Notes to Consolidated Financial Statements
(Unaudited)
|
1.
|
Description
of Business and Basis of Presentation
|
The Company
Protea Biosciences Group, Inc.
(referred to herein as “Protea,” “the Company,” “we,” “us” and “our”)
is an emerging growth, molecular information company that has developed a revolutionary platform technology that enables the direct
analysis, mapping and display of biologically active molecules in living cells and tissue samples. The technology platform offers
new, unprecedented capabilities useful to the pharmaceutical, diagnostic, clinical research, agricultural and life science industries.
“Molecular information” refers to the generation and bioinformatic processing of very large data sets, known as “big
data,” obtained by applying the Company’s technology to identify and characterize the proteins, metabolites, lipids
and other molecules which are the biologically active molecular products of all living cells and life forms.
Our technology is used to improve
pharmaceutical development and life science research productivity and outcomes, and to extend and add value to other technologies
that are used in research and development, such as three-dimensional tissue models, biomarker discovery, synthetic biologicals
and mass spectrometry. In particular, the Company believes that its ability to rapidly provide comprehensive molecular image-based
datasets addresses a universal need of the pharmaceutical, diagnostic and clinical research and life science industries.
The Company’s
commercial development is centered on three lines of business:
|
·
|
Molecular
information services – We believe that we are the commercial leader in providing
multi-modal Mass Spectrometry Imaging (“MSI”), combining Laser Ablation Electrospray
Ionization (“LAESI®”), Matrix Assisted Laser Desorption Ionization (“MALDI”)
and optical microscopy. Our proprietary services enable the identification and quantitation
of both small molecules (e.g., lipids and metabolites) and large molecules (e.g., proteins)
and our services portfolio, inclusive of MSI, proteomics, metabolomics, lipidomics and
bioinformatics is unique in the industry. Our clients include major pharmaceutical, chemical
and biotechnology companies;
|
|
·
|
LAESI®
instrument platform – We offer our proprietary LAESI® DP-1000 instrument, software
and bioanalytical consumables to corporate
and academic research laboratories,
and;
|
|
·
|
Molecular
diagnostics and clinical research – We apply our multi-modal MSI technologies and
workflows in partnership with top-tier medical research institutions to co-develop new
molecular diagnostic tests that the company believes can be used to improve the diagnosis
and prognosis of cancer and provide requisite information useful in predicting the outcome
of cancer treatment. Our current test development programs target the differential diagnosis
and prognosis of malignant melanoma and the molecular profiling of subpopulations of
cells in lung adenocarcinoma.
|
Basis of Presentation
The unaudited Consolidated
Financial Statements include the accounts of Protea Biosciences Group, Inc. and its wholly-owned subsidiary, Protea Biosciences,
Inc. In the opinion of management, these statements have been prepared on a basis consistent with the December 31, 2015 audited
Consolidated Financial Statements and include all material adjustments, consisting of normal recurring adjustments and the elimination
of material intercompany transactions and balances, necessary for a fair presentation of the Company’s consolidated financial
position and results of operations for the interim periods presented. These unaudited, interim, Consolidated Financial Statements
have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly,
they do not include certain information and footnotes normally required by accounting principles generally accepted in the United
States of America (“GAAP”) for complete consolidated financial statements.
The consolidated results of
operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results of operations
for the full fiscal year. These Consolidated Financial Statements and related footnotes should be read in conjunction with the
financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015 filed with the SEC on March 16, 2016 (“2015 Form 10-K”).
Certain amounts included in
the Company’s Consolidated Statement of Comprehensive Loss for the three and nine months ended September 30, 2015 have been
reclassified to conform to 2016 classifications.
Emerging Growth Company
The Company is an “emerging
growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) and may take advantage
of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging
growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section
404(b) of the Sarbanes-Oxley Act, and exemptions from the requirements of Sections 14A(a) and (b) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), to hold a nonbinding advisory vote of shareholders on executive compensation
and any golden parachute payments not previously approved.
The Company has elected to
use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS
Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates
for public and private companies until those standards apply to private companies. As a result of this election, our consolidated
financial statements may not be comparable to companies that comply with public company effective dates.
We will remain an “emerging
growth company” for up to five years following our initial public offering, that is, until February 2019, although we will
lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three-year
period, or if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30.
To the extent that we continue
to qualify as a “smaller reporting company,” as such term is defined in Rule 12b-2 under the Exchange Act, after we
cease to qualify as an emerging growth company, certain of the exemptions available to us as an emerging growth company may continue
to be available to us as a smaller reporting company, including: (1) not being required to comply with the auditor attestation
requirements of Section 404(b) of the Sarbanes Oxley Act; (2) scaled executive compensation disclosures, and; (3) the requirement
to provide only two years of audited financial statements instead of three years.
Critical Accounting Policies
Information with respect to
the Company’s critical accounting policies which management believes are the most important to the portrayal of the Company’s
reported results of operations and financial condition and that require management’s most difficult, subjective or complex
judgements, often as the result of the need to make estimates about the effects of matters that are inherently uncertain, is contained
in Part II, Item 7 of our 2015 Form 10-K.
Recently Issued Accounting
Pronouncements
There were no changes to the
recently issued accounting pronouncements as described in the consolidated financial statements included in our 2015 Form 10-K,
except as related to the Financial Accounting Standards Board’s (“FASB”) Accounting Standard Update 2015-03,
“Interest–Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU
2015-03”). This standard update, which was issued in April 2015, requires an entity to present debt issuance costs on the
balance sheet as a direct deduction from the related debt liability as opposed to an asset. Amortization of the costs will continue
to be reported as interest expense. The update is effective for annual reporting periods (including interim reporting periods
within those periods) beginning after December 15, 2015. Accordingly, the Company adopted ASU 2015-03 as of January 1, 2016; the
adoption of this accounting standard update did not have a material impact on the Company’s consolidated financial statements.
As mentioned above, as permitted
under the JOBS Act, the Company has elected to delay the adoption of new or revised accounting standards that have different effective
dates for public and private companies until those standards apply to private companies.
Going Concern
The Company’s Consolidated
Financial Statements included in this report have been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has funded its activities
to date almost exclusively from debt and equity financings as well as sales of certain assets. Substantially all of the Company’s
property and equipment are security for outstanding indebtedness. We will continue to require substantial funds to support our
molecular information services business and advance global commercialization of our LAESI® instrument platform and service
outstanding debt obligations, including scheduled interest and principal payments, and fulfilling payment obligations related
to debt that has reached maturity.
The Company has experienced
negative cash flows from operations since inception. Since inception, our operations have been funded primarily through proceeds
received from the issuance of debt and sale of equity securities in private placement offerings and, from time-to-time, sales
of certain assets. Management intends to continue to meet the Company’s operating cash flow requirements by raising additional
funds from the sale of equity or debt securities, the sale of certain assets, and possibly developing corporate development partnerships
to advance our molecular information technology development activities by sharing the costs of development and commercialization.
For example, we could also enter into a transaction such as a merger with a business that is complimentary to ours.
We have also worked closely
with various parties that financed our short- and long-term debt to obtain extensions and modifications that deferred or reduced
amounts due under these obligations. Such extensions and modifications have included, in certain cases, the issuance of warrants.
In addition, three members of the Company’s Board of Directors and the estate of a former board member guarantee payment
of the Company’s outstanding bank line of credit. Such extensions, modifications and guarantees have been an important part
of the Company’s ability to manage its liquidity and short-term capital resources. In addition, as part of these efforts,
the Company has delayed payments to certain vendors and suppliers. As of September 30, 2016 the Company’s accounts payable
balance of $1,947,739 included $1,608,934 that was overdue by terms, $1,303,710 of which that was more than 90 days past due (see
Note 16 Commitments and Contingencies for related information). Included in the $1,301,710 balance are amounts the Company owes
for rent, royalties due under certain license arrangements, legal fees and consulting. Also, as of September 30, 2016, the Company
was in an overdraft position of $233,246 with its bank. The Company has rectified the deficit position with its bank primarily
through the receipt of a cash advance from an existing stockholder (see Note 10 Obligations to Stockholders). As discussed below,
the Company was unable to repay its September 2016 10% OID Secured Promissory Note when it matured on October 15, 2016. The Company
is also in arrears on scheduled interest and principal payments on certain other debt obligations, as discussed in more detail
in Note 10 Obligations to Stockholders and Note 12 Debt. There can be no assurances that the Company will be able to continue to
obtain such extensions and modifications to outstanding debt, delay certain payments or use other methods such as guarantees by
or advances from stockholders, when and if necessary, to ensure the Company has the liquidity and capital resources necessary to
fund future operations and to continue as a going concern.
On May 27, 2016, the Company
filed a Form S-1 Registration Statement (“Form S-1”) with the SEC for a public offering of up to 3,100,000 shares
of the Company’s Common Stock with the goal of raising $15,000,000 from such offering. The offering was part of the Company’s
strategy to address its acute working capital needs, ensure it meets scheduled interest and principal payments on existing debt,
retire certain outstanding debt obligations, and, in general, provide the Company with the financial resources it needs to execute
its business objectives and expand its business. However, on August 26, 2016, the Company filed a petition with the SEC to withdraw
the Form S-1 due to market conditions.
On September 8, 2016, the Company
entered into a note purchase agreement (the “Note Purchase Agreement”) with an “accredited investor” (as
defined in Rule 501(a) under the Securities Act of 1933, as amended (the “Securities Act”) pursuant to which the investor
purchased a 10% original issue discount secured promissory note of the Company in the principal face amount of $720,000 due on
October 15, 2016 for an aggregate purchase price of $650,000 (the “September 2016 10% OID Secured Promissory Note”).
The Company used the proceeds from such note to repay the March 2016 Short-Term Convertible Note (see Note 12 Debt for detailed
information about this note) that matured on September 4, 2016. As of the date of this report, the Company is in discussions with
the investor regarding terms to extend the maturity date of the note and such investor has acknowledged that the Company is not
currently in default under the note. See Note 18 Evaluation of Subsequent events for related information.
As discussed under Note 9 Bank
Line of Credit, the Company has reclassified the outstanding balance of its bank line of credit to current liabilities as of September
30, 2016. As of that date, the outstanding balance of the line of credit was $3,000,000. This obligation has been presented as
a currently liability as the Company was in arrears with its interest at September 30, 2016. The Company has subsequently cured
the interest in arrears and the bank has not notified the Company of a default. The line of credit has a due date of July 2018.
