Securities registered pursuant to Section 12(g)
of the Act: Common Stock, $0.0001 par value
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
On June 30, 2016 the aggregate market
value of the voting and non-voting common equity held by non-affiliates was $16,010,330 based on the closing sales price of
the Common Stock as quoted on the OTC Markets on that date. For purposes of this computation, all officers, directors, and
10% or greater beneficial owners of the registrant’s Common Stock were deemed to be affiliates. Such determination
should not be deemed an admission that such directors, officers, or 10% beneficial owners are, in fact, affiliates of the
registrant.
As of April 13, 2017, the number of shares
of the registrant’s classes of Common Stock issued and outstanding was 209,915,199. In addition, the registrant is obligated
to issue an additional 85,724,996 shares of Common Stock under anti-dilution provisions of various outstanding securities.
This Annual Report on Form 10-K contains “forward-looking
statements”. Forward-looking statements are based upon our current assumptions, expectations and beliefs concerning future
developments and their potential effect on our business. In some cases, you can identify forward-looking statements by the following
words: “may,” “could,” “would,” “should,” “expect,” “intend,”
“plan,” “anticipate,” “believe,” “approximately,” “estimate,” “predict,”
“project,” “potential” or the negative of these terms or other comparable terminology, although the absence
of these words does not necessarily mean that a statement is not forward-looking. This information may involve known and unknown
risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different
from the future results, performance or achievements expressed or implied by any forward-looking statements.
Factors that may cause or contribute actual results to differ from
these forward-looking statements include, but are not limited to, the following:
All forward-looking statements speak only as
of the date of this report. We undertake no obligation to update any forward-looking statements or other information contained
herein. Stockholders and potential investors should not place undue reliance on these forward-looking statements.
Although we believe that our plans, intentions
and expectations reflected in or suggested by the forward-looking statements in this report are reasonable, we cannot assure stockholders
and potential investors that these plans, intentions or expectations will be achieved. These cautionary statements qualify all
forward-looking statements attributable to us or persons acting on our behalf.
Information regarding market and industry statistics
contained in this report is included based on information available to us that we believe is accurate. It is generally based on
academic and other publications that are not produced for purposes of securities offerings or economic analysis. Forecasts and
other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties
accompanying any estimates of future market size, revenue and market acceptance of products and services. Except as required by
U.S. federal securities laws, we have no obligation to update forward-looking information to reflect actual results or changes
in assumptions or other factors that could affect those statements.
PART I
Except for outstanding securities, including
share and per share data, which only relates to Protea Biosciences Group, Inc., a Delaware corporation, all references in this
Form 10-K Annual Report to “Protea,” “the Company,” “we,” “our,” “us,”
or similar terms means and includes Protea Biosciences Group, Inc. and our wholly-owned subsidiary Protea Biosciences, Inc. All
references to “year” and “fiscal year” means the year ended December 31
st
.
Protea is an emerging growth bioanalytics technology
company that provides analytical and diagnostic solutions for the rapid and direct identification, mapping and display of the molecules
present in living cells and biological samples. Protea is applying it’s technology to the development of a new generation
of products and services that enable more rapid and comprehensive analysis of living cells and biofluids, thereby providing data
that helps to define normal biological and disease processes. Protea’s technologies enable the discovery and analysis of
the proteins, metabolites and other biomolecules that regulate the biological functions of the human body and all other forms of
life.
We believe that our technology provides useful
bioanalytical capabilities that provides analytical and diagnostic solutions targeted towards the pharmaceutical, agricultural
and life science industries that facilitate the rapid and direct identification, mapping and display of the molecules present in
living cells and tissue samples. In addition, our technology supports the bioanalytical needs of immuno-oncology, the emerging
frontier of cancer treatment that utilizes the body’s own immune system to fight diseases. We also apply our technology to
develop new diagnostic tests to improve the differential diagnosis and management of cancer.
“Bioanalytics” refers to the identification
and characterization of the molecules that are produced by living cells (known as “endogenous molecules”) and molecules
that are introduced into cells (exogenous molecules), such as new pharmaceuticals.
Our Technology and Services
Cancer Diagnostic Assay Development –
Using our proprietary bioanalytics technology, we are able to qualify
and validate new molecular assays for the differential diagnosis of certain cancers.
