.

 

We do not expect to report net income in 2007.

 

Reduction in Force and Creation of Executive Committee

 

In March 2007, we announced a reduction in force in order to streamline our operations, which resulted in the elimination of 13 positions. Four of these positions were in research and development, one in sales and marketing and eight in manufacturing. We recorded a charge of $289,000 in the first quarter of 2007 related to these actions. Of the $289,000, $249,000 was for cash severance and related charges and $40,000 was a non-cash charge for the acceleration of vesting of restricted stock awards. We anticipate these charges to be paid through the first quarter of 2008. We anticipate cost savings of approximately $1.3 million in 2007 and approximately $1.9 million in 2008 related to these actions.

 

In addition, in April 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 $17,000 for certain other benefits, payable 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. The total severance charge of $381,000 was recognized as a component of selling, general and administrative expense in the first quarter of 2007.

 

We hired Mr. Ralph Makar in October 2007 to serve as our President and Chief Executive Officer. In addition, effective March 8, 2007, the Board of Directors created an Executive Committee, which serves the role of our Chief Operating Officer. The Executive Committee is composed of Ms. Christine Farrell and Dr. Richard R. Stout and reports to our Chief Executive Officer. Ms. Farrell also serves as our Vice President of Finance and Dr. Stout serves as our Executive Vice President and Chief Medical Officer.

 

11



 

Contractual Payment Obligations

 

A summary of our contractual commitments and obligations as of September 30, 2007 was as follows:

 

 

 

Payments Due By Period

 

Contractual Obligation

 

Total

 

Remainder
of 2007

 

2008 and
2009

 

2010 and
2011

 

2012 and
beyond

 

$2.0 million revolving facility

 

$

655,491

 

$

655,491

 

$

 

$

 

$

 

December 2006 $500,000 term loan

 

250,000

 

83,333

 

166,667

 

 

 

August 2007 $500,000 term loan

 

500,000

 

125,000

 

475,000

 

 

 

$1.25 million term loan(1)

 

1,250,000

 

 

 

1,250,000

 

 

Operating leases

 

2,891,679

 

91,242

 

751,368

 

789,403

 

1,259,666

 

Capital leases

 

164,777

 

56,911

 

84,058

 

23,808

 

 

Purchase order commitments

 

755,478

 

755,478

 

 

 

 

 

 

$

6,467,425

 

$

1,767,455

 

$

1,477,093

 

$

2,063,211

 

$

1,259,666

 


(1)         The accreted value of $379,648 of our $1.25 million term loan is classified as current on our consolidated balance sheet as of September 30, 2007 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.

 

Purchase order commitments relate to future raw material inventory purchases, research and development projects and other operating expenses.

 

Going Concern and Cash Requirements for the Next Twelve-Month Period

 

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, 2006 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 September 30, 2007, we had an accumulated deficit of $117.4 million with total shareholders’ equity of $2.4 million. Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles.

 

In November 2007, Partners For Growth, L.P. (“PFG”) asserted that we are in default under the loan agreements we have with PFG as a result of our not achieving certain revenue covenants in one loan agreement. We have four outstanding loans with PFG and have granted a security interest in all of our assets as collateral for the loans. We are negotiating with PFG with respect to a forbearance agreement under which PFG will agree not to declare us in default under the loan agreements with respect to specified events for an agreed upon time period. In return for this forbearance, we expect to have to pay PFG approximately $550,000, which will be applied to one or more of our loans. We expect that we will also be required to reduce the exercise or conversion price, as applicable, of three warrants and a convertible loan held by PFG to an amount in excess of market value. While we are in negotiations with respect to $500,000 of new debt financing, there is no assurance that we will ultimately receive this financing. We are also attempting to secure additional debt or equity financing. If we are unable to arrange new financing on terms acceptable to us or in a relatively short period of time, the expected payment to PFG will materially and adversely affect our liquidity and ability to continue operations beyond December 31, 2007. In addition, the expected repricing of the warrants and convertible loan will result in dilution to existing shareholders.