On September 9, 2016, the Company
reached an agreement with the holders of certain short-term convertible notes with a principal amount totaling $1,892,500 (the
“Original Principal Amount”) issued in May and June 2016 (the “Summer 2016 Notes”) whereby the Summer 2016
Notes would be exchanged for new short-term convertible notes (the “Exchange Notes”). The Exchange Notes shall have
a principal amount totaling $1,987,125 which represents the Original Principal Amount plus accrued interest of 10% per annum for
each of the Summer 2016 Notes. In addition, the notes shall extend the maturity dates under the Summer 2016 Notes to a date no
later than March 31, 2017. In addition to the Exchange Notes, the holders of the Summer 2016 Notes are exchanging their related
warrants for warrants that contain full-ratchet anti-dilution provisions. No additional changes are being made to such forms of
warrants. In October 2016, the Company reached the same such agreement with two additional holders of those certain short term
convertible notes with a principal amount totaling $91,250 issued in May and July 2016. The Exchange Notes for such additional
investors shall have a principal amount totaling $95,813 with extended maturity dates and such investors shall exchange their existing
warrants for warrants that contain full-ratchet anti-dilution provisions. As mentioned above, one element of the Company’s
strategy to manage its liquidity and capital resources and otherwise continue as a going concern is to obtain extensions and modifications
to outstanding debt.
On September 26, 2016, the Company
issued a 20% original issue unsecured convertible note in the principal face amount of $156,250 due March 26, 2017 for an aggregate
purchase price of $125,000 resulting in proceeds of $107,500 net of transaction costs. See Note 12 Debt for additional information.
On October 31, 2016, the Company
received an advance from a related party, an officer of the Company and a Board of Director. To provide the Company with $255,000
to cover the deficit at the bank, the related party had to get a loan from the bank. The Company is responsible for repaying the
related party note directly to the bank by November 30, 2016.
In November 2016, the Company
issued 14,927,066 shares of its Common Stock and warrants to purchase an aggregate of 29,854,132 shares of Common Stock resulting
in gross proceeds of $1,119,530. See Note 18 Evaluation of Subsequent Events for additional information about the transaction.
We have sold most our investment
in AzurRx BioPharma, Inc. (“AzurRx”) as a means of obtaining additional cash. We raised proceeds of $1,502,100 during
the nine months ended September 30, 2016 through sales of our ownership interest in AzurRx. As of December 31, 2015, our ownership
interest in AzurRx was 25% on a fully-diluted basis; our interest in AzurRx has been reduced to 1.7% after the most recent sale,
which was in August 2016. As of the date of this report, the Company holds 125,757 shares of AzurRx common stock, 100,000 of which
is subject to an option agreement under which a counterparty, who is the CEO of AzurRx and a former board of director of the Company,
has an option to purchase these shares from the Company for $1.00 per share from January 4, 2016 through January 4, 2021. See Note
3 Sales of Investment for additional information related to the Company’s investment in AzurRx, including AzurRx completing
an initial public offering on October 11, 2016.
Certain of the Company’s
outstanding financial instruments contain anti-dilution provisions that may be triggered by the issuance of Common Stock or financial
instruments such as Preferred Stock and warrants that are convertible or otherwise exchangeable for shares of the Company’s
Common Stock. As a result of the November 2016 share issuances anti-dilution provisions under certain outstanding financial instruments
have been triggered. Under such provisions the Company shall issue 49,500,832 shares of Common Stock resulting in significant dilution
to investors without such protection. See Note 5 Fair Value of Financial Assets and Liabilities – Derivative Financial Instruments
and Note 18 Evaluation of Subsequent Events for additional information. See also Note 4 Derivative Liabilities for additional information
related to the estimated fair value of the anti-dilution provisions included in the Company’s financial instruments that
were outstanding as of September 30, 2016.
Aside from further issuances
of its Common Stock, the Company is exploring other options for obtaining additional financial resources such as the issuances
of short-term debentures and Preferred Stock.
There can be no assurance that
we will be successful in raising enough funds to sustain operations.
Since inception, we have been
successful in raising funds and selling certain assets to fund our operations and believe that we will be successful in obtaining
the necessary capital resources to fund our operations going forward; however, there can be no assurances that we will be able
to secure any additional funding or capital resources or the terms and conditions of any such arrangements. These factors raise
substantial doubt about our ability to continue as a going-concern.
The accompanying Consolidated
Financial Statements do not include any adjustment that might be necessary if the Company is unable to continue as a going concern.
The Company recognizes revenue
from three major components: molecular information services, LAESI® instrument platform and research products.
|
|
Three Months Ended
|
|
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Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Molecular information services
|
|
$
|
452,489
|
|
|
$
|
206,601
|
|
|
$
|
1,164,362
|
|
|
$
|
596,309
|
|
LAESI® instrument platform
|
|
|
4,160
|
|
|
|
155,550
|
|
|
|
191,081
|
|
|
|
461,537
|
|
Research products
|
|
|
63,259
|
|
|
|
60,537
|
|
|
|
221,567
|
|
|
|
213,447
|
|
Gross revenue
|
|
$
|
519,908
|
|
|
$
|
422,688
|
|
|
$
|
1,577,010
|
|
|
$
|
1,271,293
|
|
In the first quarter of 2016,
the Company notified AzurRx of its intent to convert 71 shares of its Series A convertible preferred stock, $0.0001 par value
per share (“AzurRx Preferred Stock”), the remaining shares of AzurRx Preferred Stock held by the Company, into shares
of AzurRx common stock, $0.0001 par value per share (“AzurRx Common Stock”), pursuant to the terms and conditions
of the Certificate of Designation of AzurRx. The conversion rate was 24,393.65 shares of AzurRx Common Stock per share of AzurRx
Preferred Stock. The Company received 1,731,949 shares of AzurRx Common Stock upon conversion. The Company had 100,749 shares
of Common Stock left, from the 2015 conversion and stock sales, to sale in 2016. The Company sold 1,016,941 shares of AzurRx Common
Stock during the first quarter of 2016 receiving net proceeds of $637,100. The Company sold an additional 550,000 shares during
the second quarter of 2016 receiving net proceeds of $675,000. In the third quarter of 2016, the Company sold an additional 140,000
shares of AzurRx Common Stock generating net proceeds of $190,000.
As of September 30, 2016, the
Company’s ownership interest in AzurRx included 125,757 shares of AzurRx Common Stock, which represented an ownership stake
in AzurRx of 1.7% (on a fully-diluted basis). 100,000 of these shares are subject to an option agreement under which a counterparty,
who is the CEO of AzurRx and a former board of director of the Company, has the option to purchase these shares from the Company
for $1.00 per share from January 4, 2016 through January 4, 2021.
The Company previously accounted
for its investment in AzurRx using the “equity method.” However, considering the reduction in the Company’s
interest in AzurRx during the three months ended March 31, 2016, the Company discontinued the use of the “equity method”
of accounting for this investment and began accounting for the investment under the cost method (as fair market value for these
shares was not readily determinable).
On October 11, 2016, AzurRx
completed an initial public offering (“AzurRx IPO”). As of that date, shares of AzurRx common stock are listed on
the National Association of Securities Dealers Automated Quotations (“NASDAQ”) Capital Market under the ticker symbol
“AZRX”.
|
4.
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Derivative
Liabilities
|
The Company does not use derivative
instruments to hedge exposures to cash flow, market or foreign currency risks. However, the Company has certain financial instruments
that are embedded derivatives associated with certain capital raises and common stock purchase warrants. The Company evaluates
all of its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify
as derivatives to be separately accounted for in accordance with FASB Accounting Standards Codification 815-10-05-4 and 815-40.
This accounting treatment requires that the carrying amount of any embedded derivatives be recorded at fair value at issuance
and marked-to-market at each balance sheet date. If the fair value is recorded as a liability, as is the case with the Company,
the change in the fair value during the period is recorded as either income or expense. Upon conversion or exercise, the derivative
liability is marked to fair value at the conversion date and then the related fair value is reclassified to equity. See also Note
5 Fair Value of Financial Assets and Liabilities – Derivative Financial Instruments.
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5.
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Fair Value
of Financial Assets and Liabilities – Derivative Financial Instruments
|
We measure the fair value of
financial assets and liabilities in accordance with GAAP, which defines fair value, establishes a framework for measuring fair
value and requires certain disclosures about fair value measurements.
GAAP defines fair value as
the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
GAAP also establishes the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.
The three levels of inputs
used to measure fair value:
Level
1 – quoted prices in active markets for identical assets or liabilities
Level
2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level
3 – inputs that are unobservable (for example, the probability of a capital raise in a “binomial” methodology
for valuation of a derivative liability directly related to the issuance of common stock warrants)
The Company has entered into
certain financial instruments, such as convertible debentures and equity financing arrangements, which include variable conversion
rates, include anti-dilution provisions (“down-round protection”) and detachable warrants that are: (i) not afforded
equity classification; (ii) embody risks not clearly and closely related to host contracts, or; (iii) may be net-cash settled
by the counterparty. Such derivative liabilities are recorded at fair value at the issuance date. Subsequent changes in fair value
are recorded through the consolidated statement of comprehensive loss. For the Company, the Level 3 financial liability is the
derivative liabilities related to certain Common Stock and warrants that include “down-round protection” that are
valued using the “Monte Carlo Simulation” technique. While the majority of inputs are Level 2, this technique
necessarily incorporates a capital raise assumption which is unobservable and, therefore, a Level 3 input.
As of September 30, 2016, a
range of key quantitative assumptions related to the Common Stock and warrants that include “down round protection”
are as follows:
|
|
Expected life (years)
|
|
Risk-free rate
|
|
Volatility
|
|
|
Probability of a capital raise
|
|
Derivative liabilities
|
|
0.25 – 4.50
|
|
0.29% and 0.77%
|
|
|
79.52
|
%
|
|
|
100
|
%
|
Financial Assets
and Liabilities Measured at Fair Value on a Recurring Basis
The Company’s derivative
liabilities are related to certain Common Stock issuances that included “down-round protection”, warrants issued in
conjunction with certain Common Stock and debt issuances, including warrants granted to the Placement Agent related to such issuances,
that included “down-round protection”, and the variable conversion rate feature of certain short-term convertible
debentures. See also Note 12 Debt, Note 13 Common Stock, and Note 15 Warrants.