To support our diagnostics development, we
developed a proprietary software suite known as “Histology Guided Mass Spec Imaging (HG-MSI).” The software enables
pathologists to combine traditional microscopy and histology with high resolution mass spectrometry molecular imaging, allowing
researchers to share, annotate and direct the analysis of specific tissue morphologies and cell subpopulations by mass spec imaging.
With HG-MSI, molecular profiling data are collected from discrete locations within a tissue section using a histology stained section
as a guide. The digital tissue scans are visually analyzed by pathologists, who annotate specific areas for further analysis. The
annotated areas are then targeted by mass spectrometry to acquire a chemical fingerprint of the representative area. This chemical
information can then be used to identify specific molecules of interest and map the biomolecules present in a visualized morphology.
This workflow is applicable to all classes of biomolecules (e.g., proteins, peptides, lipids, metabolites) and can be carried out
on both fresh frozen and formalin fixed, paraffin embedded (FFPE) tissue specimens.
Melanoma diagnosis - Yale Collaboration
We established a collaborative research initiative
with The Yale University School of Medicine that employs our technology to differentiate benign melanocytic nevi from malignant
melanoma, by identifying unique protein expression profiles within the cells. In April 2016, we entered into an exclusive license
agreement for technology with Yale University related to the differential diagnosis of melanoma, specifically designated as a "Method
of Differentiating Benign Melanocytic Nevi from Malignant Melanoma." The technology was co-invented by Dr. Rossitza Lazova,
and Dr. Erin Seeley, our Principal Investigator.
According to research report,
“Cancer
Statistics, 2015 (Siegel RL, Miller KD, Jemal A. CA Cancer J Clin. 2015;65(1):5–29.)
”, in 2015, an estimated 73,870
persons were diagnosed with melanoma in the United States. The increase in melanoma diagnosis is partially attributed to the increase
in skin biopsies, which have increased 2.5 fold from 1986-2001 (BMJ 7515, 331- 481, 2005, “Skin Biopsy Rates and Incidence
of Melanoma: Population Based Ecological Study”.) We believe more accurate, sensitive and unbiased testing is needed to analyze
samples where the diagnosis is initially indeterminate.
Lung cancer diagnosis - MSKCC Collaboration
We have established a collaborative research
agreement with the Memorial Sloan-Kettering Cancer Center (MSKCC) and the Dana-Farber Cancer Institute (DFCI), to apply our technology
to improve the analysis of early stage lung adenocarcinoma. The objectives of the collaboration are to demonstrate that different
cancer cell sub-groups within a lung cancer will have different molecular profiles and will respond to treatment differently. The
goal is to define these molecular differences and to identify the sub-group of cancer cells with the worst prognosis that are most
likely to recur, thereby enabling earlier treatment intervention, and to use these findings to achieve lung adenocarcinoma tumor
cell “molecular profiling,” leading to more precise treatment selection and higher survivor rates.
Bioanalytical Technologies
We develop new proprietary bioanalytical technology
through internal research and by entering into collaborations with leading medical research institutions and companies where we
apply our capacities and infrastructure to generate new molecular discoveries and technologies that we believe will be important
assets for our growth and development.
LAESI bioanalytical technology platform
LAESI technology was invented in the laboratory
of Professor Akos Vertes, Ph.D., Dept. of Chemistry, The George Washington University (GWU), and exclusively-licensed to Protea.
This technology enables the direct identification of proteins, lipids and metabolites in tissues, cells and biofluids such as serum
and urine. Data is available in seconds to minutes, allowing rapid time to results and the capacity to analyze thousands of samples
in a single work period. As an example, a researcher testing a new drug’s effects on living cells can analyze changes in
the cells’ metabolism across a specific time course, thereby almost immediately obtaining data as to the activity of the
new drug.
LAESI employs a proprietary (patented) method
that utilizes the water content in a sample (native or applied) to transition the sample into a gas state, where it can be analyzed
by a mass spectrometer. LAESI accomplishes this without requiring the sample to be touched. By eliminating sample preparation,
the biological sample can be analyzed without the possible contamination, bias or sample loss that occurs with current techniques,
which require the introduction of chemicals, or the destruction of the sample itself, in order to enable analysis by mass spectrometry.