 

If we are unable to negotiate a mutually acceptable forbearance agreement with PFG or are otherwise unable to regain or maintain compliance with our credit agreements, whether before or after the forbearance period, PFG could declare us in default under the loan agreements, accelerate all of our outstanding indebtedness and foreclose on our assets, which could have a material and adverse effect on our business and our ability to continue operations.

 

In addition to the approximately $550,000 payment mentioned above, we require cash for operations, debt service and capital expenditures. We had cash, cash equivalents and marketable securities of $2.1 million

 

12



 

at September 30, 2007. If we are unable to enter into anticipated licensing agreements with our current partners or enter into new licensing, development and supply agreements, or secure the new $500,000 loan referred to above, we may need to do one or more of the following:

                  reduce our current expenditure run-rate;

                  delay capital and maintenance expenditures;

                  restructure current debt financing;

                  secure additional short-term financing;

                  secure additional long-term debt financing;

                  secure additional equity financing; or

                  secure a strategic partner.

 

There is no guarantee that such resources will be available to us on terms acceptable to us, or at all, or that such 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.

 

Results of Operations

 

The consolidated financial data for the three and nine-month periods ended September 30, 2007 and 2006 are presented in the following table:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Revenue:

 

 

 

 

 

 

 

 

 

Net sales of products

 

$

1,713,883

 

$

2,490,896

 

$

5,300,792

 

$

5,871,698

 

Licensing and technology fees

 

83,612

 

512,862

 

1,377,126

 

1,585,785

 

 

 

1,797,495

 

3,003,758

 

6,677,918

 

7,457,483

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Manufacturing

 

1,556,183

 

2,149,532

 

4,787,249

 

6,090,147

 

Research and development

 

677,869

 

1,053,565

 

2,429,885

 

3,430,060

 

Selling, general and administrative

 

453,084

 

821,128

 

2,383,636

 

3,458,602

 

Total operating expenses

 

2,687,136

 

4,024,225

 

9,600,770

 

12,978,809

 

Operating loss

 

(889,641

)

(1,020,467

)

(2,922,852

)

(5,521,326

)

 

 

 

 

 

 

 

 

 

 

Interest income

 

27,649

 

41,571

 

92,742

 

119,549

 

Interest expense

 

(175,184

)

(212,690

)

(472,180

)

(1,691,146

)

Change in fair value of derivative liabilities

 

413,706

 

728,641

 

(413,508

)

1,162,784

 

Net loss

 

(623,470

)

(462,945

)

(3,715,798

)

(5,930,139

)

Preferred stock dividend

 

(101,475

)

(93,979

)

(292,398

)

(131,542

)

Beneficial conversion on issuance of preferred stock

 

 

 

 

(109,489

)

Net loss allocable to common shareholders

 

$

(724,945

)

$

(556,924

)

$

(4,008,196

)

$

(6,171,170

)

Basic and diluted net loss per common share allocable to common shareholders

 

$

(0.05

)

$

(0.04

)

$

(0.27

)

$

(0.43

)

Shares used in per share calculations

 

15,149,821

 

14,341,359

 

14,962,750

 

14,215,967

 

 

Revenue

The $0.8 million, or 31.2%, decrease and the $0.6 million, or 9.7%, decrease in product sales in the three and nine-month periods ended September 30, 2007, respectively, compared to the same periods of 2006, were primarily due to the following:

 

                  a $0.5 million and a $1.1 million decrease, respectively, in vial adapter sales to Amgen and Ferring; and

                  a $1.0 million and a $0.4 million decrease in sales of cool.click™ product to Serono, respectively.

 

These decreases were partially offset by the following:

 

                  a $0.6 million and a $1.1 million increase, respectively, in sales to Merial for companion and production animal products; and

                  a $0.1 million and $0.2 million increase, respectively, in B2000 product sales.

