**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

## **Form 10-Q**

## ** **

**(Mark One)**

 

| ** **                                                | **ý** | **Quarterly Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                                                                                                                                                                                                             |
|-----------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **For the quarterly period ended September 30,  2004 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   0-21615**

 

**PRESSUREBIOSCIENCES, INC.**

(Exact Name of Registrant as Specified in its Charter)

 
| **Massachusetts**                        | **04-2652826**      |
|------------------------------------------|---------------------|
| (State or Other Jurisdiction of          | (I.R.S. Employer    |
| Incorporation or Organization)           | Identification No.) |
|                                     |                |
| **375 West Street,**                     | **02379-1040**      |
| **West Bridgewater, Massachusetts**      | (Zip Code)          |
| (Address of Principal Executive Offices) |                |

 

Registrant’s telephone number, including area code

**(508) 580-1900**

 

Indicateby check mark whether the Registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

ýYes    oNo

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2).

 

oYes    ýNo

 

The number of shares outstanding of the Registrant’scommon stock as of November 1, 2004 was 6,872,915.

 

 

----

 

Part I.  FinancialInformation

Item 1.  Financial Statements

 

PRESSURE BIOSCIENCES INC. AND SUBSIDIARIES

(FORMERLY BOSTON BIOMEDICA INC., AND SUBSIDIARIES)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 
| ** **                                                                                                                 | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                 | ** ** | **30-Sep**                     | ** ** | **30-Sep**                    | ** ** |
| ** **                                                                                                                 | ** ** | **2004**                       | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| REVENUE:                                                                                                                   |       |                           |       |                          |       |   |   |   |   |
| PCT Products                                                                                                               |       | $                              | 2,383      |                          | $          | — |   | $ | 12,939 |   | $ | 73,782 |   |
| Grant Revenues                                                                                                             |       | 66,518                         |       | 90,497                        |       | 292,054 |   | 424,615 |   |
| Total revenue                                                                                                              |       | 68,901                         |       | 90,497                        |       | 304,993 |   | 498,397 |   |
|                                                                                                                       |       |                           |       |                          |       |   |   |   |   |
| COSTS AND EXPENSES:                                                                                                        |       |                           |       |                          |       |   |   |   |   |
| Cost of products                                                                                                           |       | 20,654                         |       | 43,488                        |       | 55,673 |   | 97,753 |   |
| Research and development                                                                                                   |       | 239,315                        |       | 173,187                       |       | 672,087 |   | 830,308 |   |
| Selling and marketing                                                                                                      |       | 12,278                         |       | 138,350                       |       | 138,158 |   | 334,432 |   |
| General and administrative                                                                                                 |       | 140,597                        |       | 223,428                       |       | 762,597 |   | 970,873 |   |
| Stock Based Compensation                                                                                                   |       | 281,737                        |       | —                        |       | 281,737 |   | — |   |
| Total operating costs and expenses                                                                                         |       | 694,581                        |       | 578,453                       |       | 1,910,252 |   | 2,233,366 |   |
|                                                                                                                       |       |                           |       |                          |       |   |   |   |   |
| Operating loss from continuing operations                                                                                  |       | (625,680                       | )          | (487,956                      | )          | (1,605,259 | ) | (1,734,969 | ) |
|                                                                                                                       |       |                           |       |                          |       |   |   |   |   |
| Other operating credits and (charges) net,  (Note 4)                                                                       |       | (30,612                        | )          | (242,832                      | )          | (333,607 | ) | (580,503 | ) |
| Interest income                                                                                                            |       | 11,705                         |       | 1,988                         |       | 15,243 |   | 17,619 |   |
| Interest expense                                                                                                           |       | (18,483                        | )          | (12,999                       | )          | (69,453 | ) | (39,711 | ) |
|                                                                                                                       |       |                           |       |                          |       |   |   |   |   |
| Loss from continuing operations before income  taxes                                                                       |       | (663,070                       | )          | (741,799                      | )          | (1,993,076 | ) | (2,337,564 | ) |
|                                                                                                                       |       |                           |       |                          |       |   |   |   |   |
| Income tax benefit (provision)                                                                                             |       | —                         |       | —                        |       | 244,036 |   | 233,462 |   |
| Loss from continuing operations                                                                                            |       | (663,070                       | )          | (741,799                      | )          | (1,749,040 | ) | (2,104,102 | ) |
|                                                                                                                       |       |                           |       |                          |       |   |   |   |   |
| Discontinued operations (Note 3)                                                                                           |       |                           |       |                          |       |   |   |   |   |
| Income (loss) from discontinued operations,  (net of taxes for nine months ended of $245,135 in 2004 and $236,892 in 2003) |       | (440,212                       | )          | 386,043                       |       | 140,946 |   | 1,269,495 |   |
| ** **                                                                                                                 |       |                           |       |                          |       |   |   |   |   |
| Gain on sale of net assets related to  discontinued operations (net of income taxes of $3,925,200 in 2004)                 |       | 15,868,025                     |       | —                        |       | 15,868,025 |   | — |   |
| Income from discontinued operations                                                                                        |       | 15,427,813                     |       | 386,043                       |       | 16,008,971 |   | 1,269,495 |   |
|                                                                                                                       |       |                           |       |                          |       |   |   |   |   |
| Net income (loss)                                                                                                          |       | $                              | 14,764,743 |                          | $          | (355,756 | ) | $ | 14,259,931 |   | $ | (834,607 | ) |
|                                                                                                                       |       |                           |       |                          |       |   |   |   |   |
| Loss per share from continuing operations,  basic & diluted                                                            |       | $                              | (0.10      | )                             | $          | (0.11 | ) | $ | (0.26 | ) | $ | (0.31 | ) |
|                                                                                                                       |       |                           |       |                          |       |   |   |   |   |
| Income per share from discontinued operations,  basic & diluted                                                        |       | $                              | 2.25       |                          | $          | 0.06 |   | $ | 2.34 |   | $ | 0.19 |   |
|                                                                                                                       |       |                           |       |                          |       |   |   |   |   |
| Net income (loss) per share basic and  diluted                                                                             |       | $                              | 2.15       |                          | $          | (0.05 | ) | $ | 2.08 |   | $ | (0.12 | ) |
|                                                                                                                       |       |                           |       |                          |       |   |   |   |   |
| Weighted average number of shares used to  calculate net income (loss) per share, basic & diluted                      |       | 6,857,252                      |       | 6,824,075                     |       | 6,843,329 |   | 6,804,972 |   |

 

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

 

2

----

 

PRESSURE BIOSCIENCES INC. AND SUBSIDIARIES

(FORMERLY BOSTON BIOMEDICA INC., AND SUBSIDIARIES)

CONDENSED CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                                 | ** ** | **30-Sep**      | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                                                                 | ** ** | **2004**        | ** ** | **2003**         | ** ** |
|                                                                                                                       |       | **(Unaudited)** |       |             |       |
| ASSETS                                                                                                                     |       | ** **      |       |             |       |
| CURRENT ASSETS:                                                                                                            |       |            |       |             |       |
| Cash and cash equivalents                                                                                                  |       | $               | 25,595,341 |             | $          | 967,185 |   |
| Marketable securities                                                                                                      |       | —          |       | 4,071            |       |
| Accounts receivable, less allowances of $250  and $0 respectively                                                          |       | 35,937          |       | 27,557           |       |
| Inventories                                                                                                                |       | 262,568         |       | 298,351          |       |
| Prepaid expenses and other current assets                                                                                  |       | 109,897         |       | 105,048          |       |
| Assets held for sale (Note 3)                                                                                              |       | —          |       | 13,522,893       |       |
| Total current assets                                                                                                       |       | 26,003,743      |       | 14,925,105       |       |
|                                                                                                                       |       |            |       |             |       |
| PROPERTY AND EQUIPMENT, NET                                                                                                |       | 38,695          |       | 117,422          |       |
|                                                                                                                       |       |            |       |             |       |
| OTHER ASSETS:                                                                                                              |       |            |       |             |       |
| Acquired PCT patent costs, net                                                                                             |       | 486,348         |       | 522,822          |       |
| Assets transferred under contractual  arrangements (Note 4)                                                                |       | 1,340,777       |       | 1,228,200        |       |
| Deferred costs (Note 1)                                                                                                    |       |            |       | 39,719           |       |
| Escrow on deposit related to sale of assets  to Seracare                                                                   |       | 2,503,632       |       | —           |       |
| Other long-term assets                                                                                                     |       | 9,178           |       | 9,178            |       |
| Total other assets                                                                                                         |       | 4,339,935       |       | 1,799,919        |       |
|                                                                                                                       |       |            |       |             |       |
| TOTAL ASSETS                                                                                                               |       | $               | 30,382,373 |             | $          | 16,842,446 |   |
|                                                                                                                       |       |            |       |             |       |
| LIABILITIES  AND STOCKHOLDERS' EQUITY                                                                                      |       |            |       |             |       |
|                                                                                                                       |       |            |       |             |       |
| CURRENT LIABILITIES:                                                                                                       |       |            |       |             |       |
| Accounts payable                                                                                                           |       | $               | 119,799    |             | $          | 233,363 |   |
| Accrued employee compensation                                                                                              |       | 147,541         |       | 126,036          |       |
| Other accrued expenses                                                                                                     |       | 543,956         |       | 237,593          |       |
| Income taxes payable                                                                                                       |       | 3,925,200       |       | —           |       |
| Liabilities from discontinued operations  (Note 3)                                                                         |       | 32,515          |       | 192,801          |       |
| Liabilities held for sale (Note 3)                                                                                         |       | —          |       | 4,951,943        |       |
| Total current liabilities                                                                                                  |       | 4,769,011       |       | 5,741,736        |       |
|                                                                                                                       |       |            |       |             |       |
| LONG TERM LIABILITIES                                                                                                      |       |            |       |             |       |
| Liabilities from discontinued operations  (Note 3)                                                                         |       | 95,000          |       | 215,040          |       |
| Liabilities transferred under contractual  arrangements (Note 4)                                                           |       | 474,579         |       | 370,096          |       |
| Other liabilities                                                                                                          |       | —          |       | 100,364          |       |
| Total long term liabilities                                                                                                |       | 569,579         |       | 685,500          |       |
|                                                                                                                       |       |            |       |             |       |
| Total Liabilities                                                                                                          |       | 5,338,590       |       | 6,427,236        |       |
|                                                                                                                       |       |            |       |             |       |
| COMMITMENTS AND CONTINGENCIES (Note 10)                                                                                    |       |            |       |             |       |
|                                                                                                                       |       |            |       |             |       |
| STOCKHOLDERS' EQUITY:                                                                                                      |       |            |       |             |       |
| Common stock, $.01 par value; 20,000,000  shares authorized, 6,862,040 and 6,827,592 issued and outstanding,  respectively |       | 68,620          |       | 68,276           |       |
| Loan receivable from Director and CEO (Note  6)                                                                            |       | (1,000,000      | )          | (1,000,000       | )          |
| Additional paid-in capital                                                                                                 |       | 22,256,533      |       | 21,888,235       |       |
| Retained earnings / (accumulated deficit)                                                                                  |       | 3,718,630       |       | (10,541,301      | )          |
| Total stockholders' equity                                                                                                 |       | 25,043,783      |       | 10,415,210       |       |
|                                                                                                                       |       |            |       |             |       |
| TOTAL LIABILITIES & STOCKHOLDERS' EQUITY                                                                               |       | $               | 30,382,373 |             | $          | 16,842,446 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

3

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PRESSURE BIOSCIENCES INC. AND SUBSIDIARIES

(FORMERLY BOSTON BIOMEDICA INC., AND SUBSIDIARIES)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                                                                               | ** ** | **For the nine months ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                               | ** ** | **September 30**              | ** ** |
| ** **                                                                                                                               | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                                                                |       |                          |       |   |   |
| Net income / (loss)                                                                                                                      |       | $                             | 14,259,931 |   | $ | (834,607 | ) |
| Less: income from discontinued operations                                                                                                |       | 16,008,971                    |       | 1,269,495 |   |
| (Loss) from continuing operations                                                                                                        |       | (1,749,040                    | )          | (2,104,102 | ) |
| Adjustments to reconcile (loss) from  continuing operations to net cash used in operating activities:                                    |       |                          |       |   |   |
| Depreciation and amortization                                                                                                            |       | 115,203                       |       | (316 | ) |
| Provision for doubtful accounts                                                                                                          |       | 250                           |       | — |   |
| Stock based compensation                                                                                                                 |       | 281,737                       |       | — |   |
| Changes in operating assets and liabilities:                                                                                             |       |                          |       | — |   |
| Accounts receivable                                                                                                                      |       | (8,629                        | )          | 261,882 |   |
| Marketable securities                                                                                                                    |       | 3,243                         |       | — |   |
| Inventories                                                                                                                              |       | 35,783                        |       | (143,339 | ) |
| Prepaid expenses and other current assets                                                                                                |       | (4,849                        | )          | 74,495 |   |
| Assets and liabilities transferred under  contractural obligations, (net)                                                                |       | (8,095                        | )          | (386,985 | ) |
| Accounts payable                                                                                                                         |       | (113,568                      | )          | (231,321 | ) |
| Accrued employee compensation                                                                                                            |       | 21,505                        |       | 16,251 |   |
| Other accrued expenses                                                                                                                   |       | 306,363                       |       | (4,974 | ) |
| Other liabilities                                                                                                                        |       | (100,364                      | )          | (115 | ) |
| Net cash used in operating activities                                                                                                    |       | (1,220,461                    | )          | (2,518,524 | ) |
|                                                                                                                                     |       |                          |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                                                                |       |                          |       |   |   |
| Net cash provided by investing activities                                                                                                |       | —                        |       | — |   |
|                                                                                                                                     |       |                          |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                                                                |       |                          |       |   |   |
| Proceeds from issuance of common stock                                                                                                   |       | 86,905                        |       | 24,297 |   |
| Escrow deposits related to sale of assets to  SeraCare                                                                                   |       | (2,503,632                    | )          |   |   |
| Deferred costs                                                                                                                           |       | 39,718                        |       | — |   |
|                                                                                                                                     |       |                          |       |   |   |
| Net cash (used) / provided in financing activities                                                                                       |       | (2,377,009                    | )          | 24,297 |   |
|                                                                                                                                     |       |                          |       |   |   |
| **DECREASE IN CASH AND CASH EQUIVALENTS:**                                                                                               |       | (3,597,470                    | )          | (2,494,227 | ) |
|                                                                                                                                     |       |                          |       |   |   |
| Cash provided by discontinued operations                                                                                                 |       | 28,225,626                    |       | 2,774,150 |   |
| Cash and cash equivalents, beginning of year                                                                                             |       | 967,185                       |       | 975,649 |   |
| Cash and cash equivalents at end of period                                                                                               |       | $                             | 25,595,341 |   | $ | 1,255,572 |   |
|                                                                                                                                     |       |                          |       |   |   |
| **SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING  AND FINANCING ACTIVITIES:**                                                             |       |                          |       |   |   |
| Issuance of 29,155 common shares associated  with prepaid stock subscription                                                             |       | $                             | —     |   | $ | 175,000 |   |
| Conversion of Pledge of Restricted Cash as  Security for Loan from Bank to Director to a Loan Receivable from Director and  CEO (Note 6) |       | $                             | —     |   | $ | 1,000,000 |   |

 

The accompanying notes are an integralpart of these condensed consolidated financial statements.

 

4

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**(1)           Basisof Presentation and Summary of Significant Accounting Policies**

 

*Overview*

 

Theaccompanying unaudited condensed consolidated financial statements of PressureBioSciences, Inc. (formerly known as Boston Biomedica, Inc. or “BBI”) (the “Company”,“Pressure BioSciences,” or “PBI”) have been prepared in accordance withgenerally accepted accounting principles for interim financial information andwith the instructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby generally accepted accounting principles for complete financial statements.In the opinion of management, all adjustments (consisting of only normalrecurring adjustments) considered necessary for a fair presentation have beenincluded. Operating results for the three and nine months ended September 30,2004 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2004.  Forfurther information, refer to the consolidated audited financial statements andfootnotes thereto included in the Company’s Annual Report on Form 10-K (the “Form10-K”), as amended by Amendment No. 1 to the Annual Report on Form 10-K for thefiscal year ended December 31, 2003 (the Form 10-K, as amended, is referred toherein as the “Form 10-K/A”) and in the Company’s other periodic reports.