We successfully completed the development of
prototype instrumentation of LAESI technology, which integrates with laboratory instruments known as mass spectrometers. The Company
believes that LAESI technology has the potential to significantly improve the availability of molecular information in pharmaceutical
research as well as many other fields including agriculture, pathology, biomarker discovery, biodefense and forensics.
Advantages of LAESI technology
We believe that our proprietary LAESI technology,
combined with other bioanalytics technology developed by Protea, provides us with certain competitive advances over existing technologies
and which we believe will become a new industry standard. Some of these are discussed below:
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Eliminates Traditional Analytical
Drawbacks
: The LAESI platform eliminates two of the major drawbacks of traditional mass spectrometry - sample preparation
and loss of spatial information. LAESI can analyze a wide range of sample types with no sample preparation required. In addition,
samples such as a tissue section or cells can be analyzed “as is,” even live cells and bacterial colonies. LAESI technology
generates big data molecular profiles of tissue sections, biofluids (blood, urine and serum) and many other sample types, including
horticulture specimens, cell lines & pellets, bacterial colonies, hair fibers, contact lenses and hydrogels.
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Enables Mass Spectrometry Imaging
:
Protea's LAESI technology directly analyzes biological samples without the need to apply chemicals or introduce tags or tracers.
Proprietary software developed at the company enables two- and three-dimensional direct molecular imaging, displaying the distribution
of molecules in biological samples.
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Numerous Molecules per Analysis
:
It is not unusual to detect over 1,000 individual molecules in a single experiment. Larger databases aid the “molecular eyesight”
of a researcher, improving their prospects to find new biomarkers or molecular data that will provide new research insight.
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Minimal Sample Destruction
:
Because of the small spot size, the sample is only locally destroyed by the laser ablation pulse. With the use of positional stages,
LAESI allows, the spatial localization of biomolecules within a sample, thereby enabling two- and three-dimensional direct molecular
imaging.
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High Throughput Sample Profiling
:
The LAESI platform also functions as a high throughput processing system for well plate and bacterial colony analysis. With the
ability to analyze samples in seconds, researchers are able to quickly screen libraries of compounds, strains, and other assays
very rapidly.
|
Biotherapeutic protein characterization
We have developed technology to improve the
molecular characterization of biotherapeutics (also known as “therapeutic proteins” and “monoclonal antibodies”),
in particular the ability to identify their structural elements that are critical to assuring the biotherapeutic’s functionality.
Biotherapeutic researchers have the need to understand several things about the therapeutic protein including: the protein sequence,
molecular weight, any post-translational modifications and host cell proteins. To assist with these needs, we are collaborating
with a leading provider of analytical software to develop applications for biotherapeutic protein analysis. We have also developed
“workflows” (or, optimized methods for an experimental process) for the use of our high-resolution instrumentation
for the analysis of these samples.
Biotherapeutic Software development - collaboration with Protein
Metrics
We have signed a renewal of its collaboration
with California-based Protein Metrics Inc. for further applications development of their advanced analytical software for Protea’s
bioanalytical services. We believe that by combining our high-resolution mass spectrometry molecular data with the analytical power
of Protein Metrics software, we will develop bioinformatics tools that we can offer to facilitate the analysis of the structure
of therapeutic proteins, including their disulfide linkages, glycoforms and other structural components.
Systems Biology bioanalytical technology - DARPA
In January 2014, the Company, as a subcontractor
to GWU, was awarded a multi-year project with the Defense Advanced Research Projects Agency (“DARPA”). In addition
to Protea, The Stanford Research Institute International and GE Global Research also collaborate on the project entitled, “New
Tools for Comparative Systems Biology of Threat Agent Action Mechanisms.” A $15 million five-year project, the goal of DARPA’s
Rapid Threat Assessment (“RTA”) program is to develop new methods to elucidate the mechanism of action of a threat
agent, drug, biologic or chemical on living cells within 30 days from exposure. Uncovering the mechanism of action of such agents
in 30 days, compared to the years currently required, could be key to the development of effective countermeasures. The molecular
networks within living cells are vast and complex. Conventional approaches fail to capture the system-wide response of a living
cell to a threat agent. We believe our participation in this project will result in new technology to accelerate the characterization
of biological samples in rapid threat assessment scenarios.