 

13



 

In October 2007, Hoffmann-La Roche Inc. and Trimeris Inc. announced that they were not going to continue with their FDA submission for Fuzeon® to be administered with the B2000, which we anticipate will negatively affect our B2000 sales in future periods. However, patients currently utilizing the B2000 for administering Fuzeon® and those in clinical trials may continue using the device.

 

Also in October 2007, we entered into a 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.

 

We currently have significant supply agreements or commitments with Serono, Merial, Ferring Pharmaceuticals Inc., Amgen Inc. and BioScrip Inc. (formerly Chronimed Inc.).

 

License and technology fees decreased $0.4 million, or 83.7%, and $0.2 million, or 13.2%, in the three and nine-month periods ended September 30, 2007, respectively, compared to the same periods of 2006. These decreases resulted from having fewer active agreements during the 2007 periods compared to the 2006 periods.

 

We currently have active licensing and/or development agreements, which often include commercial product supply provisions, with Merial, an undisclosed European biotechnology company, an undisclosed pharmaceutical company, the Centers for Disease Control and Prevention and Vical.

 

Manufacturing Expense

Manufacturing expense is made up of the cost of products sold and manufacturing overhead expense related to excess manufacturing capacity.

 

Manufacturing expense decreased $0.6 million, or 27.6%, and $1.3 million, or 21.4%, respectively, in the three and nine-month periods ended September 30, 2007 compared to the same periods of 2006. These decreases were due primarily to a $65,000 and a $200,000 decrease, respectively, in severance, labor and other manufacturing costs, primarily related to our past restructuring activities. Decreases in product sales contributed approximately $557,000 and $264,000 to the decreases in the three and nine-month periods ended September 30, 2007, respectively, compared to the same periods of 2006. In addition, the nine-month period ended September 30, 2006 included a $915,000 non-cash charge for the write-down of our sterile fill equipment in the second quarter of 2006.

 

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.

 

Research and development expense decreased $0.4 million, or 35.6%, and $1.0 million, or 29.2%, in the three and nine-month periods ended September 30, 2007, respectively, compared to the same periods of 2006. These decreases were due primarily to a $164,000 and a $411,000 decrease, respectively, in labor and related expenses, primarily related to our past restructuring activities. In addition, project materials and tooling expenses decreased $236,000 and $589,000 in the three and nine-month periods ended September 30, 2007, respectively, compared to the same periods of 2006, as a result of the timing of projects.

 

Current significant projects include the Iject® needle-free injection device for an undisclosed company, a gas-powered drug delivery system utilizing our B2000 technology for an undisclosed company and the next generation auto-disable spring-powered device.

 

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.

 

14



 

Selling, general and administrative expense decreased $0.4 million, or 44.8%, and $1.1 million, or 31.1%, in the three and nine-month periods ended September 30, 2007, respectively, compared to the same periods of 2006. These decreases were due primarily to $307,000 and $803,000, respectively, in savings related to our past restructuring activities, as well as a $93,000 and a $297,000 decrease, respectively, in insurance, other professional fees and consulting services.

 

Restructuring

Restructuring charges were as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Manufacturing

 

$

 

$

 

$

55,229

 

$

108,041

 

Research and development

 

 

 

38,277

 

30,294

 

Selling, general and administrative

 

 

 

576,020

 

582,059

 

Total

 

$

 

$

 

$

669,526

 

$

720,394

 

 

The following table rolls forward our restructuring liability in the first nine months of 2007:

 

Nine-Month Period Ended September 30, 2007

 

Beginning
Accrued
Liability

 

Charged
to
Expense

 

Expenditures/
Transfer
to Equity

 

Ending
Accrued
Liability

 

Severance and related benefits for terminated employees

 

$

521,770

 

$

483,175

 

$

(687,105

)

$

317,840

 

Acceleration of vesting to be settled in common stock

 

315,084

 

186,351

 

(501,435

)

 

 

 

$

836,854

 

$

669,526

 

$

(1,188,540

)

$

317,840

 

 

See Note 4 of Notes to Consolidated Financial Statements for additional information regarding our 2007 restructuring charges.