 

Effective September 14,2004, pursuant to an Asset Purchase Agreement dated April 16, 2004, as amended(the “Asset Purchase Agreement”) between the Company, BBI Biotech ResearchLaboratories, Inc. and SeraCare Life Sciences, Inc. (“SeraCare”), the Companycompleted the sale of substantially all of the assets and selected liabilitiesof its BBI Diagnostics and BBI Biotech divisions to SeraCare (the “Asset Sale”).  In connection with the Asset Sale, theCompany changed its legal name from Boston Biomedica, Inc. to PressureBioSciences, Inc. effective September 14, 2004. The accompanying financial statements have been reclassified to reportthe results of operations for the BBI Diagnostics and BBI Biotech divisions (alsoreferred to as “business units”) as discontinued operations (see note 3).

 

In June 2004, the Company completed the sale of substantially all ofthe assets as well as selected liabilities of BBI Source Scientific, Inc. (theCompany’s laboratory instrumentation division) to Source Scientific, LLC, anentity owned 35% by Mr. Richard W. Henson, 35% by Mr. Bruce A. Sargeant, and30% by the Company (the “Source Scientific Agreement”).  Under the Source Scientific Agreement,the Company received notes receivable in the aggregate amount of $900,000 (the“Notes”) payable at the end of three years bearing 8% interest.  The Source Scientific Agreement provides fordiscounts on the Notes in the event of an early payoff.  As part of the Source Scientific Agreement,Source Scientific, LLC will provide engineering, manufacturing, and otherrelated services for PBI’s Pressure Cycling Technology (PCT) products until September30, 2005.  The Source ScientificAgreement also offers Mr. Henson and Mr. Sargeant the opportunity to purchasePBI’s 30% ownership interest in Source Scientific, LLC until May 31, 2007 at anescalating premium (10-50%) over PBI’s initial ownership value, provided thatthey have first paid off the Notes in their entirety.  Although the Company expects the Notes to bepaid in full by Mr. Henson and Mr. Sargeant, the repayment of the Notes may beviewed as being dependent on the future successful operations of the businessof Source Scientific, LLC.  Despite the Company’s intent to exit thelaboratory instrumentation business, the Company may be viewed as having acontinuing involvement in the business of Source Scientific, LLC due to thefact that the Company has the right to designate one or potentially threemembers of the Board of Managers of Source Scientific, LLC and the Company isguaranteeing certain facility lease payments until January 31, 2005.  Because of these factors, even though thetransaction is treated as a divestiture for legal purposes, the Company has notrecognized the transaction as a divestiture for accounting purposes inaccordance with Securities and Exchange Commission (“SEC”) Staff AccountingBulletin (“SAB”) Topic 5E, *Accounting forDivestiture of a Subsidiary or Other Business Operation*.  In accordance with SAB Topic 5E, the Companyhas recorded the assets and liabilities associated with the Source Scientific,LLC operation on the Company’s unaudited condensed consolidated balance sheetas of September 30, 2004 under the captions “Assets transferred undercontractual arrangements” and “Liabilities transferred under contractualarrangements” and have recorded a charge to income under the caption “Otheroperating credits and charges, net “ in the Company’s unaudited condensedconsolidated statement of operations for the three months and nine months endedSeptember 30, 2004 and 2003 equal to the amount of the loss attributable to thebusiness of Source Scientific for the respective periods presented.  In accordance with SAB Topic 5E, the Companywill continue this accounting treatment until circumstances have changed oruntil the net assets of the Source Scientific, LLC business have been writtendown to zero (or a net liability is recognized in accordance with U.S.Generally Accepted Accounting Principles (“GAAP”) (see note 4).

 

Asa result of the above transactions, the unaudited condensed consolidatedfinancial statements included herein, and the accompanying notes to suchcondensed consolidated financial statements, report the results of the Company’sremaining operations, which consist of all pressure cycling technology (PCT)related activities, including the PCTrelated activities of BBI Source Scientific, Inc., BBI BioSeq, Inc., and theportion of corporate activities directly associated with the Company’sremaining corporate functions including costs associated with being a publiccompany.  As described above, operatingresults of BBI Source Scientific, Inc., excluding any PCT relatedactivities, together with Source Scientific, LLC are reported as “Otheroperating credits and charges, net” hereunder. The operating results of theCompany’s BBI Diagnostics and BBI Biotech divisions, together with the resultsof the discontinued operations of the Company’s clinical laboratory testingservices segment (sold in February 2001), are reported as “DiscontinuedOperations” hereunder.   Certain amountsincluded in the prior period’s financial statements have been reclassified toconform to the current period’s presentation.

 

5

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*DeferredCosts*

 

The Company had deferredapproximately $410,000 of transaction costs as of June 30, 2004 associated withthe Asset Sale.  Due to the completion ofthe Asset Sale, these deferred transaction costs were included in the finalgain computation associated with the Asset Sale.  In addition, as discussed further in Note 8,the Company deferred approximately $145,000 of costs as of June 30, 2004associated with obtaining a line of credit. These costs were expensed in thecurrent quarter when the line of credit was repaid in full with a portion ofthe proceeds from the Asset Sale.  Theline of credit was terminated on September 14, 2004.

 

*Stock-BasedCompensation*

 

Statement ofFinancial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation” (SFAS 123), requires that companies either recognize compensationexpense for grants of stock options and other equity instruments based on fairvalue or provide pro forma disclosure of net income (loss) and net income(loss) per share in the notes to the financial statements.  Statement of Financial Accounting StandardsNo. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure –an amendment of FASB Statement No. 123,” (SFAS 148), amends SFAS 123 to providealternative methods of transition for a voluntary change to thefair-value-based method of accounting for stock-based employee compensation. Inaddition, SFAS 148 amends the disclosure requirements of SFAS 123 to requiredisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results.  At September30, 2004, the Company had six stock-based compensation plans, which aredescribed in further detail in the Company’s Annual Report on Form 10-K/A forthe year ended December 31, 2003. The Company accounts for those plans underthe recognition and measurement principles of Accounting Principles BoardOpinion No. 25 “Accounting for Stock Issued to Employees” (APB 25) and relatedinterpretations.  Accordingly, nocompensation expense has been recognized under SFAS 123 for the Company’semployee stock option plans. Had compensation expense for awards under thoseplans been determined based on the grant date fair values, consistent with themethod required under SFAS 123, the Company’s net income (loss) and net income(loss) per share would have been adjusted to the pro forma amounts indicatedbelow.

 
| ** **                                                                                                                                           | ** ** | **For the Three Months Ended September 30,** | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                                           | ** ** | **2004**                                     | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income / (loss) as reported                                                                                                                      |       | $                                            | 14,764,743 |                                        | $          | (355,756 | ) | $ | 14,259,931 |   | $ | (834,607 | ) |
| Add back: Stock-based employee compensation  in net income /(loss), as reported                                                                 |       | —                                       |       | —                                      |       | — |   | — |   |
|                                                                                                                                                 |       |                                         |       |                                        |       |   |   |   |   |
| Deduct: Stock-based employee compensation  expense determined under fair value based  methods  for all awards, net of related  tax effects |       | 257                                          |       | —                                      |       | (74,979 | ) | — |   |
| Net income / (loss) - pro forma                                                                                                                      |       | $                                            | 14,764,486 |                                        | $          | (355,756 | ) | $ | 14,184,952 |   | $ | (834,607 | ) |
|                                                                                                                                                 |       |                                         |       |                                        |       |   |   |   |   |
| Basic and diluted net income / (loss) per  share - as reported                                                                                       |       | $                                            | 2.15       |                                        | $          | (0.05 | ) | $ | 2.08 |   | $ | (0.17 | ) |
| Basic and diluted  net income / (loss) per share - pro forma                                                                                    |       | $                                            | 2.15       |                                        | $          | (0.05 | ) | $ | 2.09 |   | $ | (0.17 | ) |
|                                                                                                                                                      |            |                                              |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |

 

The Company haselected to follow APB 25 and related interpretations in accounting for itsemployee stock options. Under APB 25, because the exercise price of employeestock options equals the market price of the underlying stock on the date ofgrant, no compensation expense is recorded. The Company has adopted thedisclosure-only provisions of SFAS 123, as amended by SFAS No. 148. Pro formainformation regarding net income and earnings per share is required by SFAS 123and has been determined as if the Company had accounted for its employee stockoptions under the fair value method of that statement. The fair value of theseoptions was estimated at the date of grant using the Black-Scholes optionpricing model.  For purposes of pro formadisclosures, the estimated fair value of the options is amortized to expenseover the options’ vesting period.   Inconnection with the Asset Sale, all of the Company’s outstanding options became100% vested on September 14, 2004.

 

6

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In conjunctionwith the sale of assets and selected liabilities to SeraCare as discussedfurther in Note 3 hereunder, on September 14, 2004, the Company’s Board ofDirectors voted to extend the termination date of stock options granted to allemployees of BBI Diagnostics and BBI Biotech until the later of 90 days fromthe transaction closing date or the termination date of the contemplated tenderoffer.  In accordance with the provisionsof FASB Interpretation No. 44, the Company has recognized stock-basedcompensation $281,737 in the third quarter of 2004.

 

*Use of Estimates*

 

To prepare the condensed consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States, management is required to make significant estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the condensedconsolidated financial statements and the reported amounts of revenues andexpenses during the reporting period. In addition, significant estimates weremade in estimating future cash flows to quantify impairment of assets, inestimates regarding the collectibility of accounts receivable, realizability ofloans (plus accrued interest) made to a director/Chief Executive Officerincluding sufficiency of collateral, deferred tax assets, the net realizablevalue of its inventory, the resolution of a patent issue from a third party, aswell as an estimate for remaining liabilities associated with discontinuedoperations. ** **Onan on-going basis, we evaluate our estimates. We base our estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances, the resultsof which form the basis for making judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources. Actualresults could differ from the estimates and assumptions used by management.

 

**(2) Recent Accounting Standards **

 

In March 2004, the U.S. Securities and ExchangeCommission’s Office of the Chief Accountant and the Division of CorporateFinance released Staff Accounting Bulletin (“SAB”) No. 105, “Loan CommitmentsAccounted for as Derivative Instruments”. This bulletin contains specificguidance on the inputs to a valuation-recognition model to measure loancommitments accounted for at fair value, and requires that fair-valuemeasurement include only differences between the guaranteed interest rate in theloan commitment and market interest rate, excluding any expected future cashflows related to the customer relationship or loan servicing. In addition, SAB105 requires the disclosure of the accounting policy for loan commitments,including methods and assumptions used to estimate the fair value of loancommitments, and any associated hedging strategies. SAB 105 is effective forderivative instruments entered into subsequent to March 31, 2004 and shouldalso be applied to existing instruments as appropriate. The Company has not yetcompleted its evaluation of SAB 105, but does not anticipate a material impacton its consolidated financial statements.

 

**(3) ****Discontinued Operations   **

 

(a) BBI Diagnostics andBBI Biotech Segments

 

On September 14, 2004,the Company completed the sale of substantially all of the assets and selectedliabilities of its BBI Diagnostics and BBI Biotech business units, previouslyclassified as assets and liabilities held for sale as of June 30, 2004, toSeraCare pursuant to the Asset Purchase Agreement, for a purchase price of$30 million in cash of which $27.5 million was paid at the closingand the remaining $2.5 million was deposited in escrow pursuant to anescrow agreement expiring in March 2006.  The results of operations relating to assetsand selected liabilities sold to SeraCare are reported as discontinuedoperations in the accompanying financial statements. The purchase price issubject to increase or decrease on a dollar-for-dollar basis if the net assetvalue (as defined in the Asset Purchase Agreement) of the assets sold as of theclosing date is greater or less than $8.5 million. The transaction wasapproved by the Company’s stockholders at a special meeting of stockholdersheld on September 14, 2004.  Inconnection with the transactions contemplated by the Asset Purchase Agreement,at the stockholders meeting held on September 14, 2004, the Company’sstockholders also approved an amendment to the Company’s Restated Articles ofOrganization to change the Company’s name to Pressure BioSciences, Inc.The Articles of Amendment to change the Company’s name to PressureBioSciences, Inc. became effective on September 14, 2004.

 

7

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The assets sold included allaccounts and notes receivable, contract rights, owned and leased real property,fixtures and equipment, inventory, intellectual property and books and recordsthat relate to the BBI Diagnostics and BBI Biotech business units (suchbusiness units are collectively referred to herein as the “BBI Core Businesses”).The assets sold also included the owned real property located at 375 WestStreet, West Bridgewater, MA. The Company retained all of its assets notrelating to the BBI Core Businesses, including: all assets relating to theCompany’s pressure cycling technology activities; intercompany receivables andpayables; a $1.0 million loan receivable plus accrued interest fromRichard T. Schumacher, the Company’s Chief Executive Officer and a director;its passive stock ownership interest in Panacos Pharmaceuticals, Inc.; its30% ownership interest in Source Scientific, LLC, a newly formed limitedliability company which recently purchased substantially all of the assets ofBBI’s Source Scientific business unit; promissory notes in the aggregateprincipal amount of $900,000 from the principals of Source Scientific, LLC; andall of its cash and cash equivalents.

 

Following the closing of thesale to SeraCare, the Company’s operations consist primarily of its PCToperations. Pursuant to a transition services agreement entered into betweenSeraCare and the Company at the closing, SeraCare has agreed to provide theCompany with access to specified office space at the Company’s formerfacilities located in West Bridgewater, MA and Gaithersburg, MD and the use ofcertain laboratory equipment in Gaithersburg, MD, each for a period of one yearfollowing the closing. The Company also has limited access to the services ofcertain of SeraCare’s employees for a period of one year following the closing.

 

TheCompany has recorded a gain of $15,868,025 net of estimated taxes of $3,925,200in the third quarter of 2004. This gain is subject to post closing adjustments,including any adjustments resulting from an increase or decrease of the netasset value of the assets sold to SeraCare. See also Note 14.  The Companyexpects to utilize approximately $3,800,000 of prior period net operating losscarryforwards, previously reserved for by the Company, to partially offset thetax effect of this gain.

 

(b) Clinical LaboratoryTesting Services Segment

 

In February 2001, BBIClinical Laboratories, Inc. (“BBICL”), a wholly-owned subsidiary of theCompany, sold the business and certain assets and liabilities of its clinicallaboratory business to a third party for an adjusted purchase price of$8,958,000.  The Company retained certainother assets and liabilities of BBICL, primarily property, plant and equipment,together with the facility lease subsequent to the closing date.  The Company wrote down all of the retainedassets not otherwise redistributed to other business units to their estimatednet realizable value.

 

OnMarch 4, 2004, the Company entered into a lease termination agreement with thelandlord relative to the facility previously occupied by BBICL.  The agreement provides for a series ofreduced payments over a nine month period ending in late 2004 in return for theCompany vacating the facility on or before May 31, 2004; the Company vacatedthe facility in the second quarter of 2004.  Accordingly, the Company recognized a $135,000 gain in the first quarterof 2004 associated with this lease termination agreement and reduction of therelated remaining liability. The Company’s estimate of remaining short and long term accruedliabilities to exit the clinical laboratory testing business is approximately$128,000 as of September 30, 2004.  Themajor component of this accrual is for long term record retention of medicaland related records. In prior years, the Company recorded an

 

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after-taxgain of $4,334,000 in 2001, and an additional $225,000 in 2002. These gains maybe subject to future adjustments as the Company completes the process ofexiting this business.  The Companyutilized in 2001 certain prior period net operating loss carry-forwards,previously reserved for by the Company, to partially offset the income taxeffect of this gain.