Skin bioanalytical technology
We recently established an agreement with MatTek
Corporation (“MatTek”), which allows Protea to include MatTek’s human cell based
in vitro
tissue models
with Protea’s proprietary molecular imaging services. By combining the human tissue models with mass spectrometry imaging
workflows, researchers will be able to visualize specific compounds in highly - controlled experimental conditions using human
cell derived,
in vitro
models.
Proprietary Reagents and products
We developed proprietary bioanalytical reagents
and products to facilitate sample preparation prior to mass spectrometry analysis. Our proprietary products include new surfactants,
the Progenta ™ acid labile surfactants that feature novel, acid cleavable formulations that are sample sensitive and fully
compatible with mass spectrometry analysis.
Bioanalytical Services
Our bioanalytical services enable the identification
and characterization of both small molecules (e.g., lipids and metabolites) and large molecules (e.g. proteins). The Company believes
that it is a commercial leader in the molecular characterization of biotherapeutics (also called “biopharmaceuticals”),
and in providing multimodal mass spectrometry imaging services that provide both small and large molecule 2D and 3D molecular imaging
capabilities. Our clients include pharmaceutical, chemical and biotechnology companies, and academic and government laboratories.
We believe our proprietary bioanalytical services
are unique, in that we can provide integrated proteomics, metabolomics, protein characterization and mass spec imaging solutions.
We combine our next generation LAESI bioanalytics platform with MALDI (“matrix-assisted laser desorption ionization”),
and LCMS (“liquid chromatography mass spectrometry”) to offer integrated service capabilities.
The Company’s “Mass Spec Imaging”
(“MSI”) bioanalytical services represent a revolutionary capability that for the first time enables the identification
of all classes of biologically-active molecules produced by cells, and combines this with the ability to instantly spatially-display
the molecules (both two- and three-dimensional) in tissue histology sections. LAESI-MSI can be performed without sample preparation,
labeling or antibody techniques, thereby integrating direct molecular identification with tissue pathology for the first time.
Since the sample is not touched, data is unbiased and more rapidly available.
Our technology supports the bioanalytical needs
of immuno-oncology, the emerging frontier of cancer treatment that utilizes the body’s own immune system to fight diseases.
We provide both visual and analytical evaluation of therapeutic efficacy and apply the Company’s technology to the analysis
of drug target tissues and tumor microenvironments. Our services include two main technologies: 1) multimodal mass spectrometry
imaging (MSI) for the identification and characterization of biomolecules (from proteins to metabolites and small molecules) as
a function of their location within tissues, and 2) liquid chromatography mass spectrometry (LCMS) for the identification and characterization
of proteins and metabolites from cells, tissues, blood/serum samples, and biopharmaceutical sources.
We believe that the synergy of these technologies
combined with innovative method development provides for an unparalleled depth of biomolecule assessment for immune-oncology applications.
Understanding the distribution of these therapeutics, derivatives, metabolites and other compounds affected by the compound can
provide insight into the efficacy of the drug and overall molecular impact. Once target tissues are imaged, data analysis could
include quantitation of the dosed therapeutic, distribution analysis, and other bioinformatics including statistical and pathway
analysis. Combined with imaging, we also provide expert antibody characterization that can verify appropriate therapeutic design.
Through our multimodal approaches, we can also monitor therapeutic production processes to guide optimization decisions at the
metabolic level.
Our Business Strategy
We intend to achieve our business objectives
by leveraging its bioanalytics expertise and technology to improve the availability, comprehensiveness and usefulness of molecular
information to address the needs of the preclinical pharmaceutical research, biomarker discovery and other life science markets.
Key strategic elements are the following:
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Maintain and advance our commercial business
strategy in developing next generation bioanalytics technology, including high throughput and mass spectrometry imaging capabilities,
combined with existing bioanalytical workflows, to improve the availability, comprehensiveness, and usefulness of molecular information
to address the needs of our pharmaceutical research, biomarker discovery, agriculture and other life science research clients.