The derivative liabilities
measured at fair value on a recurring basis are summarized below:
|
|
Fair value measurements as of September
30, 2016
|
|
|
|
Carrying value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liabilities – Common
Stock
|
|
$
|
4,097,278
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
4,097,278
|
|
Derivative liabilities – Warrants
|
|
|
518,753
|
|
|
|
–
|
|
|
|
–
|
|
|
|
518,753
|
|
Derivative liabilities –
Convertible debentures
|
|
|
313,629
|
|
|
|
–
|
|
|
|
–
|
|
|
|
313,629
|
|
Total
|
|
$
|
4,929,660
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
4,929,660
|
|
|
|
Fair value measurements as of December
31, 2015
|
|
|
|
Carrying value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liabilities – Common
Stock
|
|
$
|
777,002
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
777,002
|
|
Derivative liabilities – Warrants
|
|
|
185,399
|
|
|
|
–
|
|
|
|
–
|
|
|
|
185,399
|
|
Total
|
|
$
|
962,401
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
962,401
|
|
The Company’s assessment
of the probability of future capital raises is considered to be high. Such capital raise activities are estimated to take place
at levels that could possibly result in anti-dilution triggers—currently at $0.075 per share, based on the November sale
of Common Shares—especially considering the current market price for the Company’s Common Stock (which is currently
less than $0.25 per share). The assumptions used for estimating future capital raises could be materially different from the actual
results. Any such differences could materially impact the derivative liabilities and have a materially adverse effect on the Company’s
results of operations and financial condition in the near term.
As a result of the November
2016 share issuances, anti-dilution provisions under certain outstanding financial instruments have been triggered, which was
considered in the assumptions for future capital raise activity at September 30, 2016. See Note 18 Evaluation of Subsequent Events
for additional information.
The table below provides a
summary of the changes in fair value of the derivative liabilities measured at fair value on a recurring basis:
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
|
|
Derivative liabilities
|
|
|
measurements
|
|
|
|
Common
|
|
|
|
|
|
Convertible
|
|
|
using Level 3
|
|
|
|
stock
|
|
|
Warrants
|
|
|
debt
|
|
|
inputs
|
|
Balance as of January 1, 2016
|
|
$
|
777,002
|
|
|
$
|
185,399
|
|
|
$
|
–
|
|
|
$
|
962,401
|
|
Unrealized loss on derivative liabilities outstanding
as of December 31, 2015
|
|
|
3,320,276
|
|
|
|
279,025
|
|
|
|
–
|
|
|
|
3,599,301
|
|
Fair value of variable conversion rate for convertible
debentures issued in 2016 (a)
|
|
|
–
|
|
|
|
–
|
|
|
|
313,629
|
|
|
|
313,629
|
|
Fair value of derivative liabilities
associated with other financial instruments issued in 2016 (b)
|
|
|
–
|
|
|
|
54,329
|
|
|
|
–
|
|
|
|
54,329
|
|
Balance as of September 30, 2016
|
|
$
|
4,097,278
|
|
|
$
|
518,753
|
|
|
$
|
313,629
|
|
|
$
|
4,929,660
|
|
|
(a)
|
See also Note 12 Debt
|
|
(b)
|
See also Note 15 Warrants
|
Basic and diluted loss per
common share is computed based on the weighted average number of shares of Common Stock outstanding, or 133,824,867
and
133,605,888 for the three and nine months ended September 30, 2016, respectively; for the comparative periods in 2015, weighted
average number of shares of Common Stock outstanding was 115,839,765
and 105,923,915 respectively. Common share equivalents
(which may consist of stock options, warrants and convertible debt) are excluded from the computation of diluted loss per share
for all periods presented because including them would be anti-dilutive. Common share equivalents that could potentially dilute
basic earnings per share in the future, and which were excluded from the computation of diluted loss per share, were 98,285,387
and 86,556,934 shares as of September 30, 2016 and September 30, 2015, respectively.
Inventory represents finished
goods and work in progress. Finished goods and work in progress consist primarily of specifically identifiable items that are
valued at the lower of cost or fair market value using the first-in, first-out (FIFO) method. Inventory consists of the following
at:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Work-in-progress
|
|
$
|
135,902
|
|
|
$
|
98,437
|
|
Finished goods
|
|
|
9,710
|
|
|
|
12,650
|
|
Total inventory
|
|
$
|
145,612
|
|
|
$
|
111,087
|
|
|
8.
|
Property
and Equipment
|
Property and equipment and
leasehold improvements are capitalized at cost and depreciated using the straight-line method (the Company used the double-declining
balance method for property and equipment placed in service prior to January 2011) over estimated lives as follows:
Equipment
|
5 –
10 years
|
Vehicles
|
5 years
|
Leasehold improvements
|
Life of lease
|
Software
|
3 years
|
Property and equipment consists
of the following:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Lab equipment
|
|
$
|
6,526,399
|
|
|
$
|
6,617,038
|
|
Computer equipment
|
|
|
552,423
|
|
|
|
540,212
|
|
Office equipment
|
|
|
191,248
|
|
|
|
191,248
|
|
Leasehold improvements
|
|
|
212,730
|
|
|
|
212,730
|
|
Accumulated depreciation
|
|
|
(4,725,229
|
)
|
|
|
(4,934,321
|
)
|
Property and equipment, net
|
|
$
|
2,757,571
|
|
|
$
|
2,626,907
|
|
For the three and nine months
ended September 30, 2016, depreciation expense was $177,359 and $496,487, respectively. For the three and nine months ended September
30, 2015, depreciation expense was $176,561 and $532,366, respectively.
The Company has a line of credit
with a bank that is authorized to $3,000,000. The interest rate is variable and equal to 0.75% plus prime with a minimum rate
of 5.87% per annum. The line of credit is subject to an annual review and certain covenants. Borrowings under the line are secured
by the personal guarantee of three board members and the estate of a former board member. On June 20, 2016, the Company and the
bank entered into an agreement that established July 12, 2018 as the maturity date for the outstanding balance of the line of
credit, which was $3,000,000 as of September 30, 2016 and December 31, 2015. As a result of the agreement, the outstanding
balance of the line of credit was reclassified to long-term liabilities as of the date of the agreement; previously, the “payable
upon demand” payment terms required the outstanding balance to be presented as a current liability.
The Company’s line of
credit with the bank requires the Company to adhere to certain customary covenants. For example, the bank can issue a default
notice to the Company and accelerate payment of the outstanding balance if the Company fails to make a scheduled interest payment
to the bank, is in default under any agreement with a third party which materially and adversely affects the Company’s property,
operations or financial condition, or the Company does not make timely payments on property that is useful its business, including
maintenance and repairs of such property.
As mentioned above, the Company
was not able to repay the September 2016 10% OID Promissory Note when it matured on October 15, 2016. Although the Company
is actively engaged with the lender regarding extending the maturity of the note, the Company’s inability to repay the note
could be considered a default condition under the line of credit. In addition, as detailed in Note 16 Commitments and Contingencies,
the Company is significantly in arrears on rent payments to its landlord for the Company’s office and laboratory space. The
Company is also significantly in arrears on certain other accounts payable, as discussed in Note 1 Description of Business and
Basis of Presentation. The Company’s inability to make timely payments to certain vendors and suppliers, including its landlord,
could also be considered a default condition. Considering these factors, the Company has reclassified the balance of the line of
credit to current liabilities as of September 30, 2016.
As of the date of this report,
the Company has made all scheduled payments to the bank and the bank has not issued any notice to the Company regarding any default
or possible default under the line of credit.
|
10.
|
Obligations
to Stockholders
|
During the nine months ended
September 30, 2016, the Company received advances equal to an aggregate of $235,540
from various directors and current
stockholders of the Company. The Company repaid $94,375
to three
directors during this period, which included payment
of $52,500
of the $2,574,500
in aggregate advances and other loans payable to stockholders outstanding as of December
31, 2015. As of September 30, 2016, the outstanding balance of advances and other loans payable to stockholders was $2,710,220,
which included two interest-bearing promissory notes with a combined outstanding balance of $1,111,556
with two stockholders
and $1,598,664
in outstanding advances from other stockholders. The advances have no terms of repayment and do not bear
interest.
On May 31, 2016, one of the outstanding interest-bearing promissory notes in the amount $200,000 with
a stockholder reached maturity. In June 2016, a payment was made of $12,500 to pay accrued interest through February 2016. In July
2016, a payment of $12,500 was made to cover accrued interest payable from March 2016 through June 2016 as well as $5,444 applied
against the outstanding principal balance of the note. In early August 2016, the Company and the stockholder reached a verbal agreement
to extend the maturity date to September 30, 2016, at which time the Company would make payment to the stockholder for the deferred
amount, $194,556, as well as interest accrued on the balance through September 30, 2016 of $4,864. As of the date of this report,
the Company is in discussions with the related party regarding terms to extend the maturity date of the note and such related party
has acknowledged that the Company is not currently in default under the note.
On October 31, 2016, the Company
received an advance from a related party, an officer of the Company and a Board of Director. To provide the Company with $255,000
to cover the deficit at the bank, the related party had to get a loan from the bank. The Company is responsible for repaying the
related party note directly to the bank by November 30, 2016. See Note 18 Evaluation of Subsequent Events.
See Note 13
Common Stock
related to the conversion of accrued interest on promissory notes issued by the Company to Summit Resources, Inc. (“Summit”),
an affiliate of Steve Antoline, a member of the Company’s Board of Directors, and accounts payable by the Company to Summit,
into shares of Common Stock.
See also Note 18 Evaluation
of Subsequent Events for activity related to advances and other loans payable to stockholders after September 30, 2016.
|
11.
|
Other
Current Liabilities
|
Other current liabilities consist
of the following at:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Accrued expenses
|
|
$
|
158,850
|
|
|
$
|
28,728
|
|
Accrued interest
|
|
|
117,130
|
|
|
|
108,731
|
|
Accrued warranty expense
|
|
|
54,293
|
|
|
|
50,000
|
|
Accrued payroll and benefits
|
|
|
148,890
|
|
|
|
124,183
|
|
Unearned revenue
|
|
|
72,086
|
|
|
|
79,666
|
|
Other payables and accrued expenses
|
|
$
|
551,249
|
|
|
$
|
391,308
|
|
Short-Term Convertible Notes
Issued in Second and Third Quarters 2016 and Related Exchange Notes
In the second quarter of 2016,
the Company issued a series of 20% original issue discount unsecured convertible debentures (the “Second Quarter 2016 Convertible
Debentures”) to 34 Accredited Investors pursuant to the terms and conditions of a Securities Purchase Agreement by between
the Company and each Accredited Investor. The face amount of the underlying debentures issued was $1,950,000 and the aggregate
gross cash proceeds to the Company were $1,560,000; each debenture has a six-month maturity from the date of issuance; maturities
for the Second Quarter 2016 Convertible Debentures include $448,750, $415,000, $605,000, $481,250 in November 2016 and December
2016. In addition to the original issue discount on these debentures, which totaled $390,000, the debentures accrue additional
interest at a rate of 10.0% per annum. At the Company’s option, assuming certain conditions are met, the Company can issue
shares of Common Stock in lieu of making cash interest payments. In addition, for debentures that reach maturity (i.e., they are
not converted to Common Stock), the Company has the option to pay the principal and any unpaid accrued interest in shares of Common
Stock, assuming certain conditions are met. Each debenture may be converted into Common Stock voluntarily by the holder at any
time after issuance and until the debenture is no longer outstanding. However, if the Company should complete a public offering
of Common Stock (or any security convertible into or exercisable or exchangeable for shares of Common Stock) before maturity of
any of the underlying debentures, on the date of closing of such offering any outstanding principal amount and accrued and unpaid
interest automatically converts into shares of the Company’s Common Stock at the applicable conversion rate (“Automatic
Conversion”). Each debenture is voluntarily convertible by the holder into shares of Common Stock at $0.25 per share and,
for Automatic Conversion, the conversion rate is the lower of $0.25 per share or a per share rate that is equal to 85% of the price
per share to the public of any Common Stock sold in a public stock offering (for either method of conversion, the conversion amount
being the face amount of the note plus any accrued but unpaid interest at the conversion date). The debentures sold in September
2016 (the “September 2016 10% OID Secured Promissory Note”), which had a face amount of $156,250, were sold subject
to the Company obtaining shareholder approval to increase the number of authorized shares of Common Stock; as discussed in Note
18 Evaluation of Subsequent Events, the Company obtained shareholder approval for the increase in October 2016. See Note 15 Warrants
related to warrants that were granted to the investors in the Second Quarter 2016 Convertible Debentures and the Placement Agent
for these debentures.