 

Summary of NetIncome (Loss) from Discontinued Operations

 
| ** **                                    | ** ** | **Three months ended 9/30/04** | ** ** | **Nine months ended 9/30/04** | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
|                                          |       |                           |       |                          |       |
| BBI Diagnostics and BBI Biotech divisions     |       | $                              | (440,212   | )                             | $          | 5,946 |   |
| BBI Clinical Labs testing services divisions  |       | $                              | —0-   |                          | $          | 135,000 |   |
| Gain on Sale of Assets, net                   |       | $                              | 15,868,025 |                          | $          | 15,868,025 |   |
|                                          |       |                           |       |                          |       |
| Total net income from Discontinued Operations |       | $                              | 15,427,813 |                          | $          | 16,008,971 |   |

 

**(4)  Assets and Liabilities Transferred UnderContractual Arrangements**

 

In June 2004, the Companycompleted the sale of substantially all of the assets as well as selectedliabilities of BBI Source Scientific, Inc. (the Company’s laboratoryinstrumentation division) to Source Scientific, LLC, an entity owned 35% by Mr.Richard W. Henson, 35% by Mr. Bruce A. Sargeant, and 30% by the Company (the “SourceScientific Agreement”).  Under the SourceScientific Agreement, the Company received notes receivable in the aggregateamount of $900,000 (the “Notes”), plus accrued interest, payable at the end ofthree years.  The Source ScientificAgreement provides for discounts on the Notes in the event of an earlypayoff.  As part of the Source ScientificAgreement, Source Scientific, LLC will provide engineering, manufacturing, andother related services for the Company’s pressure cycling technology (“PCT”)products until September 30, 2005.  TheSource Scientific Agreement also offers Mr. Henson and Mr. Sargeant theopportunity to purchase the Company’s 30% ownership interest in SourceScientific, LLC until May 31, 2007 at an escalating premium (10-50%) over theCompany’s initial ownership value, provided that they have first paid off theNotes in their entirety.  Although theCompany expects the promissory notes to be paid in full by Mr. Henson and Mr.Sargeant, the repayment of the promissory notes may be viewed as beingdependent on the future successful operations of the business of SourceScientific, LLC.  In addition, despitethe Company’s intent to exit the laboratory instrumentation business, theCompany may be viewed as having a continuing involvement in the business ofSource Scientific, LLC due to the fact that the Company has the right todesignate one or potentially three members of the Board of Managers and theCompany is guaranteeing the facility lease payments until January 31,2005.  Because of these factors, eventhough the transaction is treated as a divestiture for legal purposes, theCompany has not recognized the transaction as a divestiture for accountingpurposes in accordance with SEC SAB Topic 5E, *Accountingfor Divestiture of a Subsidiary or Other Business Operation*.  In accordance with SAB Topic 5E, the Companyhas recorded the assets and liabilities associated with the Source Scientific,LLC operation on the Company’s unaudited condensed consolidated balance sheetas of September 30, 2004 under the captions “Assets transferred undercontractual arrangements” and “Liabilities transferred under contractualarrangements” and has recorded a charge to income under the caption “Otheroperating credits and charges, net “ in the Company’s unaudited condensed consolidatedstatement of operations for the three months and nine months ended September30, 2004 and 2003 equal to the amount of the loss attributable to the businessof Source Scientific for the respective periods presented.    In accordance with SAB Topic 5E, theCompany will continue this accounting treatment until circumstances havechanged or until the net assets of the Source Scientific, LLC business havebeen written down to zero (or a net liability is recognized in accordance withGAAP).

 

**(5)  Computation of Net Income (Loss) per Share**

 

Basic income (loss) pershare is computed by dividing income (loss) available to common shareholders bythe weighted average number of common shares outstanding. Diluted income (loss)per share is computed by dividing income (loss) available to commonshareholders by the weighted average number of common shares outstanding plusadditional common shares that would have been outstanding if potential dilutivecommon shares had been issued. For purposes of this calculation, stock optionsare considered common stock equivalents in periods in which they have adilutive effect. Options and warrants that are antidilutive are excluded fromthe calculation.  Potentially dilutivesecurities having a net effect of 131,233 and 80,898 common shares for thethree and nine months ended September 30, 2004 were not included in thecomputation of income (loss) per share for these periods because to do so wouldhave been anti-dilutive; 46,540 and 6,001 common shares for the three and ninemonths ended September 30, 2003 were not included in the computation of dilutedincome (loss) per share because to do so would have been antidilutive. The netloss per share computation for the nine months ended September 30, 2004 and2003 reflects the issuance of 2,769 and 5,055 respectively, of additionalshares of common stock purchased by employees through their participation inthe Company’s employee stock purchase plan. 

 

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| ** **                                                                                                 | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                       |       |                                 |       |                               |       |   |   |   |   |
| Weighted Average Shares Outstanding, basic                                                                 |       | 6,857,252                            |       | 6,824,075                          |       | 6,843,329 |   | 6,804,972 |   |
| Net effect of dilutive common stock equivalents-based  on treasury stock method using average market price |       | —                               |       | —                             |       | — |   | — |   |
| Weighted Average Shares Outstanding, diluted                                                               |       | 6,857,252                            |       | 6,824,075                          |       | 6,843,329 |   | 6,804,972 |   |
|                                                                                                       |       |                                 |       |                               |       |   |   |   |   |
| Loss from continuing operations                                                                            |       | $                                    | (663,070   | )                                  | $          | (741,799 | ) | $ | (1,749,040 | ) | $ | (2,104,102 | ) |
|                                                                                                       |       |                                 |       |                               |       |   |   |   |   |
| Income from discontinued operations                                                                        |       | 15,427,813                           |       | 386,043                            |       | 16,008,971 |   | 1,269,495 |   |
|                                                                                                       |       |                                 |       |                               |       |   |   |   |   |
| Net Income / (loss)                                                                                        |       | $                                    | 14,764,743 |                               | $          | (355,756 | ) | $ | 14,259,931 |   | $ | (834,607 | ) |
|                                                                                                       |       |                                 |       |                               |       |   |   |   |   |
| Loss per share from continuing operations, basic  and diluted                                              |       | $                                    | (0.10      | )                                  | $          | (0.11 | ) |   |   |   |   |
| $                                                                                                          | (0.26      | )                                    | $          | (0.31                              | )          |
| Income per share from discontinued operations-basic  & diluted                                         |       | 2.25                                 |       | 0.06                               |       | 2.34 |   | 0.19 |   |
|                                                                                                       |       |                                 |       |                               |       |   |   |   |   |
| Net Income / (loss) per share-basic and  diluted                                                           |       | $                                    | 2.15       |                               | $          | (0.05 | ) | $ | 2.08 |   | $ | (0.12 | ) |

 

**(6)  Related Party Transaction**

 

InJanuary 2002, the Company pledged a $1,000,000 interest bearing deposit at afinancial institution to secure the Company’s limited guaranty of loans in theaggregate amount of $2,418,000 from the financial institution to an entitycontrolled by Richard T. Schumacher, a Director and the Company’s currentPresident and Chief Executive Officer. The loans from the financial institution to the entity controlled by Mr.Schumacher, which are personally guaranteed by Mr. Schumacher, were originallysecured by collateral which includes certain real property owned by Mr.Schumacher and all of his shares of common stock held in the Company.  The Company’s pledge is secured by a juniorsubordinated interest in the collateral provided by Mr. Schumacher to thefinancial institution. The Company’s pledge of $1,000,000 was made to assistMr. Schumacher in refinancing his indebtedness related to, among other things,his divorce settlement and to enable him to avoid the need to sell his Companycommon stock on the open market to satisfy his debts.  The Company’s Board of Directors and aspecial committee of the independent directors of the Board of Directors,evaluated a number of options and concluded that the pledge of the $1,000,000interest bearing deposit was the best option and in the best interests of the Company’sstockholders in the belief that it would, among other things, avoid sellingpressure on the Company’s common stock and relieve the financial pressures onMr. Schumacher that could otherwise divert his attention from the Company.

 

In January 2003, the$1,000,000 held in the interest bearing deposit account pledged to thefinancial institution to secure the Company’s limited guaranty was used by thefinancial institution to satisfy the Company’s limited guaranty obligation tothe financial institution. The Company has no further obligations to thefinancial institution and has a loan receivable in the amount for $1,000,000,plus accrued interest, from Mr. Schumacher. The Company continues to maintainits junior interest in collateral pledged by Mr. Schumacher to the financialinstitution. The Company reflected the $1,000,000 pledge as restricted cash onits balance sheet as of December 31, 2002 until the cash was used to satisfythe Company’s limited guaranty in January 2003 and since then has reflected a$1,000,000 loan receivable on its balance sheet in stockholders’ equity.

 

As of September30, 2004, the Company evaluated the recoverability of the $1,000,000 loanreceivable (excluding $113,546 of accrued interest owed to the Company as ofSeptember 30, 2004 associated with this loan) from Mr. Schumacher. The Company’sreview includes an evaluation of the remaining collateral associated with theloan. The Company maintains a junior interest in this collateral.  The remaining collateral consists of commonstock of the Company.  When consideringthe adequacy of the collateral, the Company considers the balance of a loanoutstanding ($484,334 as of September 30, 2004) between an entity controlled byMr. Schumacher with the financial institution and the fact that the Company hasa junior position in regards to the remaining collateral associated with

 

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that loan, as well as theliquidity and net realizable value of the remaining assets underlying thecollateral.

 

The ultimate value that may be recovered by the Company is dependent onnumerous factors including market conditions relative to the value of andability to sell the Company’s common stock, and the financial status of Mr.Schumacher. At September 30, 2004, the Company performed a test for impairmentof the loan receivable by analyzing the value of the collateral, and determinedthat the loan receivable was not impaired. Although the loan receivable was notdeemed impaired as of September 30, 2004, fluctuations in the quotedmarket value of the Company’s common stock, which comprises the remainingcollateral, may be an indicator of future impairment. If actual marketconditions are less favorable or other factors arise that are significantlydifferent than those anticipated by management, a write-down of this assetmight be required.

 

**(7)  SegmentReporting and Related Information**

 

Operating segments are components of an enterprise for which separatefinancial information is available that is evaluated regularly by seniormanagement in deciding how to allocate resources and in assessing theperformance of each segment. The Company is organized along legal entity linesand senior management regularly reviews financial results for all entities,focusing primarily on revenue and operating income. The Company’s underlyingaccounting records are maintained on a legal entity basis for government andpublic reporting requirements, as well as for segment performance and internalmanagement reporting.

 

As of September 30, 2004, the results of theCompany’s remaining operations consist of all pressure cycling technology (PCT) relatedactivities, including the PCT related activities of BBI Source Scientific,Inc., BBI BioSeq, Inc., and the portion of corporate activities directlyassociated with the Company’s remaining corporate functions including costsassociated with being a public company.  Therefore segment information has not beenpresented.  The Company performsresearch in the development of PCT, with particular focus in the areas ofnucleic acid and protein extraction from cells and tissues, and pathogeninactivation.  The Company announced theavailability for commercial sale of its PCT products in late September 2002.  PCT revenue to date consists primarily ofboth private and public (NIH) funding of segment research and, commencing inlate 2002, from the sale of PCT products. Most of the expenditures incurred have been for ongoing research anddevelopment expenses, marketing and sales expenses, and general managementexpenses including patent costs.** **As described inNote 4, although the sale of the assets and selected liabilities of BBI SourceScientific, Inc. is treated as a divestiture for legal purposes, theCompany has not recognized the transaction as a divestiture for accountingpurposes in accordance with SEC SAB Topic 5E, *Accountingfor Divestiture of a Subsidiary or Other Business Operation*.  In accordance with SAB Topic 5E, the Companyrecords the assets and liabilities associated with the Source Scientific, LLCoperation on the Company’s unaudited condensed condensed consolidated balancesheet as of September 30, 2004 under the captions “Assets transferred undercontractual arrangements” and “Liabilities transferred under contractualarrangements” and has recorded a charge to income under the caption “Otheroperating credits and charges, net “ in the Company’s unaudited condensed consolidatedstatement of operations for the three months and nine months ended September30, 2004 and 2003 equal to the amount of the loss attributable to the businessSource Scientific for the respective periods presented.  In accordance with SAB Topic 5E, the Companywill continue this accounting treatment until circumstances have changed oruntil the net assets of the Source Scientific, LLC business have been writtendown to zero (or a net liability is recognized in accordance with GAAP). Priorperiods have been reclassified to conform to this presentation.

 

**(8) Debt**

 

On February 5, 2004, theCompany entered into a three year, $2,500,000 revolving line of creditagreement with a private lender.  OnSeptember 14, 2004, the Company used an aggregate of $2,005,148 of the proceedsfrom the Asset Sale to repay all outstanding indebtedness under the revolvingline of credit, including an early termination fee of $50,000. Upon payment ofthe outstanding indebtedness together with the early termination fee, therevolving line of credit agreement was terminated.  Inconnection with the termination of the line of credit, the Company expenseddeferred costs associated with the line in the aggregate amount of $145,000.

 

OnApril 5, 2000, the Company borrowed $2,447,000, net of related costs, under amortgage agreement on its West Bridgewater, MA facility, of which approximately$2,220,000 was outstanding as of September 14, 2004.

 

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In connection with the Asset Sale, SeraCare assumedthe mortgage and all related payments thereunder.  As a result, the Company has no remainingpayments under the mortgage.

 

**(9)           Inventories**

 

Inventories are comprisedof primarily component parts used in the manufacture of PCT products, andamounted to approximately $263,000 at September 30, 2004 and approximately$298,000 as of December 31, 2003.

 

**(10) Commitments and Contingencies**

 

Various claims have been or may be asserted against the Company in theordinary course of business.  In certaininstances, the amounts claimed or alleged may be significant.  While it is possible that the Company’sresults of operations and/or liquidity could be materially affected by thesecontingent liabilities, based upon information currently available, managementbelieves that resolution of any of the following outstanding claims will nothave a material adverse impact on the financial position of the Company.

 

*LicensingAgreements/Customer Claims*

 

In the firstquarter of 2004, the Company received unrelated communications from two partiesrelative to licensing and royalty issues. One party requested additional information to determine whether theCompany may owe additional royalties on products sold under a patent licenseagreement; the Company has agreed to pay the third party an additional $1248 inroyalties for the period of time in question. Another party has alleged that certain products sold by the Company usedcomponent materials patented by that third party.  The Company has investigated this claim andhas informed the third party that it disputes these allegations.

 

*EnvironmentalMatters*

 

The Company hasreceived correspondence addressed to Source Scientific, Inc. originating fromthe U.S. Environmental Protection Agency (“EPA”).  In 1997, the Company acquired certain assetsand liabilities of Source Scientific, Inc. The correspondence identifies SourceScientific, Inc. as having potential liability for waste disposal by apurported predecessor entity. The Company has not yet determined if it actuallyhas liability for this matter, however should the Company and the EPA agree onresolution of this matter, it is estimated that such costs could range from aminimal amount up to $42,000.  No accrualhas been made since no specific amount can be reasonably estimated at thistime.

 

*Purchase Commitments*

 

In June 2004, in connection with the sale of substantially all of theassets as well as selected liabilities of BBI Source Scientific, Inc. (theCompany’s laboratory instrumentation division) to Source Scientific, LLC, anentity owned 35% by Mr. Richard W. Henson, 35% by Mr. Bruce A. Sargeant, and30% by Pressure BioSciences, Source Scientific, LLC agreed to provideengineering, manufacturing, and other related services for BBI’s PressureCycling Technology (PCT) products until September 30, 2005.  Reimbursement to Source Scientific, LLC bythe Company is expected to be at the rate of $25,000 per month; however,payment by the Company to Source Scientific, LLC is contingent upon actual servicesbeing rendered to the Company by Source Scientific, LLC.  During the third quarter of 2004, the Companypurchased approximately $155,000 of services from Source Scientific, LLCrelated to the development of the new bench top Barocycler unit.

 

In March 2004, the Company entered into aneleven year lease agreement with an existing landlord for approximately 65,160sq ft of new repository space located in Frederick, MD; this lease is scheduledto take effect in two stages, August 1, 2004 and August 1, 2005.  The most recent cost estimate to build outthe facility was approximately$2,600,000, of which the new lease agreement calls for the landlord tocontribute approximately $1,950,000. During the third quarter through September 14, 2004, the Company did notincur any costs associated with the build-out. In connection with the Asset Sale, SeraCare assumed the costs associatedwith the build-out and assumed the lease obligations under this lease.

 

*Guaranty of  RentPayments  on Transferred Facility Lease*

 

The Company leased 27,000 square feet of space in Garden Grove,California where its BBI Source Scientific, Inc. business unit previously manufacturedlaboratory instruments. The lease for this facility expires

 

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January31, 2005 and there is currently no extension or renewal option.In June 2004, in connection with the sale ofsubstantially all of the assets as well as selected liabilities of BBI SourceScientific, Inc. (the Company’s laboratory instrumentation division) to SourceScientific, LLC, an entity owned 35% by Mr. Richard W. Henson, 35% by Mr. BruceA. Sargeant, and 30% by the Company, the Company assigned this facility lease to Source Scientific, LLC and all relatedobligations under such lease. The Company’s remaining obligation as ofSeptember 2004 is in the form of a guarantee to the landlord for the remaining fourmonthly rent payments, approximating $128,000 in total, in the event SourceScientific, LLC not meet its obligations under the lease.

 

*Indemnification Obligation Under the Asset PurchaseAgreement*

 

In connection with the sale of substantially all of the assets of theCompany’s BBI Diagnostics and BBI Biotech business units to SeraCare, pursuantto the Asset Purchase Agreement, the Company agreed to indemnify SeraCare forany losses from breaches of most of the Company’s representations, warrantiesor covenants that occur prior to June 14, 2006. The Company’s indemnification obligations for breaches of somerepresentations and warranties, however, extend for a longer period oftime.  The Company’s indemnificationobligations are limited by an overall cap equal to the $30 million purchaseprice.  The payment of any suchindemnification obligations could adversely impact the Company’s cash resourcesfollowing the completion of the sale to SeraCare and the Company’s ability topursue the development of its pressure cycling technology business.  In addition, a large indemnification claimagainst the Company could have a material adverse effect upon the Company.