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Collaborate with platform extending companies,
as exemplified by our co-marketing partnership with MatTek, to bundle our commercial technology with theirs, where upon bundling
our commercial technology with MatTek, we can enhance and add value to our existing commercial technology. Joint marketing efforts
broaden our commercial reach by leveraging collaborator’s network of existing users to introduce our bioanalytics technology.
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Advance our market share by developing
and validating an expanding portfolio of bioanalytics capabilities and continuously expand the commercial applications for the
technology.
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Leverage the value we have created with
our proprietary bioanalytics technology and infrastructure by creating molecular discovery development partnerships with top tier
medical research institutions, wherein we provide access to our capabilities and work together to achieve our goals.
|
In furtherance of our efforts to implement
our business goals, we recently ordered a state of the art mass spectrometer. We believe that the purchase of this equipment will
significant increase our revenues as certain customers have indicated a willingness to provide us with additional purchase orders
based on our having the enhanced mass spectrometry imaging capabilities that should result from use of such equipment. The purchase
price for the additional equipment is $1,250,000 which we financed though a three year loan from Summit Resources, Inc., one of
our principal stockholders and an affiliate of Steve Antoline, an officer and director of our Company. See “Item 13. “Certain
Relationships and Related Transactions and Director Independence” elsewhere in this Annual Report.
Sales and Marketing
We market our services and products worldwide,
utilizing a combination of its own field sales organization, distributors, in-house sales support and web-based marketing. We attend
exhibitions in the U.S. and overseas to present our services and products.
We have established marketing partnerships
with VWR International and Fisher Scientific for global sales and marketing of its products. These purchasing channels are widely
used within research organizations and enable rapid purchasing and receipt of products.
In 2016 established a co-marketing agreement
with MatTek Corporation (“MatTek”), which allows us to include MatTek’s human cell based
in vitro
tissue
models with our proprietary molecular imaging services.
In 2016 we renewed a co-marketing agreement
with Protein Metrics for further application development of their analytical software for our bioanalytical service offerings.
In January 2017, we launched a new Company
website which features our Corporate “Resource Center”, where researchers can access publications and application notes
and other support materials on our bioanalytical services and technologies. The website also allows researchers to purchase products
directly and provides a breadth of information about our technologies and services.
Our customers include major pharmaceutical,
biotech, industry and life science medical and research institutions. By working collaboratively with customers, we help to define
the experimental workflow, develop any methods required to answer the question, and deliver the data or products in a professional
manner. We market directly to researchers through a variety of modern methods to spread the awareness of our organization and capabilities.
Many of our collaborative efforts are presented either at national or international scientific conferences and many have resulted
in peer-reviewed publications. Presenting our technologies, services, and diagnostic capabilities in scientific settings has resulted
in an increase in awareness and business growth. These channels have also enabled the formulation of relationships between key
strategic collaborators and customers.
Dependency on Certain Customers
A small number of our customers accounted for
a substantial portion of our revenues in 2016. Six customers accounted for approximately 53% of our gross revenue in fiscal 2016.
One large pharmaceutical company accounted for 22% of our gross revenue in 2016, and we anticipate that this customer will continue
to be a significant contributor to revenue in 2017.
Industry and Market Overview
Bioanalytics Industry
The Global Bioanalytics Industry consists of
the products and services that provide molecular information for the elucidation, identification and characterization of the biomolecules
that are the products of all living cells (endogenous molecules) as well as the molecules that are manufactured and used as therapeutics
(exogenous molecules), diagnostics and other analytical purposes for the Life Sciences Industries.
There are many methodologies that have been
developed and are used by the Bioanalytics Industry. However, due to its ability to deliver both qualitative and quantitative characterization
of biomolecules within a wide variety of sample types, it is our belief that the predominant technology platform is mass spectrometry.
We believe that mass spectrometry is the gold standard within the Bioanalytics Industry.
Mass Spectrometry
Mass spectrometry is an analytical technique
that ionizes chemical species and sorts the ions based on their “mass-to-charge ratio. It is a 100-year-old method that was
originally used for radioisotope enrichment and chemical composition analysis. More recent developments in soft ionization techniques
(e.g. electrospray and MALDI), drove advances in the use of mass spectrometry for the analysis of biomolecules, and have helped
solidify biological mass spectrometry as the backbone of the Bioanalytics Industry. Mass spectrometers are used extensively in
the biopharmaceutical, industrial, chemical, materials and forensics industries, as well as in academic research institutions.