On July 29, 2016, the Company
sold to two Accredited Investors an aggregate face amount of $63,750 of its 20% original issue discount unsecured convertible debentures
(the “July 2016 Convertible Debentures” together with the Second Quarter 2016 Convertible Debentures, the “Summer
2016 Convertible Debentures”), for aggregate gross cash proceeds of $51,000, pursuant to the terms and conditions of a Subscription
Agreement by and between the Company and such investors. The debentures have a term of six months from the date of issuance and
the principal amount of $63,750 bears interest at a rate of 10% per annum, payable upon conversion as described below and at maturity.
The Company may pay all or any portion accrued interest that is due in cash or, at the Company’s option, in shares of Common
Stock of the Company at a conversion price of $0.25 per share, or a combination thereof; provided that the Company may pay interest
in shares only if certain conditions specified in the debenture are satisfied. The debentures are convertible, in whole or in part,
into shares of Common Stock at the option of the holder, at any time and from time to time, at a conversion price equal to the
$0.25 per share (as adjusted for forward or reverse stock splits, stock dividends or other similar proportionately-applied change).
In addition, each of the investors
received a three-year warrant to purchase a number of shares of Common Stock equal to 75% of the shares of Common Stock initially
issuable upon conversion of the debenture, at an exercise price of $0.325 per share (as adjusted for forward or reverse stock splits,
stock dividends or other similar proportionately-applied change and subject to customary weighted-average anti-dilution price adjustment).
The relative fair value of these warrants was estimated to be $731,
which was recorded as a discount to the Summer
2016 Convertible Debentures and is being accreted to interest expense over the six-month term of the related notes. See also Note
15 Warrants.
In connection with the issuance
of the Summer 2016 Convertible Debentures, the Company paid to a broker dealer registered with the Financial Industry Regulatory
Authority (“FINRA”) that acted as the placement agent an aggregate of approximately $191,400
in cash compensation,
representing fees and an expense allowance. In addition, the Company agreed to issue warrants to purchase an aggregate of approximately
1,409,625 shares of Common Stock to the placement agent (or its designees) with an exercise price of $0.25
per share
and a term of three (3) years. The relative fair value of these warrants was estimated to be $3,077
which was recorded
as a discount to the Summer 2016 Convertible Debentures. See also Note 15 Warrants.
On September 9, 2016, the Company
reached an agreement with certain holders of the Second Quarter 2016 Convertible Debentures pursuant to which such debentures were
exchanged for new short-term convertible notes (the “Exchange Notes”). The Exchange Notes shall have a principal amount
totaling $1,987,125 which represents the original principal amount plus accrued interest of 10% per annum for each of the Second
Quarter 2016 Convertible Debentures. In addition, the Exchange Notes shall extend the maturity dates under the Second Quarter 2016
Convertible Debentures to a date no later than March 31, 2017. In addition to the Exchange Notes, the holders of the Second Quarter
2016 Convertible Debentures are exchanging their related warrants for warrants that contain full-ratchet anti-dilution provisions.
No additional changes are being made to such forms of warrants. In October 2016, the Company reached the same such agreement for
the exchange of notes and warrants with two additional holders of the Summer 2016 Convertible Debentures.
The relative fair value of the
new warrants was estimated to be $287,792,
which was recorded as a discount to the Exchange Notes and is being accreted
to interest expense over the six-month term of the related notes. The unaccreted balance of the fair value of the warrants issued
with Second Quarter 2016 Convertible Debentures was recorded as an adjustment to interest expense upon cancellation of the warrants.
See also Note 15 Warrants and Note 18 Evaluation of Subsequent Events.
September 2016 10% OID Secured
Promissory Note
On September 8, 2016, the Company
entered into a Note Purchase Agreement with an Accredited Investor pursuant to which the investor purchased a 10% original issue
discount secured promissory note of the Company in the principal face amount of $720,000 due October 15, 2016 for an aggregate
purchase price of $650,000 (“September 2016 10% OID Secured Promissory Note”). The principal balance of $720,000 bears
interest at a rate of 10% per annum, payable on the October 15, 2016 maturity date. The Company used the proceeds from the offering
to repay the March 2016 Short-Term Convertible Note (see below) that matured on September 4, 2016.
The
Company’s obligations to repay and otherwise perform its obligations under the September 2016 10% OID Secured Promissory
Note are secured by a continuing first priority lien and security interest in the accounts receivable and inventory of the Company
and its subsidiary, Protea Biosciences, Inc. (the “Subsidiary”) pursuant to the terms of a Security Agreement among
the Company, the Subsidiary, and the Lender (the “Security Agreement”) and include the specific assets now owned or
hereafter acquired of the Company and the Subsidiary listed on the Exhibit 1 to the Security Agreement. The Subsidiary also provided
the Lender with a full recourse guaranty for the prompt performance of all obligations of the Company, pursuant to the terms of
a guaranty agreement.
As of the date of this
report, the Company is in discussions with the investor regarding terms to extend the maturity date of the note and such
investor has acknowledged that the Company is not currently in default under the note. If the Company is unable to
successfully negotiate an extension to the note agreement, the Accredited Investor may assert all of its rights and remedies
available under the Security Agreement and applicable law. See Note 18 Evaluation of Subsequent events for
related information.
September 2016 20% OID Note
On
September 26, 2016, the Company entered into a Subscription Agreement with an Accredited Investor pursuant to which the investor
purchased a 20% original issue discount unsecured convertible debenture of the Company in the principal face amount of $156,250
due March 26, 2017 for an aggregate purchase price of $125,000 (the “September 2016 20% OID Note”). The principal
balance of $156,250 bears interest at a rate of 10% per annum, payable on the March 26, 2017 maturity date. The debenture may
be converted into Common Stock by the holder at any time after issuance and until the debenture is no longer outstanding, However,
if the Company should complete a public offering of Common Stock (or any security convertible into or exercisable or exchangeable
for shares of Common Stock) before maturity of any of the underlying debentures, on the date of closing of such offering any outstanding
principal amount and accrued and unpaid interest automatically converts into shares of the Company’s Common Stock at the
applicable conversion rate (“Automatic Conversion”). The debenture is voluntarily convertible by the holder into shares
of Common Stock at $0.25 per share and, for Automatic Conversion, the conversion rate is the lower of $0.25 per share or a per
share rate that is equal to 85% of the price per share to the public of any Common Stock sold in a public stock offering (for
either method of conversion, the conversion amount being the face amount of the debenture plus any accrued but unpaid interest
at the conversion date). In addition, the investor received a warrant to purchase 468,750 shares of the Company’s Common
Stock at an exercise price of $0.325, subject to adjustment, for a period of three years from the date thereof. The relative fair
value of these warrants was estimated to be $1,792,
which
was recorded as a discount to the September 2016 20% OID Notes and is being accreted to interest expense over the six-month term
of the notes. See also Note 15 Warrants.
In connection with such issuance,
the Company paid to a broker dealer registered with FINRA that acted as the placement agent an aggregate of approximately $15,000
in cash compensation, representing fees and an expense allowance. In addition, the Company agreed to issue warrants to purchase
an aggregate of 109,375 shares of Common Stock to such placement agent. As of the date of this report, these warrants had not
been issued to the placement agent. However, the relative fair value of these warrants was estimated to be $239,
which
was recorded as a discount to the September 2016 20% OID Note and is being accreted to interest expense over the six-month term
of the notes. See also Note 15 Warrants.
Short-Term Convertible Note
issued in March 2016
On March 4, 2016, the Company
issued to St. George Investments LLC (“St. George Investments”), an Accredited Investor, a 23% original issue discount
unsecured convertible note (the “March 2016 Convertible Note”) due September 4, 2016, with a principal amount
of $655,000, for aggregate gross cash proceeds of $500,000, pursuant to the terms and conditions of a Securities Purchase Agreement
dated March 4, 2016 between the Company and St. George Investments. In addition to the original issue discount of $150,000, the
March 2016 Convertible Note principal amount included legal fees of St. George Investments of $5,000. In connection with the issuance
of the March 2016 Convertible Note, the Company issued to St. George Investments: (a) 108,696 shares of Company’s Common
Stock (with a value of $27,174), and (b) a five-year warrant to purchase up to 1,637,500 shares of Common Stock at an exercise
price of $0.75 per share, subject to adjustment in certain events as provided therein (“St. George Investments Warrant”).
Upon an event of default as defined in the March 2016 Convertible Note, the outstanding balance is convertible at the holder’s
option into Common Stock at a conversion price equal to (initially) 70% of the lowest closing bid price for the Common Stock in
the twenty (20) trading days immediately preceding the conversion, subject to adjustment in certain events as provided therein.
The relative fair value of
the St. George Investments Warrant was estimated at $12,773, which was recorded as a discount to the March 2016 Convertible Note
and accreted to interest expense over the term of the note. The relative fair value of the Common Stock issued to St. George Investments
was estimated at $27,174, which was recorded as a discount against the note and accreted over the term of the note. The Company
recognized accretion expense of $38,019
related to the fair value of these warrants, Common Stock and transaction costs
and interest expense of $51,613 related to the original issue discount during the three months ended September 30, 2016. For the
nine months ended September 30, 2016, the Company recognized accretion expense of $104,947
and interest expense of $150,000
related to this note.