 

**(11) Investments**

 

As of September30, 2004, the Company is the owner of approximately 4.45% of PanacosPharmaceuticals, Inc. (“Panacos”) which is recorded on the Company’s books at acost of $9,178 as of both December 31, 2003 and September 30, 2004.  On June 2, 2004, Panacos announced that itentered into a definitive merger agreement with V.I. Technologies Inc. (“V.I.Technologies”), a publicly traded company based in Watertown, Massachusetts,that develops innovative anti-infective technologies to enhance blood safety.On November 8, 2004, Panacos and V.I. Technologies announced that the partiesamended the merger agreement.  Under theamended merger agreement, it is expected that V.I. Technologies will issueapproximately 54 million of its shares in exchange for all outstanding sharesof Panacos. In addition, Panacos will have the opportunity to receiveapproximately 31 million additional shares of V.I. Technologies, for a total of85 million shares, if Panacos successfully achieves certain defined milestonesof a Phase IIa study of its lead compound, PA-457, in HIV-infected patients.The number of shares is fixed and not subject to adjustment based on the marketprice of V.I. Technologies’ stock. A financing commitment of at least $25million to fund the merged company is a condition to the closing of the merger.The Board of Directors of V.I. Technologies and Panacos have approved theamendment to the merger agreement. Panacos and V.I. Technologies expect thetransaction to close in January 2005 and it is subject to approval by theshareholders of both companies and other customary closing conditions.  However, the Company does not know when or ifthe transaction between Panacos and V.I. Technologies will close. Should theabove noted transaction be approved by the shareholders of both V. I.Technologies, Inc. and Panacos, the Company’s existing common stock ownershipin Panacos of 1,500,000 shares is expected to be converted into approximately3,750,000 common shares of V.I. Technologies, Inc. (a publicly traded company)at the close of the transaction.

 

As of September30, 2004, the Company has cash and cash equivalents of approximately$25,600,000.  Of this amount,approximately $25,000,000 is invested in U. S. Treasuries having an originalmaturity of less than three months.  TheCompany’s policy is to hold these securities to maturity.  The remaining cash is invested in a moneymarket fund.  The Company periodicallyreviews its investments for any impairment.

 

**(12)         Fixed Assets **

 

Fixed assets are comprised primarily of PCT related demonstrationequipment, of which one PCT BarocyclerTM unit has been placed with athird party pursuant to a short term rental agreement.  Depreciation on PCT demonstration units isallocated over the expected useful life of approximately two years.

 

**(13)         Intangible Assets **

 

The Company hasclassified as intangible assets those costs associated with the fair value ofcertain assets

 

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of the PCT business previously acquired by the Company. ** **The remaining netbook value of intangible assets as of September 30, 2004 and December 31,2003 is comprised of approximately $486,000 and $523,000, respectively, ofacquired PCT patents which is being amortized to expense on a straight linebasis at the rate of $48,635 per year over the remaining useful life.

 

TheCompany’s policy is to expense all patent related legal costs as incurred.

 

**(14)****                         ****Subsequent Event**

 

OnNovember 14, 2004, in accordance with the terms of the Asset PurchaseAgreement between the Company, BBI Biotech Research Laboratories, Inc. andSeraCare, SeraCare delivered the closing balance sheet, which reflected adeficiency of approximately $3.1 million when compared to the target net assetvalue of $8.5 million. Based on the Company’s calculation, the closing netasset value was estimated to be approximately $8.6 million.  Accordingly, the Company objected to certaincalculations contained in the closing balance sheet, including, withoutlimitation, SeraCare’s calculation of accounts receivable and inventory.  The Company does not believe that the closingbalance sheet prepared by SeraCare is in accordance with the terms of the AssetPurchase Agreement.  The Company is inthe process of re-asserting and supporting its position as to the value andquality of the assets transferred.  To theextent the Company is not successful in defending its position on the $3.1Mdeficiency shown by SeraCare, any amount of such deficiency paid to SeraCarewill have an unfavorable impact on earnings reported and will reduce the $2.5Mescrow balance currently reported in Other Assets on the Company’s financial statements,and may otherwise have a material adverse effect on the Company.

 

OnNovember 22, 2004, SeraCare and the Company entered into an agreementpursuant to which the Company and SeraCare agreed that (i) all disputes otherthan disputes relating to accounts receivable will be determined in accordancewith the dispute resolution provisions contained in the Asset PurchaseAgreement, (ii) disputes regarding accounts receivable will be resolved bypermitting SeraCare to recover the amount of the receivable for identifiedaccounts receivable that have not been collected within 90 days of the invoicedate for domestic receivables and 180 days of the invoice date forinternational receivables,  (iii) anyadjustment amount determined to be due to SeraCare for accounts receivable orother matters will first be paid out of the $2.5 million of the purchase pricebeing held in escrow and any amounts in excess of the escrowed amount shall bepaid by the Company directly, and (iv) the Company will be entitled to directlyattempt to collect any receivables for which SeraCare receives credit for underthe escrow or from the Company directly.

 

Aspreviously announced in connection with the Asset Sale, the Company stated itsintention to commence an issuer tender offer to purchase up to 6,000,000 sharesof its common stock at a price of $3.50 per share shortly following thecompletion of the Asset Sale.   TheCompany announced that it expected to use up to $21.0 million of the after-tax netproceeds from the Asset Sale to purchase shares of its common stock tendered inthe tender offer.   Since the closing ofthe Asset Sale, the Company has incurred unanticipated expenses and liabilitiesthat have reduced the amount of proceeds from the sale to SeraCare availablefor the tender offer and remaining for our Company’s pressure cyclingtechnology business than originally anticipated.  These unanticipated expenses and liabilitiesinclude greater costs associated with the SeraCare transaction and thecontemplated tender offer, higher than anticipated medical claimsreimbursements, state tax audit costs, and greater than anticipated generaloperating expenses. At this time, the Company still intends to commence anissuer tender offer to purchase shares of its common stock at $3.50 per share.  Due to the unanticipated expenses andliabilities, however, the Company is currently evaluating its financialsituation to determine the number of shares it can offer to purchase.  The Company’s objective continues to be toprovide its stockholders with the opportunity to obtain liquidity for theirshares of common stock at a fair price, while at the same time permitting theCompany to maintain sufficient cash to run the Company’s pressure cyclingtechnology business through March 2006. The Company believes that it willrequire approximately $1.5 million in cash to fund its operations through March 2006.

 

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

 

**RECENTDEVELOPMENTS**

 

*BBI Diagnostics and BBI Biotech Business Units*

 

OnSeptember 14, 2004, the Company completed the sale of substantially all ofthe assets and selected liabilities of its BBI Diagnostics and BBI Biotechdivisions to SeraCare pursuant to an Asset Purchase Agreement dated April 16,2004, as amended (the “Asset Purchase Agreement”), for a purchase price of$30 million in cash of which $27.5 million was paid at the closingand the remaining $2.5 million was deposited in escrow pursuant to anescrow agreement expiring in March 2006. The purchase price is subject toincrease or decrease on a dollar-for-dollar basis if the net asset value (asdefined in the Asset Purchase Agreement) of the assets sold as of the closingdate is greater or less than $8.5 million. The transaction was approved bythe Company’s stockholders at a special meeting of stockholders held on September 14,2004.    In connection with thetransactions contemplated by the Asset Purchase Agreement, at a special meetingof the stockholders held on September 14, 2004, the Company’s stockholdersalso approved an amendment to the Company’s Restated Articles of Organizationto change the Company’s name to Pressure BioSciences, Inc. The Articles ofAmendment to change the Company’s name to Pressure BioSciences, Inc.became effective on September 14, 2004. In connection with the namechange, effective on September 16, 2004, the Company also changed itstrading symbol on the Nasdaq National Market to “PBIO”.

 

Theassets sold included all accounts and notes receivable, contract rights, ownedand leased real property, fixtures and equipment, inventory, intellectualproperty and books and records that relate to the BBI Diagnostics and BBIBiotech business units (such business units are referred to herein as the “BBICore Businesses”). The assets sold also included the owned real propertylocated at 375 West Street, West Bridgewater, MA. The Company retained all ofits assets not relating to the BBI Core Businesses, including: all assets relatingto the Company’s pressure cycling technology activities; intercompanyreceivables and payables; a $1.0 million loan receivable plus accruedinterest from Richard T. Schumacher, the Company’s Chief Executive Officer anda director; its passive stock ownership interest in PanacosPharmaceuticals, Inc.; its 30% ownership interest in Source Scientific,LLC, a newly formed limited liability company which recently purchasedsubstantially all of the assets of BBI’s Source Scientific business unit; promissorynotes in the aggregate principal amount of $900,000 from the principals ofSource Scientific, LLC; and all of its cash and cash equivalents.

 

Followingthe closing of the sale to SeraCare, the Company’s operations consist primarilyof its PCT operations. Pursuant to a transition services agreement entered intobetween SeraCare and the Company at the closing, SeraCare has agreed to providethe Company with access to specified office space at the Company’s formerfacilities located in West Bridgewater, MA and Gaithersburg, MD and the use ofcertain laboratory equipment in Gaithersburg, MD, each for a period of one yearfollowing the closing. The Company also has limited access to the services ofcertain of SeraCare’s employees for a period of one year following the closing.

 

The amounts associated with the sale of these assetsand selected liabilities to SeraCare are reported as discontinued operations inthe accompanying financial statements in accordance with paragraphs 30and 42 of Statement of Financial Accounting Standards No. 144 “Accounting forthe Impairment or Disposal of Long-Lived Assets”.

 

TheCompany has recorded a gain on the sale of assets and selected liabilities toSeraCare of $15,868,025 net of estimated taxes of $3,925,200 in the third quarterof 2004. This gain is subject to post closing adjustments, including anyadjustments resulting from an increase or decrease of the net asset value ofthe assets sold to SeraCare. The Company expects to utilize approximately$3,800,000 of prior period net operating loss carryforwards, previouslyreserved for by the Company, to partially offset the tax effect of this gain.

 

Netincome (loss) from discontinued operations was $(440,212) and $140,946 for thethree and nine months ended September 30, 2004. The 2004 nine month netincome includes a write-off of approximately $450,000 for lease-holdimprovements in the Frederick, Maryland repository building caused by the earlytermination of the repository lease that coincided with the move of therepository operations to larger and more accommodating facility, a $135,000reversal of a BBI Clinical Laboratory segment accrual in the first quarter of2004, and a provision for income taxes of $245,135, offset by a similar incometax benefit in continuing operations. For the three and nine month periodsended September 30, 2003, net income was approximately $386,043 and $1,269,495,respectively.

 

OnNovember 14, 2004, in accordance with the terms of the Asset PurchaseAgreement, SeraCare delivered the closing balance sheet, which reflected adeficiency of approximately $3.1 million when compared to the target net assetvalue of $8.5 million. Based on the Company’s calculation, the closing netasset value was estimated to be

 

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approximately$8.6 million.  Accordingly, the Companyobjected to certain calculations contained in the closing balance sheet,including, without limitation, SeraCare’s calculation of accounts receivableand inventory.  The Company does notbelieve that the closing balance sheet prepared by SeraCare is in accordancewith the terms of the Asset Purchase Agreement. The Company is in the process of re-asserting and supporting itsposition as to the value and quality of the assets transferred.  To the extent the Company is not successfulin defending its position on the $3.1M deficiency shown by SeraCare, any amountof such deficiency paid to SeraCare will have an unfavorable impact on earningsreported and will reduce the $2.5M escrow balance currently reported in OtherAssets on the Company’s financial statements, and may otherwise have a materialadverse effect on the Company.

 

OnNovember 22, 2004, SeraCare and the Company entered into an agreementpursuant to which the Company and SeraCare agreed that (i) all disputes otherthan disputes relating to accounts receivable will be determined in accordancewith the dispute resolution provisions contained in the Asset PurchaseAgreement, (ii) disputes regarding accounts receivable will be resolved by permittingSeraCare to recover the amount of the receivable for identified accountsreceivable that have not been collected within 90 days of the invoice date fordomestic receivables and 180 days of the invoice date for internationalreceivables,  (iii) any adjustment amountdetermined to be due to SeraCare for accounts receivable or other matters willfirst be paid out of the $2.5 million of the purchase price being held inescrow and any amounts in excess of the escrowed amount shall be paid by theCompany directly, and (iv) the Company will be entitled to directly attempt tocollect any receivables for which SeraCare receives credit for under the escrowor from the Company directly.

 

Aspreviously announced in connection with the Asset Sale, the Company stated itsintention to commence an issuer tender offer to purchase up to 6,000,000 sharesof its common stock at a price of $3.50 per share shortly following thecompletion of the Asset Sale.   TheCompany announced that it expected to use up to $21.0 million of the after-taxnet proceeds from the Asset Sale to purchase shares of its common stocktendered in the tender offer.   Since theclosing of the Asset Sale, the Company has incurred unanticipated expenses andliabilities that have reduced the amount of proceeds from the sale to SeraCareavailable for the tender offer and remaining for the Company’s pressure cyclingtechnology business than originally anticipated.  These unanticipated expenses and liabilitiesinclude greater costs associated with the SeraCare transaction and thecontemplated tender offer, higher than anticipated medical claimsreimbursements, state tax audit costs, and greater than anticipated generaloperating expenses.  At this time, theCompany still intends to commence an issuer tender offer to purchase shares ofits common stock at $3.50 per share.  Dueto the unanticipated expenses and liabilities, however, the Company iscurrently evaluating its financial situation to determine the number of sharesit can offer to purchase.  The Company’sobjective continues to be to provide its stockholders with the opportunity toobtain liquidity for their shares of common stock at a fair price, while at thesame time permitting the Company to maintain sufficient cash to run theCompany’s pressure cycling technology business through March 2006. TheCompany believes that it will require approximately $1.5 million in cash tofund its operations through March 2006.

 

*BBI Source Scientific Business Unit*

 

InJune 2004, the Company completed the sale of substantially all of theassets as well as selected liabilities of BBI Source Scientific, Inc. (theCompany’s laboratory instrumentation division) to Source Scientific, LLC, anentity owned 35% by Mr. Richard W. Henson, 35% by Mr. Bruce A. Sargeant, and30% by the Company (the “Source Scientific Agreement”).  Under the Source Scientific Agreement, theCompany received notes receivable in the aggregate amount of $900,000 (the“Notes”), plus accrued interest, payable at the end of three years.  The Source Scientific Agreement provides fordiscounts on the Notes in the event of an early payoff.  As part of the Source Scientific Agreement,Source Scientific, LLC will provide engineering, manufacturing, and otherrelated services for the Company’s pressure cycling technology (“PCT”) productsuntil September 30, 2005.  TheSource Scientific Agreement also offers Mr. Henson and Mr. Sargeant theopportunity to purchase the Company’s 30% ownership interest in SourceScientific, LLC until May 31, 2007 at an escalating premium (10-50%) over theCompany’s  initial ownership value,provided that they have first paid off the Notes in their entirety.  Although the Company expects the promissorynotes to be paid in full by Mr. Henson and Mr. Sargeant, the repayment of thepromissory notes may be viewed as being dependent on the future successfuloperations of the business of Source Scientific, LLC.  In addition, despite the Company’s intent toexit the laboratory instrumentation business, the Company may be viewed ashaving a continuing involvement in the business of Source Scientific, LLC dueto the fact that the Company has the right to designate one or potentiallythree members of the Board of Managers and the Company is guaranteeing thefacility lease payments until January 31, 2005.  Because of these factors, even though thetransaction is treated as a divestiture for legal purposes, the Company has notrecognized the transaction as a

 

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divestiturefor accounting purposes in accordance with SEC SAB Topic 5E, *Accounting for Divestiture of a Subsidiary or OtherBusiness Operation*.  Inaccordance with SAB Topic 5E, the Company has recorded the assets andliabilities associated with the Source Scientific, LLC operation on the Company’sunaudited condensed consolidated balance sheet as of September 30, 2004under the captions “Assets transferred under contractual arrangements” and“Liabilities transferred under contractual arrangements” and has recorded acharge to income under the caption “Other operating credits and charges, net “in the Company’s unaudited consolidated statement of operations for the threemonths and nine months ended September 30, 2004 and 2003 equal to theamount of the loss attributable to the business of Source Scientific for therespective periods presented.    Inaccordance with SAB Topic 5E, the Company will continue this accountingtreatment until circumstances have changed or until the net assets of theSource Scientific, LLC business have been written down to zero (or a netliability is recognized in accordance with GAAP).