According to a market research report, “
Mass
spectrometry Market by Platform (Hybrid mass spectrometry (Triple Quadrupole, QTOF, & FTMS), Single mass spectrometry (Quadrupole,
TOF, & Ion trap)) & by Application (Pharmaceuticals, Biotechnology)
(Analysis & Global Forecast to 2020), mass
spectrometry imaging (MSI) is a technique used to visualize the spatial distribution of chemical compositions (e.g. small molecules,
biomarkers, metabolites, peptides or proteins) by their molecular masses. For biological samples, MSI enables researchers to map
the presence of analyte signatures and overlay those onto optical images of the original sample, thereby allowing comparison of
the structure and architecture of a sample with its chemical compositions. The global mass spectrometry market was valued at U.S.
$4.9 billion in 2015 and is expected to reach US $7.3 billion by 2020, growing at a compound annual growth rate (“CAGR”)
of 8.1% from 2015 to 2020.
Bioanalytics Market
The largest segment of the bioanalytics market
is comprised of the pharmaceutical industry’s use of bioanalytics to support the development of new therapeutics. The Pharmaceutical
Research and Manufacturers of America (“PhRMA”), estimated a total of $49.58 billion in research and development expenditures
in 2012. Of this, $11.82 billion was spent on prehuman/preclinical functions, which represented 23.8% of all R&D expenditures.
This figure does not include non-PhRMA member companies, and R&D expenditures by government agencies such as the National Institute
of Health (NIH) and National Institute of Cancer (NIC) or domestic and international biopharmaceutical companies that are not members
of PhRMA.
According to a market research report, “
Contract
Research Organizations (CROs) Services Market by Type (Preclinical, Clinical Research, Laboratory), Therapeutic Area (Oncology,
CNS, Cardiovascular), End User (Pharmaceutical, Biopharmaceutical & Medical Device Companies) (Global Forecast to 2021
)”,
the global Pharmaceutical services market is projected to reach USD 41.86 Billion by 2021 from USD 29.29 Billion in 2016, at a
CAGR of 7.4% from 2016 to 2021. The market is expected to witness significant growth in the coming years due to the increased
demand for outsourcing of analytical testing and clinical trial services majorly by pharmaceutical, biopharmaceutical, and medical
device companies. The high-quality standards in the pharmaceutical industry, rapid growth in the biosimilars and biologics market
(or biotherapeutics), rising demand for outsourcing services by pharmaceutical and biopharmaceutical companies, and increase in
the number of clinical trial activities are factors driving the growth of this market.
According to a market research report, “
Monoclonal
Antibodies (mAbs) Market Analysis By Source (Chimeric, Murine, Humanized, Human), By Type of Production, By Indication (Cancer,
Autoimmune, Inflammatory, Infectious, Microbial, Viral Diseases), By End-use (Hospitals, Research, Academic Institutes, Clinics,
Diagnostic Laboratories) And Segment” (Grand View Research, Forecasts, 2013 – 2024, November 2016, http://www.grandviewresearch.com)
,
therapeutic proteins (known as “biopharmaceuticals”, “biotherapeutics” or “biologics”), represent
a rapidly growing sector of the pharmaceutical industry. The global market for the largest biopharmaceutical component (“therapeutic
antibodies”), was valued at USD 85.4 billion in 2015 and is expected to reach a value of USD 138.6 billion by 2024 with
an annual growth rate of 5.7%. Rising incidence of cancer and other chronic diseases is serving as the key contributing factor
for the growth of the monoclonal antibodies market. Increasing R&D pertaining to the development of therapeutic monoclonal
antibodies (or “mAb’s”) coupled with the structural complexity of therapeutic proteins and the increasing regulatory
needs for molecular information all require new analytical capabilities from the Bioanalytics Industry.