 

Interest Expense

Interest expense included the following:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Contractual interest expense

 

$

96,000

 

$

66,000

 

$

234,000

 

$

258,000

 

Amortization of debt issuance costs

 

17,000

 

84,000

 

51,000

 

285,000

 

Acceleration of amortization of debt issuance costs related to early pay-down of $3.0 million term loan

 

 

 

 

300,000

 

Accretion of PFG and LOF convertible debt

 

62,000

 

63,000

 

187,000

 

247,000

 

Loss on settlement of LOF debt

 

 

 

 

601,000

 

 

 

$

175,000

 

$

213,000

 

$

472,000

 

$

1,691,000

 

 

In addition to contractual interest expense, in future periods, interest expense will include the following:

 

                  amortization of unamortized debt issuance costs, which totaled $86,000 at September 30, 2007 and are being amortized at the rate of $17,000 per quarter; and

                  accretion of the $1.25 million convertible debt at the rate of approximately $62,000 per quarter.

 

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.

 

15



 

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.

 

We currently have a line of credit agreement for up to $2.0 million of borrowings, which matures on May 11, 2008. As of September 30, 2007, $655,000 was outstanding under the line of credit and, based on borrowing limitations, there was $80,000 available for borrowing.

 

Total cash, cash equivalents and short-term marketable securities at September 30, 2007 were $2.1 million compared to $3.7 million at December 31, 2006. We had a working capital deficit of $1.1 million at September 30, 2007 compared to working capital of $1.4 million at December 31, 2006.

 

The overall decrease in cash, cash equivalents and short-term marketable securities during the first nine months of 2007 resulted from $1.6 million used in operations, $102,000 used for capital expenditures, $173,000 used for other investing activities, primarily patent applications, and $284,000 used for principal payments on long-term debt and capital leases. These decreases were partially offset by $0.5 million of proceeds from a short-term loan received in September 2007.

 

Net accounts receivable decreased $0.4 million to $0.9 million at September 30, 2007 compared to $1.3 million at December 31, 2006. Included in the balance at September 30, 2007 was an aggregate of $572,000 due from our five largest customers. Of the amount due from these customers at September 30, 2007, $478,000 was collected prior to the filing of this Form 10-Q. Historically, we have not had collection problems related to our accounts receivable.

 

Inventories decreased $0.5 million to $0.6 million at September 30, 2007 compared to $1.1 million at December 31, 2006 and primarily included raw materials and finished goods for the Vial Adapter, B2000 Syringe products, and the spring-powered products for forecasted production in the fourth quarter of 2007.  We anticipate increased inventories at December 31, 2007 due to increased spring-powered product forecasted in 2008 for Serono. As part of Serono’s agreement, it will prepay us for raw material purchases.

 

Capital expenditures of $102,000 in the first nine months of 2007 were primarily for the purchase of manufacturing tooling. We anticipate spending up to a total of $150,000 in 2007 for production molds for current research and development projects. We anticipate that we will be reimbursed by our partners for these expenditures.

 

Derivative liabilities of $1.2 million at September 30, 2007 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 $0.3 million at September 30, 2007 compared to $1.2 million at December 31, 2006. The balance at September 30, 2007 included $11,000 received from Serono, $238,000 received from Hoffman-La Roche Inc. and Trimeris and $68,000 received from Vical.

 

We have outstanding a term loan agreement with Partners for Growth, L.P. (“PFG”) for $1.25 million of convertible debt financing (the “Debt Financing”). This loan is due in 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 and is convertible at any time by PFG into our common stock at $1.37 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

 

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received upon conversion at a price of $1.37 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 September 30, 2007, this debt was recorded on our balance sheet at $380,000 and is being accreted on a straight-line basis at the rate of approximately $62,000 per quarter to its face value of $1.25 million over the 60-month contractual term of the debt.