On
September 6, 2016, the March 2016 Convertible Note reached maturity and the Company paid $655,000 to St. George Investments LLC
in satisfaction of the obligation
(see also
September 2016
10% OID Secured Promissory Note
above).
In connection with the sale
of the March 2016 Convertible Note, the Company paid to a Placement Agent an aggregate of approximately $60,000 in cash compensation,
representing fees and an expense allowance. In addition, the Company agreed to issue warrants to purchase an aggregate of approximately
491,250 shares of Common Stock to the Placement Agent (or its designees) with an exercise price of $0.25 per share and a term
of three (3) years. As of the date of this report, the warrants had not been issued the Placement Agent. However, the relative
fair value of these warrants was estimated to be $2,456
,
which was recorded as additional paid-in capital.
See Note 15 Warrants below
related to the triggering of an anti-dilution provision included in the St. George Investments Warrant in May 2016.
Convertible Promissory Notes
with WVJITB
The Company has outstanding
two convertible promissory notes with the West Virginia Jobs Investment Trust Board (“WVJITB”). One is an 18-month
note issued in March 2012 with a principal amount of $290,000 (“March 2012 Promissory Note”) and the second a 3-month
note issued in April 2012 with principal amount of $400,000 (“April 2012 Promissory Note”). As of September 30, 2016,
the principal balance of the March 2012 Promissory Note was $290,000 with the principal balance of the April 2012 Promissory Note
having been reduced to $300,000 as the result of a payment made by the Company in 2013. Since the issuance of these notes, the
Company and WVJITB have enacted several addendums to both notes, including extending the maturity dates and reducing the rate
at which the notes are convertible into shares of Common Stock. Note 5 Long-term Debt in Notes to Consolidated Financial Statements
included in Part II, Item 8 of the Company’s 2015 Form 10-K provides details regarding these addendums.
On December 31, 2015, the Company
and WVJITB entered into an addendum whereby the maturity dates of both promissory notes were extended to March 31, 2016. In return
for the extension, in February 2016, the Company granted WVJITB a five-year warrant to purchase 590,000 shares of the Company’s
Common Stock at an exercise price of $0.40 per share. Effective as of March 31, 2016, the Company and WVJITB entered into another
addendum whereby the maturity dates of both promissory notes were extended to September 30, 2016. In return for the extension,
the Company granted WVJITB another five-year warrant to purchase 590,000 shares of the Company’s Common Stock at an exercise
price to be determined by the Board of Directors. This addendum also granted WVJITB the option to convert $200,000 of the $300,000
outstanding principal balance of the April 2012 Promissory Notes to Common Stock at $0.50 per share at or prior to the revised
maturity date. The Company would be required to pay WVJITB the remaining (unconverted) principal balance and all accrued and unpaid
interest in cash on September 30, 2016. The warrants granted to WVJITB (the warrant granted in February 2016 and the one granted
in May 2016) expire upon the Company completing an underwritten offering that results in net cash proceeds to the Company of at
least $10.0 million, if such a transaction is completed before the end of the five-year term. Regarding the warrant granted to
WVJITB in February 2016 and May 2016, the relative fair value at the issuance date, and the corresponding liability recorded for
the warrant, was estimated at $2,478.
On October 20, 2016, the WVJITB
advised the Company that it would grant an additional extension for the maturity dates of both promissory notes. As of the date
of this report, an addendum documenting the terms and conditions of the extension has not been finalized.
Promissory Note with WVDO
As of September 30, 2016, the Company
was eight months is arrears on scheduled principal and interest payments on an outstanding note payable to the West Virginia Development
Office (“WVDO”). The deferral amount totaled $64,278. As of the date of this report, the Company had fallen another
two month behind, or an additional $16,070.
In October 2016, the Company and
WVDO reached a verbal agreement whereby the Company would make a payment to WVDO no later than November 30, 2016 for the deferred
amount as well as scheduled payments for October and November 2016.
Capital Leases
In June 2016, the Company entered
into a new four-year capital lease for three pieces of equipment that had a total estimated fair value of $549,543. The equipment
is used to generate services revenue.
From time to time, in the normal
course of business, the Company enters into capital leases to finance equipment. As of September 30, 2016, the Company had seven
capital lease obligations outstanding with imputed interest rates ranging from 5.04% to 9.45%. The capital leases require 24 –
60 monthly payments and expire in December 2016 – June 2020. These leases are secured by equipment with an aggregate cost
of $1,868,809.
As of September 30, 2016, the Company was current on all capital lease payments.
Total outstanding debt, including
capital lease obligations, are as follows (table excludes the outstanding balance of the bank line of credit as of December 31,
2015 because it was presented as a current liability at that time, as discussed in Note 9 Bank Line of Credit; table also
excludes obligations to stockholders, which are detailed in Note 10
Obligations to Stockholders and presented as a separate
line item on the Company’s Consolidated Balance Sheets):
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Note Payable to the WVDO
|
|
$
|
92,873
|
|
|
$
|
100,656
|
|
Note Payable to the WVEDA (a)
|
|
|
143,312
|
|
|
|
143,312
|
|
Note Payable to the WVIJDC (b)
|
|
|
139,229
|
|
|
|
139,229
|
|
Note Payable to the WVEDA (a)
|
|
|
572,148
|
|
|
|
572,148
|
|
Note Payable to the WVIJDC (b)
|
|
|
581,987
|
|
|
|
581,987
|
|
Note Payable to the WVJITB
|
|
|
290,000
|
|
|
|
290,000
|
|
Note Payable to the WVJITB
|
|
|
300,000
|
|
|
|
300,000
|
|
Note Payable to the WVEDA (a)
|
|
|
168,362
|
|
|
|
168,362
|
|
Convertible notes (c)
|
|
|
2,982,964
|
|
|
|
–
|
|
Capital leases
|
|
|
1,048,122
|
|
|
|
754,058
|
|
Total
|
|
|
6,318,997
|
|
|
|
3,049,752
|
|
Less: current portion
|
|
|
(4,086,145
|
)
|
|
|
(1,323,594
|
)
|
Less: unamortized original-issue discount
|
|
|
(50,554
|
)
|
|
|
–
|
|
Less: unamortized debt issuance costs
|
|
|
(344,705
|
)
|
|
|
–
|
|
Long-term portion
|
|
$
|
1,837,593
|
|
|
$
|
1,726,158
|
|
|
(a)
|
West Virginia
Economic Development Authority
|
|
(b)
|
West Virginia
Infrastructure and Jobs Development Council
|
|
(c)
|
Includes convertible
notes with an outstanding balance of $1,987,125 that include anti-dilution protection
|
Future required minimum principal
repayments over the next five years are as follows (same exclusions as noted for the table above):
|
|
Future required minimum
|
|
Year Ended December 31:
|
|
principal payments
|
|
2016
|
|
$
|
4,049,767
|
|
2017
|
|
|
746,508
|
|
2018
|
|
|
514,743
|
|
2019
|
|
|
449,246
|
|
2020 and thereafter
|
|
|
558,733
|
|
Total
|
|
$
|
6,318,997
|
|
As of September 30, 2016, the Company
was authorized to issue a total of 260,000,000 shares of stock, of which 250,000,000 shares were designated common stock, par
value of $0.0001 per share with one vote in respect of each share held and no cumulative voting rights (“Common Stock”),
and 10,000,000 are designated preferred stock, par value of $0.0001 per share with one vote in respect of each share held (“Preferred
Stock”). There were no shares of Preferred Stock issued or outstanding as of December 31, 2015 and no such shares were
issued during the nine months ended September 30, 2016. As discussed in Note 18 Evaluation of Subsequent Events, in October
2016, the Company’s stockholders approved an increase in the number of authorized shares of stock, which included increasing
the number of authorized shares of Common Stock to 500,000,000.
On December 1, 2015, the Company’s
stockholders approved a Certificate of Amendment to the Company’s Certificate of Incorporation to effect a reverse stock
split of Common Stock, within a range of no less than one-for-fifteen (1:15) and no more than one-for-twenty-five (1:25), with
such final ratio to be determined by the Board of Directors, in its sole discretion and with such reverse split to be effective
at such time and date within one year after stockholder approval (the “Reverse Split”). See Note 18 Evaluation of
Subsequent Events for additional information related to the expected ratio and timing for the Reverse Split.
As of the date of this report,
the Company’s Board of Directors had not enacted the Reverse Split and, therefore, the information presented in this report
does not include the effects of any such transaction.
See also Note 18 Evaluation of
Subsequent Events related to the Company’s sale of Common Stock in November 2016.
Conversion of Accrued
Interest and Accounts Payable
In February 2016, the Company’s
Board of Directors authorized the conversion of an aggregate of $33,333 of accrued interest on promissory notes issued by the
Company to Summit and $8,060 of account payable (or a total of $41,393) by the Company to Summit, into 165,573 shares of Common
Stock at the rate of $0.25 per share. The transaction also included the issuance of warrants to purchase 450,000 shares of Common
Stock. The warrants have an exercise price of $0.40 per share, a five-year term and do not contain an anti-dilution provision.
The relative fair value of these warrants at the issuance date, and the corresponding liability recorded for these warrants at
that date, was estimated at $945.
In September 2016, the Company’s
Board of Directors authorized the conversion of an aggregate of $41,667 of accrued interest on promissory notes issued by the
Company to Summit and $9,781 of account payable (or a total of $51,448) by the Company to Summit, into 205,791 shares of Common
Stock at the rate of $0.25 per share.
Advertising Services
Agreement
In March 2016, the Company entered
into an agreement with an advertising firm for certain services to be rendered to the Company over an estimated ninety (90) day
period (the “Media Advertising Agreement”). Besides cash compensation, the Media Advertising Agreement required the
Company to issue 150,000 shares of Common Stock to the advertising firm as of the execution date of the agreement and an additional
150,000 shares to be issued to the advertising firm thirty (30) days from the execution date of the agreement. The estimate fair
value of the shares issued in March 2016 and April 2016 was $37,500 for each issuance, which was recorded as consulting expense
in the month of issuance.
In July 2016, the Company renewed
the agreement with such advertising firm for certain services to be rendered to the Company over an estimated ninety (90) day
period. Besides cash compensation, the Media Advertising Agreement required the Company to issue 300,000 shares of Common Stock
upon execution of the document. The fair value of the shares issued was estimated at $75,000 with the amount recorded as consulting
expense.