 

**OVERVIEW**

 

Following the closing of thesale to SeraCare and the sale of the assets and selected liabilities of BBISource Scientific, Inc., the Company’s operations consist primarily of itspressure cycling technology (PCT) operations. The results of operations discussed below report the results of theCompany’s remaining operations, which consist of all PCT related activities including BBI BioSeq,Inc., and the portion of corporate activities directly associated with theCompany’s remaining corporate functions including costs associated with being apublic company.  Operating results ofBBI Source Scientific, Inc., excluding any PCT related activities, togetherwith Source Scientific, LLC are reported as “Other operating credits andcharges” hereunder. The operating results of the Company’s BBI Diagnostics andBBI Biotech divisions, together with the results of the discontinued operationsof the Company’s clinical laboratory testing services segment, are reported as“Discontinued Operations” hereunder.  Certain amounts included in the prior period’s financial statements havebeen reclassified to conform to the current period’s presentation.

 

TheCompany’s pressure cycling technology uses an instrument that is capable ofcycling pressure at controlled temperatures****between lowand high levels to rapidly and repeatedly control the interactions ofbiomolecules. PCT utilizes the Company’s BarocyclerTM instrument and disposablePULSETM Tubes to release nucleic acids and biologically active proteins fromplant and animal cells and tissues, as well as other organisms, which are noteasily disrupted by standard chemical and physical methods.   The Company believes that its patented andproprietary pressure cycling technology employs a unique approach that has thepotential for broad applications in a number of established and emergingfields, including genomics, proteomics, drug discovery and development, proteinpurification, pathogen inactivation, immunodiagnostics, food safety, and DNAsequencing.  The Company also believesthat this technology can be applied to a wide range of commercial applications.

 

Todate, the Company has primarily applied PCT to the area of sample preparationfor genomics and proteomics.  The Companyhas also developed scientific collaborations with leading laboratories andacademic institutions in the United States, which the Company expects willremain ongoing into 2005 and beyond.  TheCompany further expects that the data generated by the Company’s collaboratorswill be publicly released in scientific publications and presentations, andthat these collaborators are primary candidates to purchase the Company’s PCTproducts. The Company has investigated the use of PCT for the inactivation ofpathogens in human blood plasma, therapeutics, and diagnostic reagents and hasdemonstrated the technical feasibility of applying PCT to immunodiagnostics,protein purification, pathogen inactivation, food safety, and DNA sequencing.

 

Asof September 30, 2004, the Company has invested approximately $11.0million in the development of the Company’s pressure cycling technology since1997, with the funds coming from both internal and public sources.  To date, the Company has received seven SmallBusiness Innovative Research (“SBIR”) grants from the National Institutes ofHealth (“NIH”) totaling approximately $2,000,000 (including two SBIR Phase IIgrants each in excess of $750,000) to develop PCT in the areas of microbialinactivation, sample processing, and Mycobacterium sample preparation.  Most recently, in May 2004 the Company wasawarded a $140,000 SBIR Phase I grant to study the use of PCT in applicationsto combat bio-terrorism.

 

InSeptember 2002, the Company released for sale its first commercial PCTinstrument, the Barocycler NEP 2017.   In2002, the Company also released for sale PULSE Tubes, which are single-use,disposable processing and storage tubes that work in conjunction with theBarocycler NEP 2017. Sales of these products have been extremely limited.  To date the Company has leased one and soldtwo pressure cycling technology systems (“PCT

 

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SamplePreparation System”) and a limited number of PULSE Tubes, and has generatedapproximately $106,000 of product revenue. The Company believes that salesof its pressure cycling technology products have been adversely affectedprimarily as a result of the longer than anticipated sales cycle associatedwith these products. The Company believes the following factors havecontributed to this slower than expected sales cycle: (1) the initial sellingprice of the Barocycler, (2) the limited amount of research data availabledemonstrating its capabilities and potential, (3) the absence of a strong salesand marketing management team, (4) the absence of a strong promotional campaignafter the commercial release of the Barocycler NEP 2017, (5) the inability toexecute its sales plan as a result of financial constraints, (6) current USeconomic conditions and uncertainties which negatively affected capitalspending on laboratory instruments, (7) the financial condition of the Companyduring 2003 and 2004, and (8) the focus of the Company’s resources on otherprojects, including the sale of the Company’s BBI Diagnostics and BBI Biotechbusiness units, a process that began in October 2002 and was recentlycompleted in September 2004.

 

To address the longer sales cycle associated with theBarocycler NEP 2017, the Company has been developing a less expensive andsmaller, bench top version of the Barocycler, the NEP 3229, which the Companyexpects will facilitate an easier and quicker purchase decision by potentialcustomers. The Company has also generated additional research data to supportits sales efforts.  The Company believesthat the new bench top Barocycler will fill an immediate and growing need inthe genomics and proteomics sample preparation market for a smaller, moreaffordable instrument that can provide the quality, reproducibility, and safetyof the NEP 2017 PCT Sample Preparation System. The NEP 3229 is scheduled to be shipped to four collaborating sitesin  December 2004, and the Company expectsit will be available for commercial sale beginning in the first quarter of2005.

 

**THREE MONTHS ENDED SEPTEMBER 30, 2004 AND2003**

 

*Revenue*

 

PCT related revenues amounted to approximately$69,000 in the third quarter of 2004, as compared to approximately $90,000 inthe third quarter of 2003.

 

Product Revenue.  The Company had product revenue of $2,383 inthe quarter ended September 30, 2004, and no product revenue in thecorresponding quarter of 2003.  Productrevenue in 2004 included lease payments from one customer and sales of PULSETubes to three customers.  The Companycontinues to have very limited sales of its PCT products, as sales of theseproducts is slower than expected. The Company is continuing to work on thedevelopment of a less expensive and smaller bench top version of the PCTBarocyclerä, which theCompany presently plans to have ready for commercial sale in the first quarterof 2005.

 

Service and Grant Revenue.  A decrease in PCT grant revenue was primarilyrelated to a lower level of research conducted under SBIR research grants inthe third quarter of 2004 (approximately $67,000) as compared to the thirdquarter of 2003 (approximately $90,000). During the third quarter of 2003, workwas conducted on two Phase-II SBIR grants; work on one of the two grants wascompleted in the first quarter of 2004, and work on the other was completedearly in the third quarter of 2004. Although work was also conducted on the one Phase I SBIR grant in thethird quarter of 2004 and not in the corresponding quarter of 2003, a lowerlevel of work was nonetheless required during the third quarter of 2004.   The Company has submitted three new SBIRresearch grant proposals to fund additional research.

 

*Cost ofProducts*

 

The cost of PCT products in each of the thirdquarter of 2004 ($20,654) and in the third quarter of 2003 ($43,488) wasprimarily due to depreciation expense on PCT Barocycleräunits that were being used by three collaborators and one customer who leases aBarocycler.  No PCT Barocycler units orother PCT products other than PULSE Tubes were manufactured or sold in thequarters ended September 30, 2003 or 2004.

 

*Researchand Development*

 

PCT related research and developmentexpenditures increased to approximately $239,000 in the third quarter of 2004from approximately $173,000 in the third quarter of 2003.  This increase was primarily due to costsassociated with the ongoing development of a bench top Barocycler, which workwas performed by Source Scientific, LLC.  During the third quarter of 2004, the Companypurchased approximately $155,000 of services from Source Scientific, LLCrelated to the development of the new bench top Barocycler unit.  This increase in R&D expenditures waspartially offset by decreased work required under the

 

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Company’stwo NIH grants, as work required under one Phase II SBIR grant was completed inthe first quarter of 2004 and work required on the other was completed early inthe third quarter 2004.

 

*Selling and Marketing*

 

PCT related selling and marketing expenses inthe third quarter of 2004 were approximately $12,000 as compared toapproximately $138,000 in the third quarter of 2003.  During the third quarter of 2004, the Companydid not employ any sales personnel, attended fewer trade shows, and spent lesson marketing materials as compared to the third quarter of 2003, in which theCompany incurred expenses associated with attending a number of trade shows,developed several marketing materials, and employed two full time salesrepresentatives for PCT related sales and marketing activities.  The Company expects to hire sales personnelin fiscal 2005.

 

*General and Administrative*

 

General and administrative costs totaledapproximately $140,000 in the third quarter of 2004, as compared toapproximately $223,000 in the third quarter of 2003. The majority of theadditional G&A expenditures in the period ended September 30, 2003compared to the same period in 2004 was related to significantly higher patentcosts incurred in the prosecution of the Company’s patents in Europe.

 

*Stock Based Compensation*

 

In conjunction with the Asset Sale on September 14,2004, the Company’s Board of Directors voted to extend the termination date ofall stock options granted to employees of BBI Diagnostics and BBI Biotech tothe later of 90 days from the closing of the SeraCare transaction or thetermination of the contemplated tender offer. In accordance with the provisionsof FASB Interpretation No. 44, the Company has recognized stock-based compensationof $281,737 in the third quarter of 2004.

 

*Operating Loss from Continuing Operations*

 

The operating loss of the PCT business amountedto approximately ($625,000) in the third quarter of 2004 as compared to anoperating loss of approximately ($488,000) in the third quarter of 2003.  This increase was primarily due to thenon-cash charge incurred because of stock option extensions as described above,and was partially offset by decreased selling, marketing and G&A expensesin the third quarter of 2004 as compared to the same period in 2003, as alsodescribed above.

 

#### ***Other OperatingCredits and Charges***

 

Thenon-PCT related activities of BBI Source Scientific, Inc., together with SourceScientific, LLC, had an operating loss of approximately ($31,000) in the thirdquarter of 2004, as compared to an operating loss of approximately ($243,000)in the third quarter of 2003. This decrease was the result of higher revenues,better operating margins, and lower operating costs in the third quarter of2004 as compared to the third quarter of 2003. See also Note 4 to the Condensed Consolidated Financial Statements.

 

*Net Interest Expense*

 

Interest expense totaled approximately $18,400 in the third quarter of2004 as compared to interest expense of approximately $13,000 in the thirdquarter of 2003.  The third quarter of2004 interest expense was primarily associated with borrowings on the Company’srevolving line of credit, which became effective on February 5, 2004. TheCompany used a portion of the borrowings under the revolving line of credit topay certain transaction related costs associated with the Asset Sale.  On September 14, 2004, the Company usedan aggregate of $2,005,148 of the proceeds from the Asset Sale to repay alloutstanding indebtedness under the revolving line of credit, including an earlytermination fee of $50,000.  Upon paymentof the outstanding indebtedness together with the early termination fee, therevolving line of credit agreement was terminated.  The Company does not have a lineof credit from which it can borrow and cannot  assure that it would obtain  one on  acceptable terms  unless  there is a change  in the  Company’s circumstances.  Partially offsetting interest expense wasinterest income of approximately $11,700 earned on the $27.5 million ofpurchase price proceeds received in connection with the Asset Sale in the third

 

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quarterof 2004 and approximately $2,000 in interest income in the period ended September 30,2003.

 

### *Loan Receivable from Director and ChiefExecutive Officer*

 

As of September 30, 2004, the Company evaluatedthe recoverability of a $1,000,000 loan receivable from Mr. Richard T.Schumacher, a Director and the Company’s current President and Chief Executive Officer,which is reflected on its balance sheet in stockholders’ equity as a loanreceivable as of December 31, 2003 and September 30, 2004. TheCompany’s review includes an evaluation of the collateral associated with theloan. The Company maintains a junior interest in this collateral.  As of September 30, 2004, the remainingcollateral consists of common stock of the Company.  When considering the adequacy of thecollateral for the Company’s $1,000,000 receivable plus accrued interest, theCompany considers the balance of a loan outstanding ($484,338 as of September 30,2004) between an entity controlled by Mr. Schumacher with a financialinstitution and the fact that the Company has a junior position with respect tothe remaining collateral associated with that loan, as well as the liquidityand net realizable value of the remaining assets underlying thecollateral.   The ultimate value that maybe recovered by the Company is dependent on numerous factors including marketconditions relative to the value of and ability to sell the Company’s commonstock, and the financial status of Mr. Schumacher. At September 30, 2004,the Company performed a test for impairment of its loan receivable by analyzingthe value of the collateral, and determined that the loan receivable was notimpaired. While the loan receivable was not impaired as of September 30,2004, fluctuations in the quoted market value of the Company’s common stock,which comprises the remaining collateral, may be an indicator ofimpairment.  Based on the Company’sassessment as of and through November 2004, the Company estimates that thevalue of the collateral approximates the amount of the Company’s recordedloan.  If actual market conditions areless favorable or other factors arise that are significantly different thanthose anticipated by management, a write-down of this asset might be required.

 

*Income Taxes*

 

#### **In the year 2000, the Companyestablished a full valuation allowance for its deferred tax assets inaccordance with Statement of Financial Accounting Standards No. 109 and inconsideration of three consecutive years of losses; accordingly, the Companyhas not recognized a consolidated income tax benefit associated with the netloss in the third quarter of 2004 and the third quarter of 2003. **   The Company estimates that ithad approximately $3,800,000 of NOL carryforwards which were utilized in thethird quarter of 2004 to offset the gain on the sale of assets to SeraCare.   

 

#### ***DiscontinuedOperations***

 

OnSeptember 14, 2004, pursuant to the Asset Purchase Agreement between theCompany, BBI Biotech Research Laboratories and SeraCare, the Company completedthe sale of substantially all of the assets and selected liabilities of its BBIDiagnostics and BBI Biotech divisions to SeraCare, for a purchase price of$30 million in cash of which $27.5 million was paid at the closingand the remaining $2.5 million was deposited in escrow pursuant to anescrow agreement expiring in March 2006. The purchase price is subject toincrease or decrease on a dollar-for-dollar basis if the net asset value (asdefined in the Asset Purchase Agreement) of the assets sold as of the closingdate is greater or less than $8.5 million. The transaction was approved bythe Company’s stockholders at a special meeting of stockholders held on September 14,2004.  In connection with thetransactions contemplated by the Asset Purchase Agreement, at the stockholdersmeeting held on September 14, 2004, the Company’s stockholders alsoapproved an amendment to the Company’s Restated Articles of Organization tochange the Company’s name to Pressure BioSciences, Inc. The Articles ofAmendment to change the Company’s name to Pressure BioSciences, Inc.became effective on September 14, 2004.

 

Theassets sold included all accounts and notes receivable, contract rights, ownedand leased real property, fixtures and equipment, inventory, intellectualproperty and books and records that relate to the BBI Core Businesses. Theassets sold also included the owned real property located at 375 West Street,West Bridgewater, MA. The Company retained all of its assets not relating tothe BBI Core Businesses, including: all assets relating to the Company’spressure cycling technology activities; intercompany receivables and payables;a $1.0 million loan receivable plus accrued interest from Richard T.Schumacher, the Company’s Chief Executive Officer and a director; its passivestock ownership interest in Panacos Pharmaceuticals, Inc.; its 30%ownership interest in Source Scientific, LLC, a newly formed limited liabilitycompany which recently purchased substantially all of the assets of BBI’sSource Scientific business unit; promissory notes in the aggregate principalamount of $900,000 from the principals of Source Scientific, LLC; and all ofits cash and cash equivalents.

 

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Theamounts associated with the sale of these assets and selected liabilities toSeraCare are reported as discontinued operations in the accompanying financialstatements, in accordance with paragraphs 30 and 42 of Statement of FinancialAccounting Standards No. 144 “Accounting for the Impairment or Disposal ofLong-Lived Assets”.

 

Netincome (loss) from discontinued operations (not including the after tax gain of$15,868,025 on the sale of assets to SeraCare) was $(440,212) for the threemonths ended September 30, 2004, as compared to income of $386,043 for thesame period in 2003.  During the thirdquarter of 2004, the Company wrote-off approximately $450,000 of lease-holdimprovements in the Frederick, Maryland repository building that was caused bythe early termination of the repository lease that coincided with the move ofthe repository operations to larger and more accommodating facility, as well aspreviously deferred costs of approximately $145,000 related to the terminationof the Company’s line of credit on September 14, 2004.

 

On March 4, 2004, the Company entered into alease termination agreement with the landlord of the facility previouslyoccupied by BBI Clinical Laboratories, Inc., formerly a wholly-owned subsidiaryof the Company in the clinical laboratory testing services segment.  The agreement calls for a series of reducedpayments over the next nine months in return for the Company vacating thefacility; the Company vacated the facility in the second quarter of 2004.Accordingly, the Company recognized a $135,000 gain in the first quarter of2004 associated with this favorable early termination lease agreement. TheCompany’s estimate of remaining short and long term accrued liabilities to exitthe clinical laboratory testing business is approximately $128,000 as of September 30,2004.