 

We also have outstanding a Loan and Security Agreement (the “Loan Agreement”) with PFG. The Loan Agreement provides for two loan facilities. One facility is a $500,000 term loan (the “Term Loan”), as described below, and the second facility permits us to borrow up to an amount equal to the sum of 75% of our eligible accounts receivable plus 30% of our eligible inventory, up to a maximum of $2.0 million plus any principal amounts of the Term Loan that have been repaid (the “Revolving Loan”). The Revolving Loan matures on May 11, 2008 and bears interest at (i) the greater of 4.5% or the prime rate of Silicon Valley Bank, (ii) plus 2%. Under the Loan Agreement, we are obligated to pay PFG a collateral handling fee of 0.55% per month on the average amount borrowed during that month. If the closing price of our common stock is between $2.00 and $4.00 per share for 30 consecutive trading days, the fee will be reduced to 0.38% per month.  If the closing price of our common stock is at or above $4.00 per share for 30 consecutive trading days, the fee will be reduced to 0.22% per month. Under the Loan Agreement, we granted a security interest in substantially all of our assets to PFG to secure our obligations under the Loan Agreement. Our obligations under the Loan Agreement accelerate upon certain events, including a sale or change of control.  As of September 30, 2007, we had $655,000 outstanding under the Revolving Loan at an interest rate of 9.75% and, based on borrowing limitations, there was $80,000 available for future borrowings.

 

The $500,000 Term Loan is being repaid in 18 equal monthly installments, with a maturity date of May 11, 2008. We borrowed the full amount of the Term Loan on December 12, 2006. The Term Loan bears interest at a monthly rate equal to (i) the greater of 4.5% or the prime rate of Silicon Valley Bank, plus (ii) 1.5%.  At September 30, 2007, we had $250,000 outstanding under this Term Loan at an interest rate of 9.25%.

 

On August 31, 2007, we entered into a 2007 Term Loan and Security Agreement (the “2007 Loan Agreement”) with PFG for a $500,000 term loan (the “Loan”). The Loan is due in twelve equal monthly installments of $41,666.67 commencing October 1, 2007 and ending September 1, 2008. Interest accrues at the rate of the prime rate of Silicon Valley Bank plus 2% per annum and is due on the first day of each month for interest accrued during the prior month. Under the Loan Agreement, we are obligated to pay PFG a collateral handling fee of 0.55% per month on the average amount borrowed during that month. If the closing price of our common stock is between $2.00 and $4.00 per share for 30 consecutive trading days, the fee will be reduced to 0.38% per month. If the closing price of our common stock is at or above $4.00 per share for 30 consecutive trading days, the fee will be reduced to 0.22% per month. Under the Loan Agreement, we granted a security interest in substantially all of our assets to PFG to secure our obligations under the Loan Agreement. The Loan Agreement contains certain revenue and working capital covenants. At September 30, 2007, $500,000 was outstanding on this Loan at an interest rate of 9.75%. We were in compliance with the revenue and working capital requirements at September 30, 2007.

 

See “Going Concern and Cash Requirements for the Next Twelve-Month Period” above for a description of recent events relating to the loans with PFG.

 

Critical Accounting Policies and Estimates

 

We reaffirm the critical accounting policies and estimates as reported in our Form 10-K for the year ended December 31, 2006, which was filed with the Securities and Exchange Commission on April 2, 2007.

 

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.

 

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New Accounting Pronouncements

 

See Note 9. of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There have been no material changes in our reported market risks or risk management policies since the filing of our 2006 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on April 2, 2007.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

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.