According to a market
research report, “
Biomarkers: Technological and Commercial Outlook 2012 – 2022” (
Visiongain, July 2012,
https://www.visiongain.com/Report/852/Biomarkers-Technological-and-Commercial-Outlook-2012-2022
)
a related sector of the
Bioanalytics Industry is the identification of disease-specific molecular “biomarkers.” Biomarkers are specific molecules,
or panels of molecules, that have been found to be regulated in conjunction with specific disease states or drug treatments relevant
to human health and disease. The human disease biomarker sector seeks to identify and validate biomolecules that are associated
with the onset and progression of a specific disease, and thus can become new diagnostics, or biomarkers, to be used for personalized
medicine, as well as companion diagnostics to guide new pharmaceutical development for specific patient subgroups. The global market
for biomarkers in 2011 was $13.8 billion and expected to reach $37.68 billion in 2022.
Market for Melanoma Analysis
According to research report,
“Cancer
Statistics, 2015, t
he U.S. market for analysis of indeterminate or borderline analysis of malignant melanoma is approximately
$720 million annually. About 500,000 skin biopsies are labeled as indeterminate or borderline every year in the U.S.
According to the National Cancer Institute,
there is an estimated 73,870 new cases of melanoma diagnosed in the USA in 2015. As a standard clinical practice, there are up
to two million biopsies performed each year to rule out melanoma. Of these biopsies, 25% cannot be definitively classified using
routine histopathology (
Am J Surg Pathol
, ,
33
, 1146-56, 2009). Currently, additional testing is necessary in order
to assess the indeterminate skin biopsy samples.
Competition
We believe that our technology provides significant
improvements over what is currently on the market. Bioanalytics is a major global industry and competition is expected to be broad-based;
however, we believe that the industry also affords opportunities for commercial partnerships, such as our collaboration with Agilent
(NYSE:A). The following list of competitors is not intended to be exhaustive, and there are other existing competitors and there
likely will be new potential competitors in the future.
Bioanalytical Services
Competitors include Quintiles Transnational
Holdings Inc. (U.S.), Laboratory Corporation of America Holdings (U.S.), Pharmaceutical Product Development, LLC (U.S.), PAREXEL
International Corporation (U.S.), and Icon Plc (Ireland), PRA Health Sciences, Inc. (U.S.), InVentiv Health Inc. (U.S.), Charles
River Laboratories International Inc. (U.S.), INC Research Holdings Inc. (U.S.), and Wuxi PharmaTech (Cayman) Inc. (China). Many
of these competitors for services operate at various steps across the drug discovery and development process from disease target
identification, preclinical testing, toxicology and safety analysis, and clinical trial design and manufacturing.
Competitors in the field of mass
spectrometry imaging services include ImaBiotech Corp., based in Loos, France.
Intellectual Property, Licenses and Terms
of Collaborative Agreements
Intellectual Property
Protea currently owns eight patents (with additional
pending applications) and has an exclusive license to sixteen additional patents and other pending applications owned by GWU. The
subjects of the patent applications include: 1) Laser Ablation Electrospray Ionization (“LAESI”) for high throughput
and imaging mass spectrometry (two- and three-dimensional biomolecular imaging); 2) nanopost arrays (“NAPA”) for high
sensitivity and matrix-free analysis of biological samples in MALDI mass spectrometers; 3) novel acid-cleavable chemical surfactants;
and 4) protein microscope.
Subsequent to December 31,2016, the
Company had received two Payment on Demand letters from George Washington University regarding the patent license agreement
for “LISMA/NAPA License” and exclusive license agreement for the “LAESI License” along with the
patent license agreement for the “Protein Microscope License.” As these letters relate to such agreements and
past due payments, they allow the Company to make payment or release their rights of the each of such license agreements by
specified amount of days for each agreement or provide requested plans. See Note 15 Evaluation of Subsequent Events of Part
IV, Financial Statement Footnotes in this report for more information.