(this space intentionally left blank)
Common Stock issued and outstanding
is as follows:
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
issued and
|
|
|
per
|
|
|
Gross
|
|
|
fair value at
|
|
|
Par
|
|
|
Additional
|
|
|
|
outstanding
|
|
|
share
|
|
|
proceeds
|
|
|
issuance
|
|
|
value
|
|
|
paid-in capital
|
|
Balance as of December 31, 2015
|
|
|
133,146,250
|
|
|
|
Various
|
|
|
$
|
58,393,786
|
|
|
$
|
2,359,303
|
|
|
$
|
13,315
|
|
|
$
|
60,740,153
|
|
Issuance (a)
|
|
|
371,364
|
|
|
$
|
0.25
|
|
|
|
–
|
|
|
|
92,841
|
|
|
|
37
|
|
|
|
92,804
|
|
Issuance (b)
|
|
|
108,696
|
|
|
$
|
0.25
|
|
|
|
–
|
|
|
|
27,174
|
|
|
|
11
|
|
|
|
27,163
|
|
Issuance (c)
|
|
|
600,000
|
|
|
$
|
0.25
|
|
|
|
–
|
|
|
|
150,000
|
|
|
|
60
|
|
|
|
149,940
|
|
Balance as of September 30,
2016
|
|
|
134,226,310
|
(d)
|
|
|
|
|
|
$
|
58,393,786
|
|
|
$
|
2,629,318
|
|
|
$
|
13,423
|
|
|
$
|
61,010,060
|
|
|
(a)
|
See above under
Conversion
of Accrued Interest and Accounts Payable
|
|
(b)
|
Shares issued in conjunction with
the March 2016 Convertible Note (see Note 12 Debt)
|
|
(c)
|
See above under
Advertising Services Agreement
|
|
(d)
|
Includes 21,214,642 shares that contain an anti-dilution provision
|
14. Stock Options and Stock-Based Compensation
In 2002, the Board adopted the
2002 Equity Incentive Plan (the “2002 Plan”) that governed equity awards to employees, members of the Board of Directors,
and consultants of the Company. Under the 2002 Plan, 450,000 shares of Common Stock were reserved for issuance. From 2006 through
2012, the 2002 Plan was amended several times to increase the total number of shares authorized under this plan to 4,150,000 shares.
In 2013, the Board of Directors adopted the 2013 Equity Incentive Plan (the “2013 Plan”) and, together with the 2002
Plan (the “Plans”), governs the equity awards to employees, members of the Board of Directors, and consultants of
the Company. Under the 2013 Plan, an additional 12,500,000 shares of Common Stock were reserved for issuance.
The types of awards permitted under
the Plans include qualified incentive stock options (“ISO”), non-qualified stock options (“NQO”), and
restricted stock. Each stock option shall be exercisable at such times and subject to such terms and conditions as the Board of
Directors may specify. Stock options generally vest over four (4) years and expire no later than ten (10) years from the date
of grant. A summary of stock option activity is as follows:
|
|
|
|
|
Weighted average
|
|
|
Weighted ave. remaining
|
|
|
|
Stock options
|
|
|
exercise price
|
|
|
contractual life (years)
|
|
Outstanding as of December 31, 2015
|
|
|
10,050,086
|
|
|
$
|
0.69
|
|
|
|
7.26
|
|
Granted
|
|
|
3,350,000
|
|
|
$
|
0.15
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
Cancelled or expired
|
|
|
(1,594,216
|
)
|
|
$
|
0.31
|
|
|
|
|
|
Outstanding as of September 30, 2016
|
|
|
10,800,086
|
|
|
$
|
0.57
|
|
|
|
7.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2015
|
|
|
4,938,664
|
|
|
$
|
1.01
|
|
|
|
5.59
|
|
Exercisable as of September 30, 2016
|
|
|
5,204,317
|
|
|
$
|
0.90
|
|
|
|
5.61
|
|
(this space intentionally left blank)
The following table summarizes
information about stock options at September 30, 2016:
Stock options outstanding
|
|
|
Stock options exercisable
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted average
|
|
|
average
|
|
|
|
|
|
average
|
|
|
|
|
|
|
|
remaining contractual
|
|
|
exercise
|
|
|
|
|
|
exercise
|
|
Exercise price
|
|
|
Outstanding
|
|
|
life (in years)
|
|
|
price
|
|
|
Exercisable
|
|
|
price
|
|
$
|
0.15
|
|
|
|
3,250,000
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
$
|
0.25
|
|
|
|
1,573,336
|
|
|
|
|
|
|
|
|
|
|
|
576,264
|
|
|
|
|
|
$
|
0.48
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
37,500
|
|
|
|
|
|
$
|
0.50
|
|
|
|
79,000
|
|
|
|
|
|
|
|
|
|
|
|
79,000
|
|
|
|
|
|
$
|
0.53
|
|
|
|
405,000
|
|
|
|
|
|
|
|
|
|
|
|
126,563
|
|
|
|
|
|
$
|
0.55
|
|
|
|
3,312,000
|
|
|
|
|
|
|
|
|
|
|
|
2,354,240
|
|
|
|
|
|
$
|
0.80
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
$
|
1.25
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
$
|
1.50
|
|
|
|
1,646,000
|
|
|
|
|
|
|
|
|
|
|
|
1,646,000
|
|
|
|
|
|
$
|
2.00
|
|
|
|
214,750
|
|
|
|
|
|
|
|
|
|
|
|
214,750
|
|
|
|
|
|
|
$0.15
– $2.00
|
|
|
|
10,800,086
|
|
|
|
7.53
|
|
|
$
|
0.58
|
|
|
|
5,204,317
|
|
|
$
|
0.90
|
|
As
of September 30, 2016, the total aggregate intrinsic value for stock options currently exercisable and stock options outstanding
was estimated to be $0.
This value represents the total
pre-tax, intrinsic value based on the estimated fair value of the Company’s Common Stock price of $0.12 per share
as
of September 30, 2016.
The following table summarizes
the activity of the Company’s stock options that have not yet vested:
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
grant-date fair
|
|
|
|
Stock options
|
|
|
value (per option)
|
|
Non-vested as of December 31, 2015
|
|
|
5,111,422
|
|
|
$
|
0.153
|
|
Granted
|
|
|
3,350,000
|
|
|
$
|
0.153
|
|
Forfeited
|
|
|
(1,594,216
|
)
|
|
$
|
0.314
|
|
Vested
|
|
|
(1,038,437
|
)
|
|
$
|
0.106
|
|
Non-vested as of September 30, 2016
|
|
|
5,828,769
|
|
|
$
|
0.126
|
|
The fair value of non-vested stock
options to be recognized in future periods is $674,803, which is expected to be recognized over a weighted average period of 2.72
years. The total fair value of stock options vested during the nine months ended September 30, 2016 was $175,304
compared
to $207,971 for the nine months ended September 30, 2015.
Stock-based compensation expense
is as follows:
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Selling, general, and administrative expense
|
|
$
|
164,860
|
|
|
$
|
178,371
|
|
Research and development expense
|
|
|
10,443
|
|
|
|
29,600
|
|
Total stock-based compensation
|
|
$
|
175,303
|
|
|
$
|
207,971
|
|
The
weighted average grant-date fair value of stock options granted during the nine months ended September 30, 2016 was
$0.095
per stock option
and for the nine months ended September
30, 2015 it was $0.31 per stock option.
The fair value of the stock option
grants was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Weighted average risk-free interest rate
|
|
|
1.33
|
%
|
|
|
1.69
|
%
|
Volatility factor
|
|
|
66.51
|
%
|
|
|
66.34
|
%
|
Weighted average expected life (in years)
|
|
|
7.46
|
|
|
|
8
|
|
Dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
The Company utilizes a peer group
to estimate its expected volatility assumptions used in the Black-Scholes option-pricing model. The Company completed an analysis
and identified four similar public companies considering their industry, stage of life cycle, size, and financial leverage. Given
the Company’s limited history with stock options, the Company’s expected term is based on an average of the contractual
term and the vesting period of the options (the SEC Staff Accounting Bulletin No. 110, “Simplified” method).
In connection with the issuance
of the Summer 2016 Convertible Debentures and the September 2016 20% OID Note (see Note 12 Debt above), the Company granted each
investor a three-year warrant to purchase shares of the Company’s Common Stock at an exercise price of $0.325 per share,
as adjusted for forward or reverse stock splits, stock dividends or other similar proportionately-applied change and subject to
customary weighted-average anti-dilution price adjustment. The total number of shares of Common Stock issuable upon exercise of
these warrants is 6,510,000. The relative fair value of these warrants was estimated at $28,202, which was recorded as a discount
to these debentures and is being accreted over the term of the underlying debentures. As noted below, a majority of the warrants
issued in conjunction with the Summer Convertible Debentures are being cancelled in exchange for new warrants.
On September 9, 2016, the Company
reached an agreement with holders of certain short-term convertible notes issued in May and June 2016, the Second Quarter 2016
Convertible Debentures, to exchange existing notes with new short-term convertible notes (the “Exchange Notes”). In
addition to the Exchange Notes, such holders are exchanging their existing warrants for warrants that contain full-ratchet anti-dilution
provisions. No additional changes are being made to such forms of warrants. The relative fair value of the new warrants was estimated
at $233,345, which was recorded as a discount to the New Notes and is being accreted to interest expense over the six-month term
of these notes. Related to the exchange transaction, the Placement Agent also exchanged their warrants for warrants that contain
full-ratchet anti-dilution provisions. No additional changes are being made to such forms of warrants. The relative fair value
of the new warrants issued to the Placement Agent was estimated at $54,447, which was also recorded as a discount to the Exchange
Notes and is also being accreted to interest expense over the six-month term of the related notes. See also Note 18 Evaluation
of Subsequent Events for information related to the acceptance of the Company’s exchange offer by two additional investors
in October 2016.
The St. George Investments Warrant
(see Note 12 Debt above for additional information related to this warrant and the related short-term convertible note) included
an anti-dilution provision that required the Company to reduce the exercise price for the warrant for any subsequent issuances
of Common Stock, or any instrument or securities that are convertible into or exercisable for shares of Common Stock, if the effective
price for any such issuance was at an effective price per share that was less than the exercise price for the St. George Investments
Warrant. Such a triggering event occurred upon issuance of the first of the Second and Third Quarter 2016 Convertible Debentures,
each of which are convertible into shares of the Company’s Common Stock at $0.25 per share. Effective May 20, 2016, the
exercise price of the St. George Investment Warrant was reduced to $0.25 per share thereby increasing the number of shares of
Common Stock issuable upon exercise of this warrant to 4,912,500 shares from 1,637,500 shares (the adjustment was capped by a
provision in the warrant agreement that limits any anti-dilution adjustment to three times the original number of shares issuable
upon exercise of the warrant). The relative fair value of the adjustment was estimated to be $6,879, which was recorded as an
additional discount to the March 2016 Convertible Debenture and was accreted over the remaining term of the obligation. As discussed
above in Note 12 Debt, this debenture matured on September 6, 2016. The Company recognized accretion expense of $104,947 related
to the adjustment.