 

#### ***Net Income (Loss)***

####  

Inthe third quarter of 2004, the Company recorded net income of $14,764,743,consisting primarily of the $15,868,025 gain on the sale of assets and selectedliabilities to SeraCare (net of estimated taxes of $3,925,200) completed in thethird quarter of 2004, compared to a net loss of ($355,756) in the thirdquarter of 2003.  The gain from the saleto SeraCare is subject to post closing adjustments, including any adjustmentsresulting from an increase or decrease of the net asset value of the assetssold to SeraCare. The Company expects to utilize approximately $3,800,000 ofprior period net operating loss carryforwards, previously reserved for by theCompany, to partially offset the tax effect of this gain.

 

**NINE MONTHS ENDED SEPTEMBER 30, 2004 AND2003**

 

*Revenue*

 

PCT related revenues amounted to approximately $305,000 in the firstnine months of 2004, as compared to approximately $498,000 in the first ninemonths of 2003.

 

Product Revenue.  The Company had product revenue of $12,939 inthe nine months ended September 30, 2004, compared to $73,782 in thecorresponding period of 2003.  Productrevenue in the first nine months of 2004 included lease payments from onecustomer and sales of PULSE Tubes to three customers; product revenue in thefirst nine months of 2003 included the sale of one PCT Barocycler unit. TheCompany sold no PCT Barocyclerä units inthe first nine months of 2004.   TheCompany continues to have very limited sales of its PCT products, as sales ofthese products is slower than expected. The Company is continuing to work onthe development of a less expensive and smaller bench top version of the PCTBarocyclerä, which theCompany presently plans to have ready for commercial sale in the first quarterof 2005.

 

Service and Grant Revenue.  A decrease in PCT grant revenue was primarilyrelated to a lower level of research conducted under SBIR research grants inthe nine months of 2004 (approximately $292,000) as compared to the first ninemonths of 2003 (approximately $425,000). During the first nine months of 2003,work was conducted on two Phase-II SBIR grants; work on one of the two grantswas completed in the first quarter of 2004, and work on the other was completedearly in the third quarter of 2004, thus resulting in a lower level of workrequired during the first nine months of 2004.  In May 2004, the Company was awarded a $140,000 SBIR Phase I grant tostudy the use of PCT in applications to combat bio-terrorism; work on thisgrant was conducted in  the third quarter2004, but such work was minimal and could not compensate for lower workrequired by the other NIH SBIR grants.  The Company has submitted three new SBIR research grant proposals tofund additional research.

 

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*Cost ofProducts*

 

The cost of PCT products in the first nine monthsof 2004 (approximately $55,700) was primarily due to depreciation expense onPCT Barocyclerä units that werebeing used by three collaborators and one lease customer.  Cost of product sales for the correspondingperiod ended September 30, 2003 (approximately $97,750) was primarily due tothe sale of one PCT Barocycler unit.  

 

*Researchand Development*

 

PCT related research and development expenditures decreasedto approximately $672,000 in the first nine months of 2004 from approximately$360,500 in the first nine months of 2003. The decreased level of expenditures was associated primarily with alower amount of work required in the performance of two NIH SBIR-II grantsduring the third quarter of 2004 as compared to the same period in 2003.  This decrease in work required under theCompany’s two NIH grants during the first nine months of 2004 as compared tothe first nine months of 2003 was partially offset by increased costsassociated with the ongoing development of a bench top version of theBarocycler instrument during the quarter.

 

*Selling and Marketing*

 

PCTrelated selling and marketing expenses decreased to $138,158 in the first ninemonths of 2004 from $334,432 in the first nine months of 2003. This decreasewas associated with a reduced level of trade show expenditures, lower marketingcosts, and 2 vacant sales positions in the first nine months of 2004.  In the first nine months of 2003, the Companyhad two full time sales representatives employed for PCT related sales andmarketing activities.   The Company doesnot currently employ any sales personnel, though it expects to hire sales personnelin fiscal 2005.

 

*General and Administrative*

 

Generaland administrative costs decreased to $762,597 in the first nine months of 2004as compared to $970,873 in the first nine months of 2003. The first nine monthsof 2003 included costs associated with legal and director fees incurred by theSpecial Oversight Committee of the Company’s Board of Directors, formed in February 2003to oversee the management of the affairs of the Company until such time as anew Chief Executive Officer was employed. The Company also incurred increased legal fees during the first ninemonths of 2003 associated with the March 2003 adoption of a ShareholdersPurchase Rights Plan.  Higher costs inthe first nine months of 2003 were partially replaced during the same period in2004 by certain monthly commitment and servicing fees associated with a newline of credit effective February 2004. In addition, the Company expensed approximately $145,000 of previouslydeferred costs associated with obtaining a line of credit; such line wasterminated on September 14, 2004.

 

*Stock Based Compensation*

 

Inconjunction with the sale of assets and liabilities to SeraCare, on September 14,2004, the Company’s Board of Directors voted to extend the termination date ofall stock options granted to employees of BBI Diagnostics and BBI Biotech untilthe later of 90 days from the transaction closing date of the SeraCare sale orthe termination date of the expected Tender Offering. In accordance with theprovisions of FASB Interpretation No. 44, the Company has recognized stockbased compensation of $281,737 in the third quarter of 2004.

 

*Operating Loss from Continuing Operations*

 

Theoperating loss of the PCT business decreased to $(1,605,259) in the first ninemonths of 2004 from $(1,734,969) in the first nine months of 2003. This decreasewas primarily due to the 2003 third quarter costs associated with legal anddirector fees incurred by the Special Oversight Committee and the adoption of aShareholders Purchase Rights Plan (as discussed above); these costs wereslightly offset in then third quarter of 2004 by the non-cash charge incurredby the Company as a result of the extension of employee stock options asdescribed previously, lower PCT revenue in the 2004 period as compared to sameperiod in 2003, and significant  R&Dcosts related to the development of the bench top Barocycler unit.

 

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#### ***Other OperatingCredits and Charges***

####  

BBISource Scientific, Inc., (non-PCT related activities), together with SourceScientific, LLC, recognized an operating loss of $(334,000) in the first ninemonths of 2004, as compared to an operating loss of $(581,000) in the firstnine months of 2003. The decrease was the result of higher revenue, higheroperating profit margins, and lower operating costs.  See Notes 4 to the Condensed ConsolidatedFinancial Statements.

 

*Net Interest Expense*

 

Interest expense increased to approximately $69,500 in the first ninemonths of 2004 as compared to approximately $40,000 in the first nine months of2003, with the majority of said interest charges related to borrowings on theCompany’s revolving line of credit, which became effective on February 5,2004. The Company used a portion of the borrowings under the revolving line ofcredit to pay certain transaction related costs associated with the AssetSale.  On September 14, 2004, theCompany used an aggregate of $2,005,148 of the proceeds from the Asset Sale torepay all outstanding indebtedness under the revolving line of credit,including an early termination fee of approximately $50,000.  Upon payment of the outstanding indebtednesstogether with the early termination fee, the revolving line of credit agreementwas terminated. The Company does nothave a line of credit from which it can borrow and the  Company cannot  assure  that it could obtain  one on acceptable  terms  unless there  is a change  in the Company’s circumstances. Partially offsetting this interest expense for the first nine months of2004 was interest income of $15,000 primarily earned on the $27.5 million ofpurchase price proceeds received in connection with the Asset Sale in the thirdquarter of 2004, and interest income of $18,000 earned in the same period of2003.

 

### *Loan Receivable from Director and ChiefExecutive Officer*

 

As of September 30, 2004, the Companyevaluated the recoverability of a $1,000,000 loan receivable plusaccrued interest from Mr. Richard T. Schumacher, a Director and the Company’scurrent President and Chief Executive Officer, which is reflected on itsbalance sheet in stockholders’ equity as a loan receivable as of December 31,2003 and September 30, 2004. The Company’s review includes an evaluationof the collateral associated with the loan. The Company maintains a juniorinterest in this collateral.  As of September 30,2004, the remaining collateral consists of common stock of the Company.  When considering the adequacy of thecollateral for the Company’s $1,000,000 receivable, the Company considers thebalance of a loan outstanding ($484,338 as of September 30, 2004) betweenan entity controlled by Mr. Schumacher with a financial institution and thefact that the Company has a junior position with respect to the remainingcollateral associated with that loan, as well as the liquidity and netrealizable value of the remaining assets underlying the collateral.   The ultimate value that may be recovered bythe Company is dependent on numerous factors including market conditionsrelative to the value of and ability to sell the Company’s common stock, andthe financial status of Mr. Schumacher. At September 30, 2004, the Companyperformed a test for impairment of its loan receivable by analyzing the valueof the collateral, and determined that the loan receivable was not impaired.While the loan receivable was not impaired as of September 30, 2004,fluctuations in the quoted market value of the Company’s common stock, whichcomprises the remaining collateral, may be an indicator of impairment.  Based on the Company’s assessment as of andthrough November 2004, the Company estimates that the value of thecollateral approximates the amount of the Company’s recorded loan.  If actual market conditions are lessfavorable or other factors arise that are significantly different than thoseanticipated by management, a write-down of this asset might be required.

 

*Income Taxes*

 

Inthe year 2000, the Company established a full valuation allowance for itsdeferred tax assets in accordance with Statement of Financial AccountingStandards No. 109 and in consideration of three consecutive years of losses;accordingly, the Company has not recognized a consolidated income tax benefitassociated with the net loss from the first nine months of 2004 and the firstnine months of 2003. However, consistent with our presentation of discontinuedoperations in accordance with paragraphs 30 and 42 of Statement ofFinancial Accounting Standards No. 144 “Accounting for the Impairment orDisposal of Long-Lived Assets,” the Company is showing a tax benefit from thelosses incurred on its unprofitable continuing operations, offset by a taxprovision for its profitable discontinued operations. Income tax expense in the first nine monthsof 2003 relates to various state income taxes.  The Company estimates that ithad approximately $3,800,000 of NOL carryforwards which were utilized in thethird quarter of 2004 to offset the gain on the sale of assets to SeraCare.

 

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*Discontinued Operations*

 

Asdescribed in the third quarter of 2004 compared to the third quarter of 2003discussion above, in accordance with paragraphs 30 and 42 of Statement ofFinancial Accounting Standards No. 144 “Accounting for the Impairment orDisposal of Long-Lived Assets”, the results of operations for the Company’s BBIDiagnostics and BBI Biotech business units, which were classified as assets andliabilities held for sale as of June 30, 2004, are reported asdiscontinued operations in the current period.

 

Net income from discontinued operations (not including the gain on thesale of assets and selected liabilities to SeraCare) was $140,946 for the ninemonths ended September 30, 2004, as compared to net income of $1,269,495for the same period in 2003.  The lower 2004nine month net income was primarily affected by a write-off of approximately$450,000 for lease-hold improvements in the Frederick, Maryland repositorybuilding caused by the early termination of the repository lease that coincidedwith the move of the repository operations to larger and more accommodatingfacility, a $135,000 reversal of a BBI Clinical Laboratory segment accrual inthe first quarter of 2004, and a provision for income taxes of $245,135, offsetby a similar income tax benefit in continuing operations, as well as previouslydeferred costs of approximately $145,000 related to the termination of theCompany’s line of credit on September 14, 2004..

 

On March 4, 2004, the Company entered into alease termination agreement with the landlord of the facility previouslyoccupied by BBI Clinical Laboratories, Inc., formerly a wholly-owned subsidiaryof the Company in the clinical laboratory testing services segment.  The agreement calls for a series of reducedpayments over the next nine months in return for the Company vacating thefacility; the Company vacated the facility in the second quarter of 2004.Accordingly, the Company recognized a $135,000 gain in the first quarter of2004 associated with this favorable early termination lease agreement. TheCompany’s estimate of remaining short and long term accrued liabilities to exitthe clinical laboratory testing business is approximately $128,000 as of September 30,2004

 

#### ***Net Income (Loss)***

 

The Company has recorded net income of$14,259,931, which consisted primarily of the $15,868,025 gain, net ofestimated taxes of $3,925,200, for the nine months ended September 30,2004 due to the Asset Sale  to SeraCarecompleted in the third quarter of 2004, compared to a net loss of $(834,607) inthe nine months ended September 30, 2003. This gain on the sale of assetsto SeraCare is subject to post closing adjustments, including any adjustmentsresulting from an increase or decrease of the net asset value of the assetssold to SeraCare. The Company expects to utilize approximately $3,800,000 ofprior period net operating loss carryforwards, previously reserved for by theCompany, to partially offset the tax effect of this gain.

 

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**LIQUIDITY AND FINANCIAL CONDITION**

 

The Company’s working capital position, as of September 30, 2004,increased to $21,234,732 as of September 30, 2004 from $9,183,369 millionas of December 31, 2003.  Theincrease in the Company’s working capital is due to the sale of substantiallyall of the assets and selected liabilities of its BBI Diagnostics and BBIBiotech business units to SeraCare for an aggregate purchase price of$30 million in cash of which $27.5 million was paid at the closingand the remaining $2.5 million was deposited in escrow pursuant to anescrow agreement expiring in March 2006.

 

Net cash used by operations for the nine months ended September, 30,2004 was approximately $1,220,000 as compared to net cash used by operations ofapproximately $2,519,000 for the nine months ended September 30, 2003. Thecash used in operations for both years was primarily a result of lossesincurred.

 

Net cash used by financing activities for the ninemonths ended September 30, 2004 was approximately $2,377,000 as comparedto cash provided of approximately $24,300 during the nine months ended September 30,2003.   On September 14, 2004,the Company used an aggregate of $2,005,148 of the proceeds from the Asset Saleto repay all outstanding indebtedness under the revolving line of credit,together with an early termination fee of $50,000.  Upon payment of the outstanding indebtedness togetherwith the early termination fee, the revolving line of credit agreement wasterminated.  The Company does not have a line of credit from which it can borrowand the  Company  cannot assure  that it could obtain  one on acceptable  terms  unless there  is a change  in the Company’s circumstances.

 

On April 5, 2000, the Company borrowed$2,447,000, net of related costs, under a mortgage agreement on its WestBridgewater, MA facility, of which approximately $2,200,000 was outstanding asof September 14, 2004. In connection with the Asset Sale, SeraCare assumedthe mortgage and all related payments thereunder.  As a result, the Company has no remainingpayments under the mortgage.

 

*Investment in Panacos Pharmaceuticals*

 

As of September 30, 2004, the Company isthe owner of approximately 4.45% of Panacos Pharmaceuticals, Inc. ("Panacos")whichis recorded on the Company’s books at a cost of $9,178 as of both December 31,2003 and September 30, 2004.  On June 2,2004, Panacos Pharmaceuticals announced that it entered into a definitivemerger agreement with V.I. Technologies Inc. ("V.I. Technologies"), apublicly traded company based in Watertown, Massachusetts, that developsinnovative anti-infective technologies to enhance blood safety. On November 8,2004, Panacos and V.I. Technologies announced that the parties amended themerger agreement.  Under the amendedmerger agreement, it is expected that V.I. Technologies will issueapproximately 54 million of its shares in exchange for all outstanding shares ofPanacos. In addition, Panacos will have the opportunity to receiveapproximately 31 million additional shares of V.I. Technologies, for a total of85 million shares, if Panacos successfully achieves certain defined milestonesof a Phase IIa study of its lead compound, PA-457, in HIV-infected patients.The number of shares is fixed and not subject to adjustment based on the marketprice of V.I. Technologies’ stock. A financing commitment of at least $25million to fund the merged company is a condition to the closing of the merger.The Board of Directors of V.I. Technologies and Panacos have approved theamendment to the merger agreement. Panacos and V.I. Technologies expect thetransaction to close in January 2005 and is subject to approval by theshareholders of both companies and other customary closing conditions.  However, the Company does not know when or ifthe transaction between Panacos and V.I. Technologies will close. Should theabove noted transaction be approved by the shareholders of both V. I.Technologies, Inc. and Panacos, the Company’s existing common stock ownershipin Panacos of 1,500,000 shares will be converted into approximately 3,750,000common shares of V.I. Technologies, Inc. (a publicly traded company) at theclose of the transaction.

 

*Summary*

 

OnSeptember 14, 2004, pursuant to an Asset Purchase Agreement between theCompany, BBI Biotech Research Laboratories, Inc. and SeraCare, the Companycompleted the sale of substantially all of the assets and selected liabilitiesof its BBI Diagnostics and BBI Biotech divisions to SeraCare, for a purchaseprice of $30 million in cash of which $27.5 million was paid at theclosing and the remaining $2.5 million was deposited in escrow pursuant toan escrow agreement expiring in March 2006. The purchase price is subjectto increase or decrease on a

 

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dollar-for-dollarbasis if the net asset value (as defined in the Asset Purchase Agreement) ofthe assets sold as of the closing date is greater or less than$8.5 million.