 

PART II

 

ITEM 1A.  RISK FACTORS

 

In addition to the other information contained in this Form 10-Q, 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 are negotiating a forbearance agreement with our lender, who has a security interest in all of our assets. The expected terms of this agreement may have a material adverse effect on our business and cause dilution to shareholders. In addition, if we are unable to successfully negotiate a forbearance agreement or regain or maintain compliance with our loan agreements, our assets could be foreclosed upon, which could materially and adversely affect our business. In November 2007, PFG asserted that we are in default under the loan agreements we have with PFG as a result of our not achieving certain revenue covenants in one loan agreement. We have four outstanding loans with PFG and have granted a security interest in all of our assets as collateral for the loans. We are negotiating with PFG with respect to a forbearance agreement under which PFG will agree not to declare us in default under the loan agreements with respect to specified events for an agreed upon time period. In return for this forbearance, we expect to have to pay PFG approximately $550,000, which will be applied to one or more of our loans. We expect that we will also be required to reduce the exercise or conversion price, as applicable, of three warrants and a convertible loan held by PFG to an amount in excess of market value. While we are in negotiations with respect to $500,000 of new debt financing, there is no assurance that we will ultimately receive this financing. We are also attempting to secure additional debt or equity financing. If we are unable to arrange new financing on terms acceptable to us or in a relatively short period of time, the expected payment to PFG will materially and adversely affect our liquidity and ability to continue operations beyond December

 

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31, 2007. In addition, the expected repricing of the warrants and convertible loan will result in dilution to existing shareholders.

 

If we are unable to negotiate a mutually acceptable forbearance agreement with PFG or are otherwise unable to regain or maintain compliance with our credit agreements, whether before or after the forbearance period, PFG could declare us in default under the loan agreements, accelerate all of our outstanding indebtedness and foreclose on our assets, which could have a material and adverse effect on our business and our ability to continue operations.

 

We may need additional funding to support our operations beyond 2007; sufficient funding is subject to conditions and may not be available to us, and the unavailability of funding could adversely affect our business. In addition to the approximately $550,000 payment mentioned above, we require cash for operations, debt service and capital expenditures. We had cash, cash equivalents and marketable securities of $2.1 million at September 30, 2007. If we are unable to enter into anticipated licensing agreements with our current partners or enter into new licensing, development and supply agreements, or secure the new $500,000 loan referred to above, we may need to do one or more of the following:

                  reduce our current expenditure run-rate;

                  delay capital and maintenance expenditures;

                  restructure current debt financing;

                  secure additional short-term financing;

                  secure additional long-term debt financing;

                  secure additional equity financing; or

                  secure a strategic partner.

 

There is no guarantee that such resources will be available to us on terms acceptable to us, or at all, or that such 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.

 

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 September 30, 2007, we had an accumulated deficit of $117.4 million and a net working capital deficit of $1.1 million. 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 dated April 2, 2007 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 nursing organizations for flu 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.

 

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, the Biojector® 2000 system and the Vitajet® system 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. The Biojector® 2000, the Iject® system, the Vitajet® system or any of our products under development 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

 

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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, including those with Hoffman-La Roche Pharmaceuticals, Merck & Co. and Amgen, have been canceled by our partners prior to completion. These agreements were canceled for various reasons, including 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. No revenue resulted from any of the canceled agreements in 2006, 2005 or 2004.

 

In addition, in October 2007, Hoffmann-La Roche Inc. and Trimeris Inc. announced that they were not going to continue with their FDA submission for Fuzeon® to be administered with the B2000. While we did not have a licensing and supply agreement with these parties, this announcement may negatively affect our B2000 sales in future periods.

 

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.

 

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 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.

 

We hired a new President and Chief Executive Officer, and our business could be harmed if we fail to assimilate him. On October 1, 2007, we hired Mr. Ralph Makar as our new President and Chief Executive Officer. If we fail to effectively assimilate Mr. Makar, it may be disruptive to our business and negatively impact our operating results and may result in the departure of existing employees and customers.

 

We may not be able to effectively implement our restructuring activities, and 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. Despite our restructuring efforts, we cannot assure you that we will achieve all of the operating expense reductions and improvements in operating margins and cash flows currently anticipated from these restructuring activities in the periods contemplated, or at all. Our inability to realize these benefits, and our failure to appropriately structure our business to meet market conditions, could negatively impact our results of operations. As part of our recent restructuring 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 restructuring 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 efforts will be successful.