See Note 12
Debt and Note
13 Common Stock for information related to the issuance of warrants to Summit, WVJITB, and a placement agent for the purchase
of 450,000, 1,180,000, and 2,010,250 shares of Common Stock, respectively during the nine months ended September 30, 2016. Note,
the amount of warrants issued to the placement agent are net of warrants cancelled in September 2016.
See also Note 18
Evaluation
of Subsequent Events for information related to warrants issued in conjunction with the Company’s sale of Common Stock in
early November 2016. In addition, see Note 18
Evaluation of Subsequent Events for information related to the triggering
of certain anti-dilution provisions included in certain of the Company’s outstanding financial instruments, including the
reduction of the exercise price for certain warrants.
As of September 30, 2016, warrants
to purchase 82,946,270 shares of Common Stock were outstanding and exercisable. During the nine months ended September 30, 2016,
the Company recognized a total of $49,894 in interest expense resulting from the accretion of the fair value of issued warrants.
The following table summarizes
the activity of the Company’s warrants:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
average
|
|
|
average remaining
|
|
|
|
|
|
|
exercise
|
|
|
contractual life
|
|
|
|
Warrants
|
|
|
price
|
|
|
(in years)
|
|
Outstanding as of December 31, 2015
|
|
|
71,342,894
|
|
|
$
|
0.77
|
|
|
|
2.375
|
|
Granted
|
|
|
15,803,751
|
|
|
$
|
0.30
|
|
|
|
2.998
|
|
Exercised
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
Cancelled or expired
|
|
|
(4,200,375
|
)
|
|
$
|
2.00
|
|
|
|
|
|
Outstanding as of September 30, 2016
|
|
|
82,946,270
|
(a)
|
|
$
|
0.61
|
|
|
|
1.984
|
|
(a) includes 57,488,533 warrants
that contain an anti-dilution provision
The following table summarizes
information about warrants as of September 30, 2016:
Warrants outstanding
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted average
|
|
|
average
|
|
|
|
|
|
|
|
remaining contractual
|
|
|
exercise
|
|
Exercise price
|
|
|
Outstanding
|
|
|
life (in years)
|
|
|
price
|
|
$
|
0.250
|
|
|
|
12,317,895
|
|
|
|
|
|
|
|
|
|
$
|
0.310
|
|
|
|
7,500,000
|
|
|
|
|
|
|
|
|
|
$
|
0.325
|
|
|
|
6,510,001
|
|
|
|
|
|
|
|
|
|
$
|
0.350
|
|
|
|
14,831,098
|
|
|
|
|
|
|
|
|
|
$
|
0.360
|
|
|
|
2,845,000
|
|
|
|
|
|
|
|
|
|
$
|
0.400
|
|
|
|
1,630,000
|
|
|
|
|
|
|
|
|
|
$
|
0.450
|
|
|
|
1,730,000
|
|
|
|
|
|
|
|
|
|
$
|
0.500
|
|
|
|
2,250,523
|
|
|
|
|
|
|
|
|
|
$
|
0.750
|
|
|
|
11,065,144
|
|
|
|
|
|
|
|
|
|
$
|
0.800
|
|
|
|
1,415,000
|
|
|
|
|
|
|
|
|
|
$
|
1.100
|
|
|
|
19,054,350
|
|
|
|
|
|
|
|
|
|
$
|
1.120
|
|
|
|
263,750
|
|
|
|
|
|
|
|
|
|
$
|
2.000
|
|
|
|
138,800
|
|
|
|
|
|
|
|
|
|
$
|
2.200
|
|
|
|
98,320
|
|
|
|
|
|
|
|
|
|
$
|
2.250
|
|
|
|
1,296,389
|
|
|
|
|
|
|
|
|
|
|
$0.250
– $2.25
|
|
|
|
82,946,270
|
|
|
|
1.984
|
|
|
$
|
0.61
|
|
|
16.
|
Commitments
and Contingencies
|
Legal Proceedings
The Company currently is not a
party to any material legal proceeding and has no knowledge of any material legal proceeding contemplated by any governmental
authority or third party. The Company may be subject to a number of claims and legal proceedings which, in the opinion of our
management, are incidental to normal business operations. In management’s opinion, although final settlement of these claims
and suits may impact the financial statements in a particular period, they will not, in the aggregate, have a material adverse
effect on the Company’s financial position, cash flows or results of operations.
As of the date of this report,
the Company had received three court summons for past due accounts payables. The claims total $213,032
and are related
to amounts the Company has properly accounted for in its accounting records, including late-payment fees and interest, if applicable.
As discussed in Note 1, Description of Business and Basis of Presentation, the Company has delayed payment to certain suppliers
and vendors as part of its efforts to manage its liquidity and short-term capital resources.
Agreement with Landlord
On November 4, 2016, the Company
reached an agreement with the landlord for its Morgantown, West Virginia facility for payment of past-due rent. The agreement
stipulates that the Company will pay the amount due as of October 31, 2016, $90,801, in four installments from November 4, 2016
through December 16, 2016. The Company has paid the first two installments, as scheduled. If the Company fails to make either
of final two payments, as scheduled, the landlord may take legal action against the Company, which could include seizing possession
the Company’s office and laboratory space.
Warranty Reserve
The Company provides for a one-year
warranty with the sale of its LAESI® instruments. As the Company does not currently have sufficient historical data on warranty
claims, the Company’s estimates of anticipated rates of warranty claims and costs are primarily based on comparable industry
metrics. The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating
the quality of its products. As of September 30, 2016, and December 31, 2015, the Company had accrued warranty expense of
$54,293 and $50,000, respectively.
University License Agreements
The Company has agreements with
West Virginia University (“WVU”) and George Washington University (GWU) related to in-licensed technologies as follows:
|
WVU
|
The Company has entered into a
License and Exclusive Option to License Agreement with the West Virginia University Research
Corporation (“WVURC”), a nonprofit West Virginia corporation acting for and
on behalf of WVU. Under the terms of this agreement, the WVURC has granted the Company
an exclusive option to license technology from the laboratories of certain WVU principal
investigators in the field of protein discovery, for therapeutic, diagnostic and all
other commercial fields worldwide. Under the terms of this Agreement, the Company pays
expenses for the preparation, filing and prosecution of related patent applications,
and the Company will pay royalties on the net revenue resulting from the sale of products
and services that utilize the WVU subject technology.
|
|
GWU
|
I
n
March 2009, the Company entered into an Exclusive License Agreement with GWU for technology developed
in the laboratory of Dr. Akos Vertes Ph.D., Professor of Chemistry, Professor of Biochemistry & Molecular Biology, Founder
and Co-Director of the W.M. Keck Institute for Proteomics Technology and Applications, the Department of Chemistry, who is a science
advisor to the Company. The technology field is laser ablation electrospray ionization, or “LAESI”, a new method of
bioanalytical analysis that enables high throughput biomolecule characterization. Under the terms of this agreement, the Company
has the exclusive, worldwide rights to commercialize the technology. The Company has obtained a registered trademark for “LAESI®”.
The Company is obligated to pay expenses for the preparation, filing and prosecution of related patent applications, and the Company
pays royalties on the net revenues resulting from the sale of products and services that utilize the GWU subject technology. During
the three and nine months ended September 30, 2016, the Company recorded royalty expenses of $4,765 and $20,299, respectively.
During the three and nine months ended September 30, 2015, the Company recorded royalty expenses of $10,934 and $31,145, respectively.
As of September 30, 2016, the Company’s accounts payable balance included $118,046 payable to GWU, of which $79,292 was past
due, for royalties on sales of the LAESI® instrument platform. Under the terms of the Company’s Exclusive License Agreement
with GWU, as amended, the Company is required to pay interest on amounts that are more than five (5) business days overdue. In
addition, the Company’s agreement with GWU allows GWU to terminate the agreement under certain circumstances, including related
to late payments. As of the date of this report, GWU has not taken any such action.
|
In November 2012, the Company
entered into a Patent License Agreement with GWU for technology developed in the laboratory of Akos Vertes Ph.D. The technology
field is Laser Desorption/Ionization and Peptide Sequencing on Laser-Induced Silicon Microcolumn Arrays (“LISMA”)
and Nanophotonic Production, Modulation and Switching of Ions by Silicon Microcolumn Arrays (Nanophotonic arrays, or “NAPA”).
Under the terms of this agreement, the Company has an exclusive, worldwide license to make, have made, use, import, offer for
sale and sell the licensed products. The Company is obligated to pay a license initiation fee of $25,000 and a minimum license
diligence resources of $12,500 in year two and $20,000 each year thereafter to develop and commercialize the products, $30,000
milestone payment upon the first sale of a licensed product, and royalties will be 7% of the net sales of licensed products and
5% of the net sales of combination products for combined cumulative net sales up to $50 million. Thereafter, royalties reduce
to 6% and 4%, respectively, after taking into account quarterly minimum royalties of $1,500 for the first four quarters after
the first sale of a licensed product, $2,500 for the next four quarters, $3,500 for the next four quarters and $6,000 for each
succeeding quarter. During the three and nine months ended September 30, 2016, the Company recorded royalty expenses of $2,500
and $5,500, respectively, related to sales of REDIchip™. As of September 30, 2016, the Company’s accounts payable
balance includes $8,500 payable to GWU, of which $6,000 was past due, related to this agreement. Similar to the Company’s
agreement with GWU related to LAESI®, the Company’s agreement with GWU for LISMA/NAPA allows GWU to terminate the agreement
under certain circumstances, including related to late payments. As of the date of this report, GWU has not taken any such action.
In January 2014, the Company became
a subcontractor to GWU in a multi-year project with the Defense Advanced Research Projects Agency (“DARPA”) to develop
new tools and methods to elucidate the mechanism of action of a threat agent, drug, biologic or chemical on living cells within
thirty (30) days of exposure. We have commercialized a NAPA-based product out of this arrangement that is currently being sold
to research laboratories performing small molecule analysis.
This product is called REDIchip™ (an acronym for Resonance-Enhanced
Desorption Ionization).