 

OnNovember 14, 2004, in accordance with the terms of the Asset PurchaseAgreement, SeraCare delivered the closing balance sheet, which reflected adeficiency of approximately $3.1 million when compared to the target net assetvalue of $8.5 million. Based on the Company’s calculation, the closing netasset value was estimated to be approximately $8.6 million.  Accordingly, the Company objected to certaincalculations contained in the closing balance sheet, including, without limitation,SeraCare’s calculation of accounts receivable and inventory.  The Company does not believe that the closingbalance sheet prepared by SeraCare is in accordance with the terms of the AssetPurchase Agreement.  The Company is inthe process of re-asserting and supporting its position as to the value andquality of the assets transferred.  Tothe extent the Company is not successful in defending its position on the $3.1Mdeficiency shown by SeraCare, any amount of such deficiency paid to SeraCarewill have an unfavorable impact on earnings reported and will reduce the $2.5Mescrow balance currently reported in Other Assets on the Company’s financialstatements, and may otherwise have a material adverse effect on the Company.

 

OnNovember 22, 2004, SeraCare and the Company entered into an agreementpursuant to which the Company and SeraCare agreed that (i) all disputes otherthan disputes relating to accounts receivable will be determined in accordancewith the dispute resolution provisions contained in the Asset PurchaseAgreement, (ii) disputes regarding accounts receivable will be resolved bypermitting SeraCare to recover the amount of the receivable for identifiedaccounts receivable that have not been collected within 90 days of the invoicedate for domestic receivables and 180 days of the invoice date forinternational receivables,  (iii) anyadjustment amount determined to be due to SeraCare for accounts receivable orother matters will first be paid out of the $2.5 million of the purchase pricebeing held in escrow and any amounts in excess of the escrowed amount shall bepaid by the Company directly, and (iv) the Company will be entitled to directlyattempt to collect any receivables for which SeraCare receives credit for underthe escrow or from the Company directly

 

Aspreviously announced in connection with the Asset Sale, the Company stated itsintention to commence an issuer tender offer to purchase up to 6,000,000 sharesof its common stock at a price of $3.50 per share shortly following the completionof the Asset Sale.   The Companyannounced that it expected to use up to $21.0 million of the after-tax netproceeds from the Asset Sale to purchase shares of its common stock tendered inthe tender offer.   Since the closing ofthe Asset Sale, the Company has incurred unanticipated expenses and liabilitiesthat have reduced the amount of proceeds from the sale to SeraCare availablefor the tender offer and remaining for our pressure cycling technology businessthan we originally anticipated.  These unanticipatedexpenses and liabilities include greater costs associated with the SeraCaretransaction and the contemplated tender offer, higher than anticipated medicalclaims reimbursements, state tax audit costs, and greater than anticipatedgeneral operating expenses. At this time, the Company still intends to commencean issuer tender offer to purchase shares of its common stock at $3.50 pershare.  Due to the unanticipated expensesand liabilities, however, the Company is currently evaluating its financialsituation to determine the number of shares it can offer to purchase.  The Company’s objective continues to be toprovide its stockholders with the opportunity to obtain liquidity for theirshares of common stock at a fair price, while at the same time permitting theCompany to maintain sufficient cash to run the Company’s pressure cyclingtechnology business through March 2006. The Company believes that it willrequire approximately $1.5 million in cash to fund its operations through March 2006,and, accordingly, any tender offer ultimately commenced by the Company willlikely be structured so that at least $1.5 million in cash is remaining in theCompany assuming all shares offered to be purchased are tendered.

 

Based on current forecasts, plans and expectations, management believesthat the Company has sufficient liquidity to finance operations until March 2006.  Management’s forecasts involve assumptionsthat could prove to be incorrect. If the Company continues to incur operatinglosses or negative cash flows, it may need to raise additional funds. There canbe no assurance that these funds will be available when required on termsacceptable to the Company, if at all. If adequate funds are not availablewhen needed, the Company may be required to further reduce certain of its costsand delay, scale back, or eliminate certain of its activities, including itsPCT product development activities, any of which could have a material adverselong term effect on its business, financial condition and results of operations.

 

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*Related Party Transaction *

 

In January 2002, the Company pledged a$1,000,000 interest bearing deposit at a financial institution to secure theCompany’s limited guaranty of loans in the aggregate amount of $2,418,000 fromthe financial institution to an entity controlled by Richard T. Schumacher, aDirector and the Company’s current President and Chief Executive Officer.  The loans from the financial institution tothe entity controlled by Mr. Schumacher, which are personally guaranteed by Mr.Schumacher, were originally secured by collateral which includes certain realproperty owned by Mr. Schumacher and all of his shares of common stock held inthe Company.  The Company’s pledge issecured by a junior subordinated interest in the collateral provided by Mr.Schumacher to the financial institution. The Company’s pledge of $1,000,000 wasmade to assist Mr. Schumacher in refinancing his indebtedness related to, amongother things, his divorce settlement and to enable him to avoid the need tosell his Company common stock on the open market to satisfy his debts.  The Company’s Board of Directors and aspecial committee of the independent directors of the Board of Directors,evaluated a number of options and concluded that the pledge of the $1,000,000interest bearing deposit was the best option and in the best interests of theCompany’s stockholders in the belief that it would, among other things, avoidselling pressure on the Company’s common stock and relieve the financialpressures on Mr. Schumacher that could otherwise divert his attention from theCompany.  In January 2003, the$1,000,000 held in the interest bearing deposit account pledged to thefinancial institution to secure the Company’s limited guaranty was used by thefinancial institution to satisfy the Company’s limited guaranty obligation tothe financial institution. The Company has no further obligations to thefinancial institution and has a loan receivable in the amount for $1,000,000(plus accrued interest) from Mr. Schumacher. The Company continues to maintainits junior interest in collateral pledged by Mr. Schumacher to the financialinstitution. The Company reflected the $1,000,000 pledge as restricted cash onits balance sheet as of December 31, 2002 until the cash was used tosatisfy the Company’s limited guaranty in January 2003 and since then hasreflected a $1,000,000 loan receivable on its balance sheet in stockholders’equity.

 

On February 14, 2003, the Company announced thatits Board of Directors terminated Mr. Schumacher as Chairman and ChiefExecutive Officer, effective immediately. Mr. Schumacher remained as a Director of the Company. Kevin W. Quinlan,President and Chief Operating Officer, continued to lead day-to-dayoperations.  A special committee of theBoard of Directors was appointed to oversee the management of the affairs ofthe Company until such time as a new Chief Executive Officer was employed.

 

On July 9, 2003, the Company announcedthat Mr. Schumacher agreed to accept an engagement with the Company as anExecutive Project Consultant to advise the Company with respect to thestrategic direction of the Company’s PCT and BBI Source Scientific activitiesand the Company’s ownership interest in Panacos Pharmaceuticals, Inc.  As part of this engagement, Mr. Schumachercontinued to reevaluate the ongoing business prospects for both the Company’sLaboratory Instrumentation segment and PCT activities. On February 9,2004, the Company announced it had extended until December 31, 2004 theExecutive Consultant Agreement it had with Mr. Schumacher.  Under the terms of the Consulting Agreement,Mr. Schumacher served in an advisory role directing the Company’s PCT and BBISource Scientific activities, the Company’s interest in PanacosPharmaceuticals, Inc. and such other duties as the President or the Board ofDirectors of the Company assigned to him. In addition to these responsibilities, Mr. Schumacher also continued hislead role in working with William Blair & Co. the investment banking firmretained by the Company in October 2002.  In connection with his Consulting Agreement, Mr. Schumacher was paid anannualized salary of $250,000.  Inaddition to his salary, Mr. Schumacher was eligible to receive, at the discretionof the Company’s Board of Directors, a bonus in an amount to be determined bythe Board of Directors in recognition of the successful completion of hisduties and responsibilities under the agreement, and he was also eligible toparticipate in the Company’s health and medical insurance, disabilityinsurance, group life insurance and group travel insurance, and 401(k)retirement plans.

 

On April 20, 2004, the Company’s Board ofDirectors announced the appointment of Mr. Schumacher to the Company’s open positionof Chief Executive Officer (CEO), effective immediately.  Mr. Schumacher, the Founder of the Company,has served as a member of the Board of Directors of BBI since 1978, was theCompany’s President from 1986 to 1999, and was CEO and Chairman of the Boardfrom 1992 to February 2003. Mr. Schumacher is working as an employee ofthe Company pursuant to the terms of his existing consulting agreement.**  **Effective on September 14,2004, concurrent with the closing of the Asset Sale to SeraCare, Kevin W. Quinlan,the Company’s then acting President, Chief Operating Officer and Treasurer,resigned from all of such offices. On that same date, Mr. Schumacher, theCompany’s Chief Executive Officer, was appointed to replace Mr. Quinlan asPresident and Treasurer of the Company. Mr. Quinlan andMr. Schumacher each continue to serve as a director of the Company.

 

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**CRITICAL ACCOUNTING POLICIES**

 

The critical accounting policies utilized bythe Company in the preparation of the accompanying financial statements are setforth in Part I, Item 7 of the Company’s Form 10-K for the year ended December 31,2003, as amended, under the heading “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations”.  There have been nomaterial changes to these policies since December 31, 2003, except as setforth below.

 

On April 16, 2004, the Company announcedthat it had signed an Asset Purchase Agreement to sell substantially all of theassets and selected liabilities of its BBI Diagnostics and BBI BiotechDivisions to SeraCare.  Accordingly, inthe second quarter of 2004, the Company reclassified the above referencedassets and liabilities into separate balance sheet categories entitled “AssetsHeld for Sale” and “Liabilities held for Sale”, in accordance with theprovisions of Statementof Financial Accounting Standards No. 144 “Accounting for the Impairment orDisposal of Long-Lived Assets”.   TheCompany ceased depreciation and amortization, estimated at approximately$250,000 per quarter, on such long lived assets held for sale effective April 16,2004, in accordance with the provisions of this accounting pronouncement.  On September 14, 2004, the Companycompleted the sale of substantially all of the assets and selected liabilitiesof its BBI Diagnostics and BBI Biotech business units to SeraCare and theassets and liabilities previously classified as assets and liabilities for saleas of June 30, 2004, are reported as discontinued operations.  The Company’s remaining operations currentlyconsist of its Pressure Cycling Technology business unit.

 

Deferred Costs

 

Previouslythe Company deferred approximately $410,000 of transaction costs as of June 30,2004 associated with the above noted Asset Purchase Agreement and $145,000 ofcosts as of June 30, 2004 associated with obtaining a line of credit.  The Company expensed these costs as a resultof the Asset Sale  to SeraCare and the terminationof its line of credit, both occurring on September 14, 2004.

 

Patent Costs

 

The Company’s policyis to expense all new patent related legal costs as incurred.

 

Research & Development Costs

 

The Company’s policyis to expense substantially all new PCT related research and development costsas incurred.

 

**CONTRACTUAL OBLIGATIONS**

 

In connection with the sale of substantially all ofthe assets and selected liabilities of the Company’s BBI Diagnostics and BBIBiotech business units to SeraCare, which was completed on September 14,2004, many of the Company’s contractual obligations and commitments were eitherassumed by SeraCare or were paid off on the closing date.  More specifically, contractual obligationsdescribed under the headings “mortgage payments, operating lease obligations,note payable, real estate facility leases and construction purchase commitment”in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,2004 have been assumed by SeraCare and are no longer contractual obligations ofthe Company.   In addition, thecontractual obligation described under the heading “Revolving Line of Credit”in the Company’s Quarterly Report on Form 10-Q, has been satisfied infull.  As described elsewhere, on September 14,2004, the Company used an aggregate of $2,005,148 of the proceeds from theAsset Sale to repay all outstanding indebtedness under the revolving line ofcredit, including an early termination fee of $50,000.  Upon payment of the outstanding indebtednesstogether with the early termination fee, the revolving line of credit agreementwas terminated.  The Company does not have a line of credit from which it can borrowand the  Company  cannot assure that it could obtain  oneon  acceptable  terms unless  there  is a change in the  Company’s circumstances.

 

TheCompany’s remaining contractual commitments and obligations which were notassumed or paid off in connection with the sale of the assets and selectedliabilities of the Company’s BBI Diagnostics and BBI Biotech business units toSeraCare, are described below under the headings “minimum future royaltypayments, obligations relating to discontinued operations – clinical laboratorytesting services segment, PCT related purchase commitment, and CA real estatefacility lease guarantee”.

 

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| ** **                                                                                        | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| **Contractual Obligations**                                                                       | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **1-3  years** | ** ** | **4 - 5  years** | ** ** | **More than  5  years** | ** ** |
| Minimum future royalty payments (1)                                                               |       | —                     |       | — |   | — |   | — |   | — |   |
| Obligations relating to Discontinued  Operations – clinical lab testing services segment (2) |       | 128,000                    |       | 24,000 |   | 60,000 |   | 10,000 |   | 25,000 |   |
| PCT related purchase commitment (3)                                                               |       | 300,000                    |       | 225,000 |   | 75,000 |   |   |   |   |   |
| CA Real Estate Facility Lease Guarantee (4)                                                       |       | —                     |       | — |   | — |   | — |   | — |   |
|                                                                                              |       |                       |       |   |   |   |   |   |   |   |   |
| Total Contractual Obligations                                                                     |       | $                          | 428,000    |   | $ | 249,000 |   | $ | 135,000 |   | $ | 10,000 |   | $ | 25,000 |   |
|                                                                                                   |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)  The Company acquired in 1998 all theremaining outstanding common stock of BioSeq, Inc., a development stage companyinvolved with PCT. In accordance with the provisions of a technology transferagreement assumed in the transaction, the Company is obligated to pay a 5%royalty on net sales (until March 2016) of future sales by any entity ofthe Company utilizing PCT.

 

(2)  In December 2000, the Company made adecision to exit the clinical laboratory testing services segment and in February 2001,BBI Clinical Laboratories, Inc., a wholly-owned subsidiary of the Company.  The Company’s estimate of remaining short andlong term accrued liabilities to exit the clinical laboratory testing businessis $128,000 as of September 30, 2004.  See also Note 3 of Notes to Condensed Consolidated Financial Statementshereunder, included in Part I, Item 1 of this Form 10-Q; amounts due pursuantto a lease termination agreement entered into in March 2004 are reflectedin the above table.

 

(3)  In connection with the sale of assets andselected liabilities of the Company’s BBI Source Scientific business unit toSource Scientific, LLC, Source Scientific, LLC has agreed to provideengineering, manufacturing, and other related services for BBI’s PressureCycling Technology (PCT) products until September 30, 2005, at the rate ofapproximately $25,000 per month.**  **Payment, however,is contingent upon actual services being rendered to the Company by SourceScientific LLC. The table above assumes a $25,000 per month payment

 

(4)  The Company leases 27,000 square feet ofspace in Garden Grove, California where its BBI Source Scientific business unitpreviously manufactured laboratory instruments. The lease for this facilityexpires January 31, 2005 and there is currently no extension or renewaloption.In June 2004,in connection with the sale of assets and selected liabilities of the Company’sBBI Source Scientific business unit to Source Scientific, LLC, the Company received approval of thelandlord to assign this lease to Source Scientific, LLC and all relatedobligations under such lease.   TheCompany’s remaining obligations under this lease is in the form of a guaranteeto the landlord for five monthly rent payments, covering the period September 2004through January 2005 at approximately $32,000 per month, should SourceScientific, LLC not meet its obligations. Source Scientific, LLC has made alllease payments through November 2004, and has only two remaining payments(December 2004 and January 2005) for which Company has guaranteedpayment.  The schedule above assumesthat no additional payments will be required to be made by the Company pursuantto this lease.

 

**FORWARD-LOOKING STATEMENTS**

 

This Quarterly Report on Form 10-Q contains forward-looking statementswhich involve risks and uncertainties, including statements regarding theCompany’s plans, objectives, expectations and intentions.  In some cases, forward-looking statements areidentified by terms such as “may”, “will”, “should”, “could”, “would”, “expects”,“plans”, “anticipates”, “believes”, “estimates”, “projects”, “predicts”, “potential”,and similar expressions intended to identify forward-looking statements. Suchstatements include, without limitation, statements made regarding the expectedrecovery and value of the loan receivable from the Company’s Chief ExecutiveOfficer; the Company’s belief that it has sufficient liquidity to financeoperations through March 2006; the amount of any purchase price adjustmentin connection with the Asset Sale to SeraCare; the amount of claims forindemnification

 

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made or to be made by SeraCare under the Asset Purchase Agreement; theamount of cash necessary to operate the Company’s business; the Company’sability to raise additional capital when and if needed;  the Company’s plans and expectations withrespect to its pressure cycling technology operations and the use of itsavailable cash; the timing of the commercial release of the Company’s new benchtop Barocycler NEP 3229 instrument; the Company’s ability to remain as a publiccompany or to remain quoted on the Nasdaq National Market; the Company’s intentto commence an issuer tender offer ; and the anticipated future financialperformance of the Company and its products. These forward-looking statements are only predictions and involve knownand unknown risks, uncertainties, and other factors that may cause the Company’sactual results, levels of activity, performance, or achievements to bematerially different from any future results, levels of activity, performance,or achievements expressed or implied by such forward-looking statements. Also,these forward-looking statements represent the Company’s best estimates andassumptions only as of the date of this report. Except as otherwise required by law, the Company expressly disclaims anyobligation or undertaking to release publicly any updates or revisions to anyforward-looking statement contained in the report to reflect any change in theCompany’s expectations or any change in events, conditions, or circumstances onwhich any of the Company’s forward-looking statements are based.