 

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We may not be able to comply with Nasdaq listing requirements, which could result in our common stock being delisted from the Nasdaq Capital Market. On October 3, 2006, we received a Nasdaq Staff Deficiency Letter stating that we 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 our common stock closed below the minimum $1.00 bid requirement. Compliance would be regained if at any time prior to April 2, 2007 the bid price of our common stock closed at $1.00 per share or more for a minimum of 10 consecutive business days. On November 1, 2006, Nasdaq notified us that we were in compliance with the minimum bid requirement. Our common stock is again trading at less than $1.00 and, as a result, we expect that we will receive another Deficiency Letter from Nasdaq in the near future. In addition, we may be unable to comply with Nasdaq’s other listing standards on an ongoing basis. As a result, our stock may be delisted from the Nasdaq Capital Market, which could have a negative effect on the price of our common stock, as well as on our ability to raise additional debt or equity resources.

 

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 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 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

 

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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. 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 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. The Iject® is still in development and has not yet been sold commercially.

 

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.

 

Bioject has received the following certifications from Underwriters Laboratories or TUV Product Services 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

 

Dated

ISO 13485:2003 and CMDCAS (Underwriters Laboratories)

 

December 2006

 

 

 

Annex V of the Directive 93/42/EEC on Medical Devices (TUV)

 

Audit February 2006

 

 

 

Annex II, section 3 of the Directive 93/42/EEC on Medical Devices (TUV)

 

Audit February 2006

 

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-syringes 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

 

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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 and Vitajet® product line 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 and Vitajet® product line.

 

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 the Vitajet® 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 in the future, and these delays 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 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

 

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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. We know of no such infringement claims.

 

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 in the near future, 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 beginning at various points in time in the future. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. 520,088 shares of our common stock currently outstanding are eligible for sale without registration pursuant to Rule 144 under the Securities Act, subject to certain conditions of Rule 144. The holder of these shares also has certain demand and piggyback registration rights enabling it to register its shares for sale under the Securities Act. We have registered approximately 20.9 million shares for resale on Form S-3 registration statements, including approximately 2.4 million shares issuable upon exercise of warrants. In addition, as of September 30, 2007, we had 658,000 shares of common stock reserved for future issuance under our stock incentive plan and our employee share purchase plan combined. As of September 30, 2007, options to purchase approximately 1.5 million shares of common stock were outstanding and 620,000 restricted stock units were outstanding and will be eligible for sale in the public market from time to time subject to vesting. In connection with the Loan Agreement signed in December 2006, we issued a warrant to purchase 200,000 shares of our common stock at an exercise price of $1.37 per share. In addition, in connection with the Loan Agreement signed in August 2007, we issued a warrant to purchase 71,429 shares of our common stock at an exercise price of $1.40 per share. The warrants expire on December 10, 2011 and August 30, 2014, respectively. The shares underlying these warrants have not been registered for resale.

 

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 early-stage, 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.

 

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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 and warrants to purchase common stock representing in aggregate approximately 32% of our outstanding voting power (assuming 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 6.  EXHIBITS

 

The following exhibits are filed herewith and this list is intended to constitute the exhibit index:

 

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.

 

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.

 

  3.2

 

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.

 

 10.1

 

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.

 

 10.2

 

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.

 

 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.

 

 31.2

 

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.

 

 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.

 

 32.2

 

Certification of Principal 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.

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

Date: November 14, 2007

BIOJECT MEDICAL TECHNOLOGIES INC.

 

(Registrant)

 

 

 

 

 

 

 

 

 

/s/ RALPH MAKAR

 

 

Ralph Makar

 

President and Chief Executive Officer

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

 

 

/s/ CHRISTINE M. FARRELL

 

 

Christine M. Farrell

 

Vice President of Finance

 

(Principal Financial and Accounting Officer)

 

 

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