COAST Project
In 2014, the Company entered
into an agreement with Omics2Image B.V. (“O2I”) related to the “Next Generation Ambient Imaging Mass Spectrometry
for (Bio)polymers and Smart Materials” (the “COAST Project”). As part of this arrangement, the Company agreed
to commit €60,000 (approximately $76,000 at that time) to the COAST Project and O2I agreed to evenly share the value gained
from the efforts as outlined within the scope of the project, which may include new intellectual property and the development
of a commercial, integrated instrument system. The Company’s remaining obligation on this arrangement is $24,500, an amount
that was due by agreement in 2014.
|
17.
|
Supplemental
Cash Flow Information
|
Cash paid for interest and income
taxes
During the nine months ended September 30, 2016, cash
paid for interest totaled $190,752. Cash paid for interest for the nine months ended September 30, 2015 was $193,942.
The Company did not pay any income taxes during 2015
or the nine months ended September 30, 2016.
Non-cash investing and financing
activities
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Equipment acquired under capital leases
|
|
$
|
605,227
|
|
|
$
|
516,832
|
|
Debt converted to preferred stock
|
|
$
|
–
|
|
|
$
|
550,260
|
|
Dividends paid in preferred stock
|
|
$
|
–
|
|
|
$
|
156,056
|
|
Issuance of common stock upon conversion of accrued interest
|
|
$
|
92,841
|
|
|
$
|
–
|
|
Issuance of common stock for services
|
|
$
|
–
|
|
|
$
|
–
|
|
Issuance of common stock with short-term convertible notes
|
|
$
|
27,174
|
|
|
$
|
–
|
|
Issuance of warrants with short-term convertible notes
|
|
$
|
31,747
|
|
|
$
|
–
|
|
Warrants to be issued to Placement Agent
|
|
$
|
5,772
|
|
|
$
|
–
|
|
Anti-dilution warrants to be issued
|
|
$
|
6,878
|
|
|
$
|
–
|
|
Debt issuance costs
|
|
$
|
5,000
|
|
|
$
|
–
|
|
|
18.
|
Evaluation
of Subsequent Events
|
Obligations to Stockholders
Subsequent to September 30,
2016, the Company received an advance from a related party, an officer of the Company and a Board of Director. To provide the Company
with $255,000 to cover the deficit at the bank, the related party had to get a loan from the bank. The Company is responsible for
repaying the related party note directly to the bank by November 30, 2016.
Subsequent to September 30,
2016, the Company received other advances totaling $83,000 from certain current directors and related parties and repaid $9,164
to certain related parties. As with advances from stockholder as of September 30, 2016, the advances from stockholders from October
1, 2016 through the date of this report have no terms of repayment and do not bear interest. As of the date of this report, the
outstanding balance of the Company’s obligations to stockholders was $3,039,056. See Note 10 Obligations to Stockholders
for additional information.
Increase in Authorized Shares
of Common Stock
On October 21, 2016, the Company’s
stockholders voted in favor of an increase in the Company’s authorized capitalization from 250,000,000 shares of Common
Stock and 10,000,000 shares of preferred stock, par value $0.0001 per share, to 500,000,000 shares of Common Stock and 10,000,000
shares of preferred stock, par value $0.0001 per share (the “Authorized Common Stock Increase”). On October 24, 2016,
the Company filed the necessary Certificate of Amendment to the Certificate of Incorporation with the Delaware Secretary of State
to effectuate the change.
Sale of Common Stock
At an initial closing held on
November 3, 2016 (the “Closing”), the Company received an aggregate of $631,680 in gross cash proceeds from 25 accredited
investors (the “Purchasers”) in connection with the sale of approximately 63 units of securities (each a “Unit”
and collectively, the “Units”) pursuant to the terms and conditions of Subscription Agreements (the “Subscription
Agreements”) by and among the Company and each of the Purchasers.
On November 18, 2016 (the “Closing”),
the Company received an aggregate of $487,850 in gross cash proceeds from 11 accredited investors (the “Purchasers”)
in connection with the sale of approximately 48.79 units of securities (each a “Unit” and collectively, the “Units”)
pursuant to the terms and conditions of Subscription Agreements (the “Subscription Agreements”) by and among the Company
and each of the Purchasers.
Pursuant to its private placement
memorandum, dated as of October 31, 2016 (the “Memorandum”), the Company is offering, through a placement agent, a
maximum of 500 Units of securities at a price of $10,000 per Unit for up to $5,000,000 in gross proceeds (the “Offering”).
Each Unit consists of up to (a) 133,333.33 shares of common stock, par value $0.0001 (the “Common Stock”), (b) 18
month warrants to purchase 133,333.33 shares of Common Stock at an exercise price of $0.09 per share (the “Class A Warrants”),
and (c) five year warrants to purchase 133,333.33 shares of Common Stock at an exercise price of $0.1125 per share (the “Class
B Warrants” and together with the Class A Warrants, the “Investor Warrants”). If all 500 Units are sold, the
Company will issue an aggregate of 66,666,667 shares of its Common Stock and Investor Warrants to purchase up to 133,333,334 shares
of Common Stock. The Offering will terminate on December 31, 2016 unless the Company and the Placement Agent mutually agree to
extend the Offering to as late at March 31, 2017.
The Company intends to consummate
a 1-for-25 reverse stock split of its outstanding Common Stock following the termination date of the Offering, which reverse split
has previously been authorized by the Company’s stockholders. Consummation of the Reverse Stock Split will require (a) the
filing of an amendment to the Company’s Certificate of Incorporation with the Delaware Secretary of State, and (b) obtaining
the approval of FINRA.
In connection with the Closings,
the Company paid to the placement agent an aggregate of $152,384 in cash compensation, representing fees and an expense allowance.
In addition, the Company agreed to issue a warrant to the placement agent to purchase an aggregate of 4,231,120 shares of Common
Stock, with an exercise price of $0.09 per share and term of three years. The Company also issued one Unit to the placement agent’s
legal counsel for services rendered in connection with the Closing.
In connection with the Closing,
the Company also entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with each of the
Purchasers, which requires the Company to file a registration statement (the “Registration Statement”) with the Securities
and Exchange Commission (the “Commission”) registering for resale (i) all Common Stock issued to the Purchasers as
part of the Units, (ii) all shares of Common Stock issuable upon exercise of the Investor Warrants and the warrants issued to
the placement agent, and (iii) all shares of Common Stock issued to legal counsel for services rendered in connection with the
Closing.
If the Registration Statement is
not declared effective by the SEC within the specified deadlines set forth in the Registration Rights Agreement, the Company
will be required to pay to each Purchaser an amount in cash, as partial liquidated damages, equal to 1.0% of the aggregate purchase
price paid by such Purchaser per 30-day period that such failure continues, up to the maximum of 6% of the aggregate Purchase
Price. If the Company fails to pay any partial liquidated damages in full within seven days after the date payable, the Company
will pay interest thereon at a rate of 18% per annum.
The forms of the Subscription
Agreement, the Registration Rights Agreement, the Class A Warrant, the Class B Warrant and the warrant issued to the placement
agent are filed as Exhibits to a Current Report on Form 8-K filed with the SEC on November 9, 2016, and the foregoing summaries
of the terms of such documents are subject to, and qualified in their entirety by, the full text of such documents, which are incorporated
herein by reference.
Exchange of Summer 2016 Convertible
Debentures
In October 2016, the Company
reached an agreement with two additional holders of the Summer 2016 Convertible Debentures pursuant to which such debentures will
be exchanged for new short-term convertible notes (the “Exchange Notes”). The Exchange Notes shall have a principal
amount totaling $95,813 which represents the original principal amount plus accrued interest of 10% per annum for each of the two
investors in the Summer 2016 Convertible Debentures. In addition, the Exchange Notes shall extend the maturity dates under the
Summer 2016 Convertible Debentures to a date not later than March 31, 2017. In addition to the Exchange Notes, such holders are
exchanging their related warrants for warrants that contain full-ratchet anti-dilution provisions. No additional changes are being
made to such forms of warrants. The relative fair value of the new warrants are estimated to be $13,876,
which will
be recorded as a discount to the Exchange Notes and is being accreted to interest expense over the six-month term of the related
notes. The unaccreted balance of the fair value of the warrants issued with Summer 2016 Convertible Debentures was recorded as
an adjustment to interest expense upon cancellation of the warrants. See Note 12 Debt and Note 15 Warrants for related information.
Anti-Dilution Triggering
Event
The sale of Common Stock in
November 2016 (see above) was completed at a unit price of $0.075 per share, which triggered the anti-dilution provisions contained
in certain outstanding financial instruments. As a result, to satisfy the Company’s obligations under such provisions, the
Company expects to issue 49,500,832 shares of Common Stock, issue 25,244,336 Warrants to purchase shares of Common Stock, reduce
the conversion rate for the Exchange Notes to $0.075 per share (See Note 12 Debt) and reduce the exercise price of 49,459,532
warrants.
Agreement with Landlord
On November 4, 2016, the Company
reached an agreement with the landlord for its Morgantown, West Virginia facility for payment of past-due rent. The agreement stipulates
that the Company will pay the amount due as of October 31, 2016, $90,801, in four installments from November 4, 2016 through December
16, 2016. The Company has paid the first two installments, as scheduled. If the Company fails to make either of final two payments,
as scheduled, the landlord may take legal action against the Company, which could include seizing possession the Company’s
office and laboratory space.
September 2016
10% OID Secured Promissory Note
On September 8, 2016, the Company
entered into a Note Purchase Agreement with an Accredited Investor pursuant to which the investor purchased a 10% original issue
discount secured promissory note of the Company in the principal face amount of $720,000 due October 15, 2016 for an aggregate
purchase price of $650,000 (“September 2016 10% OID Secured Promissory Note”). The principal balance of $720,000 bears
interest at a rate of 10% per annum, and was payable on the October 15, 2016 maturity date.
The
Company’s obligations to repay and otherwise perform its obligations under the September 2016 10% OID Secured Promissory
Note are secured by a continuing first priority lien and security interest in the accounts receivable and inventory of the Company
and its subsidiary, Protea Biosciences, Inc. (the “Subsidiary”) pursuant to the terms of a Security Agreement among
the Company, the Subsidiary, and the Lender (the “Security Agreement”) and include the specific assets now owned or
hereafter acquired of the Company and the Subsidiary listed on the Exhibit 1 to the Security Agreement. The Subsidiary also provided
the Lender with a full recourse guaranty for the prompt performance of all obligations of the Company, pursuant to the terms of
a guaranty agreement.
As of the date of this report,
the Company is in discussions with the investor regarding terms to extend the maturity date of the note and such investor has
acknowledged that the Company is not currently in default under the note. If the Company is unable to successfully negotiate an
extension to the note agreement, the Accredited Investor may assert all of its rights and remedies available under the Security
Agreement and applicable law.