 

Factors, risks and uncertainties which might cause actual results todiffer materially from those projected in the forward-looking statementscontained herein include the following:

 

•                  The Company may require additional capital tofurther develop its pressure cycling technology products and services andcannot assure that additional capital will be available on acceptable terms orat all.

 

•                  By selling the Company’s BBI Diagnostics and BBI Biotech business units to SeraCare and focusing primarily on its pressure cycling technology operations, the Company has become less diversified.

 

•                  The Company’s business is primarily dependent on the success of its pressure cycling technology products andservices, which has a limited operating history, and has generated substantiallosses and only a limited amount of revenues to date.

 

•                  The Company’s pressure cycling technology business has a history of operating losses.

 

•                  The Company’s pressure cycling technology products and services are newand have limited market awareness or acceptance.

 

•                  The sales cycle of the Company’s pressurecycling technology products has been lengthy and as a result, the Company hasincurred and may continue to incur significant expenses before it generates anysignificant revenue related to those products.

 

•                  If the Company is unable to protect itspatent and other proprietary technology relating to its pressure cyclingtechnology products, the Company’s business will be harmed.

 

•                  If the Company infringes on theintellectual property rights of others, its business will be harmed.

 

•                  The Company may be unable to adequately respond to rapid changes intechnology.

 

•                  The Company may face the possibility of moving to The Nasdaq SmallCap Market and potential delisting from the Nasdaq Stock Market entirely.

 

•                  Stockholders face the risks of holding “penny stocks.”

 

•                  The Company currently has few employees and its future success is dependent on the continued services of Richard T. Schumacher, the Company’s President and Chief Executive Officer.

 

•                  In connection with the sale of the Company’s BBI Diagnostics and BBI Biotech business units, the Company remains exposed to contingent liabilities of up to $30.0 million, the purchase price for the

 

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BBI Core Businesses, which could adversely affect the Company’s ability to pursue its remaining business operations or the Company’s ability to complete the contemplated tender offer in the event an indemnification claim is brought against the Company.

 

•                  The Company may not be able to fully collectthe $900,000 in aggregate principal amount of promissory notes, which theCompany received in connection with the sale of the Company’s BBI SourceScientific business unit to Source Scientific, LLC.

 

•                  The Company may not be able to fully collectthe principal and interest due on a $1,000,000 loan receivable from the Company’sPresident and Chief Executive Officer, which could harm the Company’s businessand financial condition.

 

•                  A few stockholders control a significantpercentage of voting power and may exercise their voting power in a manneradverse to other stockholders’ interests.

 

•                  Provisions in the Company’s charter andby-laws and the Company’s stockholders rights plan may discourage or frustratestockholders’ attempts to remove or replace current management of the Company.

 

Certain of these and other factors which might causeactual results to differ materially from those projected are more fully setforth under the caption “Risk Factors” in the Company’s Annual Report on Form10-K, as amended by Amendment No. 1 to Form 10K for the year ended December 31,2003 and in the Company’s other reports and statements the Company files fromtime to time with the SEC.

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

Therehave been no material changes in the reported market risks since December 31,2003, except that the Company has invested approximately $25,000,000 of theproceeds from the SeraCare transaction as previously discussed in short termU.S. treasury bills.  The Companyconsiders the market risk to be minimal.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

The Company maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in its Securities Exchange Act reports is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicated tothe Company’s management, including the Company’s Principal Executive Officerand Principal Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure. In designing and evaluating the disclosurecontrols and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, as theCompany’s are designed to do, and management necessarily was required to applyits judgment in evaluating the cost-benefit relationship of possible controlsand procedures.

 

As of September 30,2004, the Company carried out an evaluation, under the supervision and with theparticipation of its management, including its Principal Executive Officer andPrincipal Financial Officer of the effectiveness of the design and operation ofits disclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934. Based upon thatevaluation, the Company’s Principal Executive Officer and Principal FinancialOfficer concluded that the Company’s disclosure controls and procedures areeffective in enabling the Company to record, process, summarize and reportinformation required to be included in the Company’s periodic SEC filingswithin the required time period.  Notwithstandingthe foregoing conclusions, due to the complexity and timing of the completionof the Asset Sale with SeraCare, including transition matters relating thereto,the Company was unable to file this quarterly report on Form 10-Q for thequarter ended September 30, 2004 within the prescribed time period.  TheCompany filed this quarterly report on Form 10-Q for the quarter endedSeptember 30, 2004 one day after the time period permitted by the extensionpursuant to Rule 12b-25 of the Exchange Act.  The Company, including thePrincipal Executive Officer and Principal Financial Officer, believe thatthe failure to timely file this Form 10-Q for the quarter ended September 30,2004 was due to unusual and non-recurring circumstances.  TheCompany, including the Principal Executive Officer and Principal FinancialOfficer, continue to conclude that, despite the failure to timely filethis Form 10-Q, the disclosure controls are effective in enabling theCompany to record, process, summary and report information required to beincluded in the Company's periodic SEC filings and the Companycurrently anticipates that it will be able to timely file its periodic reportsin the future.

 

There have been no changes in the Company’s internal control overfinancial reporting that occurred during the period covered by this report thathave materially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

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**PART II.  OTHER INFORMATION**

 

**ITEM 1.   LEGAL PROCEEDINGS**

 

None.

 

##### **ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

A Special Meeting of Stockholders of the Company was held on September 14, 2004, at which the stockholders voted on the following proposals:

 

Proposal No. 1:  To approve a proposal to sell the assets of the Company’s BBI Diagnostics and BBI Biotech business units, which assets constitute substantially all of the assets of the Company, to SeraCare Life Sciences, Inc. for cash pursuant to the terms and conditions of that certain Asset Purchase Agreement dated April 16, 2004 between the Company, BBI Biotech Research Laboratories, Inc. and SeraCare, as set forth in the proxy statement provided to stockholders;

 

Proposal No. 2:  To approve a proposal to amend the Company’s Restated Articles of Organization, as amended, to change the corporate name of the Company to “Pressure BioSciences, Inc.” promptly following the completion of the sale to SeraCare, as set forth in the proxy statement provided to stockholders; and

 

Proposal No. 3:  To approve a proposal to grant the persons named as proxies discretionary authority to vote to adjourn the special meeting, if necessary, to solicit additional proxies to vote in favor of Proposal Nos. 1 and 2, as set forth in the proxy statement provided to stockholders.

 

The Company’s stockholders voted on these matters as follows:

 
| ** **     | ** ** | **Votes For** | ** ** | **Votes Against** | ** ** | **Abstentions** | ** ** |
|----------------|------------|---------------|------------|-------------------|------------|-----------------|------------|
| Proposal No. 1 |       | 4,750,453     |       | 106,448           |       | 6,499           |       |
| Proposal No. 2 |       | 4,743,307     |       | 113,464           |       | 6,629           |       |
| Proposal No. 3 |       | 4,706,555     |       | 148,446           |       | 8,399           |       |

 

**ITEM5.  OTHER INFORMATION**

 

InAugust 2004, prior to the completion of the sale of assets to SeraCare,the Company received notification from the Listing Qualifications Department ofthe Nasdaq Stock Market (“Nasdaq”) indicating that, based on the Company’sQuarterly Report on Form 10-Q for the period ended June 30, 2004, theNasdaq listing qualifications staff (the “Staff”) determined that the Company’sstockholders’ equity at $9,974,731 did not comply with the minimum $10,000,000stockholders’ equity requirement for continued listing on The Nasdaq NationalMarket set forth in Marketplace Rule 4450(a)(3).  Given the Company’sfailure to satisfy the minimum stockholders’ equity standard, the Staff isreviewing the Company’s eligibility for continued listing on The NasdaqNational Market.  Since the completion ofthe sale to SeraCare, the Company has regained compliance with the minimumstockholders’ equity standard of the Nasdaq National Market.  On October 28, 2004, the Companyreceived notice from the Staff informing it that it is in compliance with theminimum stockholders’ equity standard.

 

On November 14,2004, in accordance with the terms of the Asset Purchase Agreement between theCompany, BBI Biotech Research Laboratories, Inc. and SeraCare, SeraCaredelivered the closing balance sheet, which reflected a deficiency ofapproximately $3.1 million when compared to the target net asset value of $8.5million. The Company objected to the calculations contained in the closingbalance sheet, including, without limitation, SeraCare’s calculation of accountsreceivable and inventory.  The Companydoes not believe that the closing balance sheet was prepared by SeraCare inaccordance with the terms of the Asset Purchase Agreement.   The Company is in the process of re-assertingand supporting its position as to the value and quality of the assetstransferred.  To the extent the Companyis not successful in defending its position on the $3.1M deficiency shown bySeraCare, any amount of such deficiency paid to SeraCare will have an unfavorableimpact on earnings reported

 

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and will reduce the $2.5Mescrow balance currently reported in Other Assets on the Company’s financialstatements, and may otherwise have a material adverse effect on the Company.

 

OnNovember 22, 2004, SeraCare and the Company entered into an agreementpursuant to which the Company and SeraCare agreed that (i) all disputes otherthan disputes relating to accounts receivable will be determined in accordancewith the dispute resolution provisions contained in the Asset PurchaseAgreement, (ii) disputes regarding accounts receivable will be resolved bypermitting SeraCare to recover the amount of the receivable for identifiedaccounts receivable that have not been collected within 90 days of the invoicedate for domestic receivables and 180 days of the invoice date forinternational receivables,  (iii) anyadjustment amount determined to be due to SeraCare for accounts receivable orother matters will first be paid out of the $2.5 million of the purchase pricebeing held in escrow and any amounts in excess of the escrowed amount shall bepaid by the Company directly, and (iv) the Company will be entitled to directlyattempt to collect any receivables for which SeraCare receives credit for underthe escrow or from the Company directly

 

Aspreviously announced in connection with the Asset Sale, the Company stated itsintention to commence an issuer tender offer to purchase up to 6,000,000 sharesof its common stock at a price of $3.50 per share shortly following thecompletion of the Asset Sale.   TheCompany announced that it expected to use up to $21.0 million of the after-taxnet proceeds from the Asset Sale to purchase shares of its common stocktendered in the tender offer.   Since theclosing of the Asset Sale, the Company has incurred unanticipated expenses andliabilities that have reduced the amount of proceeds from the sale to SeraCareavailable for the tender offer and remaining for its pressure cyclingtechnology business than originally anticipated.  These unanticipated expenses and liabilitiesinclude greater costs associated with the SeraCare transaction and thecontemplated tender offer, higher than anticipated medical claimsreimbursements, state tax audit costs, and greater than anticipated generaloperating expenses.  At this time, theCompany still intends to commence an issuer tender offer to purchase shares ofits common stock at $3.50 per share.  Dueto the unanticipated expenses and liabilities, however, the Company iscurrently evaluating its financial situation to determine the number of sharesit can offer to purchase.  The Company’sobjective continues to be to provide its stockholders with the opportunity toobtain liquidity for their shares of common stock at a fair price, while at thesame time permitting the Company to maintain sufficient cash to run the Company’spressure cycling technology business through March 2006. The Companybelieves that it will require approximately $1.5 million in cash to fund itsoperations through March 2006.

 

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**ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K**

 

**(a)  Exhibits:**

 

**EXHIBIT INDEX**

 
| **Exhibit  No.** | ** ** | ** **                                                                                                                                                                                            |   | **Reference**   |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|
|             |       |                                                                                                                                                                                                  |   |            |
| 3.1              |       | Amendment  to Restated Articles of Organization, effective September 14, 2004                                                                                                                    |   | Filed  herewith |
|             |       |                                                                                                                                                                                                  |   |            |
| 10.1             |       | Amendment  No. 1 to Asset Purchase Agreement (filed with the Commission as Exhibit 2.2  to the Company’s Current Report on Form 8-K dated September 20, 2004)                               |   | *               |
|             |       |                                                                                                                                                                                                  |   |            |
| 10.2             |       | Extension  Agreement (filed with the Commission as Exhibit 2.3 to the Company’s Current  Report on Form 8-K dated September 20, 2004)                                                       |   | *               |
|             |       |                                                                                                                                                                                                  |   |            |
| 10.3             |       | Letter  Agreement with SeraCare Life Sciences, Inc.                                                                                                                                                   |   | Filed  herewith |
|             |       |                                                                                                                                                                                                  |   |            |
| 31.1             |       | Principal  Executive Officer and Principal Financial Officer Certification Pursuant to  Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 |   | Filedherewith   |
|             |       |                                                                                                                                                                                                  |   |            |
| 32.1             |       | Principal  Executive Officer and Principal Financial Officer Certification Pursuant to  Item 601(b)(32) of Regulation S-K, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 |   | Filedherewith   |

 

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| * |   | In accordance with Rule 12b-32 under the Securities Exchange Act of  1934, as amended, reference is made to the documents previously filed with  the Securities and Exchange Commission, which documents are hereby  incorporated by reference. |
|---|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**(b) Reports on Form 8-K.**

 

TheCompany filed a Form 8-K, dated September 2, 2004, relative to itsannouncement that it received notice from the Nasdaq Stock Market indicatingthat the Company was not in compliance with the minimum stockholders’ equityrequirement under the Nasdaq National Market continued listing standards.

 

TheCompany filed a Form 8-K dated September 20, 2004 relating to (i) thecompletion of the sale of substantially all of the assets of its BBIDiagnostics and BBI Biotech business units to SeraCare, (ii) the resignation ofKevin W. Quinlan as President and Chief Operating Officer of the Company, (iii)the appointment of Richard T. Schumacher as President of the Company and (iv)the filing of required financial statements in connection with sale toSeraCare.

 

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**SIGNATURES**

 

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

 

 
|   | PRESSURE BIOSCIENCES, INC.                       |   |
|--------|--------------------------------------------------|--------|
|   | (Registrant)                                     |
|   |                                             |   |
|   |                                             |   |
| Date:  | November 22, 2004                           |   | By: | */s/ Richard T. Schumacher* | * * |
|   | Richard T. Schumacher                            |
|   | President, Chief Executive Officer and Treasurer |
|   | Principal Accounting and Financial Officer       |
|        |                                                  |        |  |  |  |  |

 

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**EXHIBIT INDEX **

 
| **Exhibit  No.** | ** ** |                                                                                                                                                                                                  |   | **Reference**   |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|
|             |       |                                                                                                                                                                                                  |   |            |
| 3.1              |       | Amendment  to Restated Articles of Organization, effective September 14, 2004                                                                                                                    |   | Filed  herewith |
|             |       |                                                                                                                                                                                                  |   |            |
| 10.1             |       | Amendment  No. 1 to Asset Purchase Agreement (filed with the Commission as Exhibit 2.2  to the Company’s Current Report on Form 8-K dated September 20, 2004)                               |   | *               |
|             |       |                                                                                                                                                                                                  |   |            |
| 10.2             |       | Extension  Agreement (filed with the Commission as Exhibit 2.3 to the Company’s Current  Report on Form 8-K dated September 20, 2004)                                                       |   | *               |
|             |       |                                                                                                                                                                                                  |   |            |
| 10.3             |       | Letter  Agreement with SeraCare Life Sciences, Inc.                                                                                                                                                   |   | Filed  herewith |
|             |       |                                                                                                                                                                                                  |   |            |
| 31.1             |       | Principal  Executive Officer and Principal Financial Officer Certification Pursuant to  Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 |   | Filedherewith   |
|             |       |                                                                                                                                                                                                  |   |            |
| 32.1             |       | Principal  Executive Officer and Principal Financial Officer Certification Pursuant to  Item 601(b)(32) of Regulation S-K, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 |   | Filedherewith   |

 

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| * |   | In accordance with Rule 12b-32 under the Securities Exchange Act of  1934, as amended, reference is made to the documents previously filed with  the Securities and Exchange Commission, which documents are hereby  incorporated by reference. |
|---|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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