Agreement with West Virginia University (“WVU”)
On December 21, 2005, the Company entered into
an Exclusive License Agreement (the “WVU Agreement”) with the West Virginia University Research Corporation, a nonprofit
West Virginia corporation (“WVURC”) acting for and on behalf of West Virginia University. Under the terms of the WVU
Agreement, the Company is required to pay (i) a license fee equal to $25,000 due within 90 days of the date on which the first
notice of allowance is issued by the United States Patent and Trademark Office or a similar foreign country with respect to the
technology underlying the WVU Agreement; (ii) annual royalties equal to 4% of the gross sales of products and services that utilize
the subject technology which are payable semi-annually within 30 days of June 30 and December 31 of each calendar year covering
gross sales received during the preceding year; and (iii) expenses for the preparation, filing and prosecution of related patent
applications. In the event the Company is required to license any intellectual property from third parties in order to practice
or commercialize the technology underlying the WVU Agreement, the royalty payments will be reduced by the lesser of (a) 50% or
(b) the royalty and licensing fees actually incurred by the Company to license the intellectual property rights from such third
party. If such a reduction is applicable, WVURC is entitled to earned royalties of at least 2% on gross sales of products and services
that utilize the WVU subject technology. For any sublicense granted to sub-licensees, WVURC is entitled to 10% of any license fee
and other payments or fees received from the sublicensee, which is due and payable within ten days of receipt by the Company from
the sublicensee. At present, the Company sponsors collaborative research in the WVU School of Medicine Department of Pathology
and the Mary Babb Randolph Cancer Center (MBRCC).
Unless earlier terminated in accordance with
its terms, the WVU Agreement automatically terminates upon the later of: (i) the expiration of the last patent to expire issued
in respect of the licensed technology, or (ii) 20 years from the first commercial sale by the Company of the last licensed product
included in the subject technology by amendment to the WVU Agreement. At present, there are no patent applications being pursued
by WVU in respect of the technology licensed to the Company under the WVU Agreement. The Company has made all the payments required
under the WVU Agreement, and the Company is otherwise in full compliance with the terms of the WVU Agreement.
Agreements with The George Washington
University (“GWU”)
In December 2008, the Company entered into
an Exclusive License Agreement, as amended on February 22, 2010 and from time to time thereafter with GWU (Washington, D.C.) for
the LAESI technology developed in the laboratory of 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. Under the terms of the license agreement, the Company has the exclusive,
worldwide rights to commercialize the technology. The Company is obligated to pay expenses for the preparation, filing and prosecution
of future related patent applications governed by the license agreement and related license fees, annual royalties equal to 5%
of the net sales of products and processes sold by the Company, or an affiliate that utilizes the subject technology, after taking
into account the annual minimum royalty fees described below, and 50% of payments received by the Company in connection with any
sublicense of the technology under the agreement. On the first anniversary of either the date on which the Company first sells
a product or service utilizing the technology underlying the agreement or the date on which the Company enters into its first sublicense
agreement, whichever occurs first (the “First Sale Date”), the Company is required to pay GWU a non-refundable minimum
royalty payment equal to $5,000. The university is also entitled to the following non-refundable minimum royalty payments on each
subsequent anniversary of the First Sale Date: second anniversary: $10,000; third anniversary: $15,000; fourth anniversary and
continuing annually through the expiration or termination of the agreement: $20,000.
Unless earlier terminated in accordance with
its terms, the agreement expires upon the later of 20 years from the effective date or the end of the term of the last underlying
patent to expire. Currently, the LAESI patent (US 7,964,843) is the underlying patent and will expire on May 21, 2026.
As of the date of this report our obligation
to GWU is approximately $47,000 which is related to Napa License technology. Subsequent to December 31, 2016, GW has requested
all NAPA past due royalties and milestone payments be made no later than February 6, 2017. The Company has decided to not comply
and terminate the NAPA license agreement. Subsequent to December 31, 2016, GWU has also requested all LAESI past due royalties
of $110,374 are paid by March 28, 2017 to bring our LAESI obligations under the GWU License current. The Company has made
such payment and remains in compliance with the agreement.
GWU and DARPA
In January 2014, the Company, as a subcontractor
to GWU, was awarded a multi-year project with the Defense Advanced Research Projects Agency (“DARPA”). In addition
to Protea, The Stanford Research Institute International and GE Global Research also collaborate on the project entitled, “New
Tools for Comparative Systems Biology of Threat Agent Action Mechanisms.” A $15 million five year project, the goal of DARPA’s
Rapid Threat Assessment (“RTA”) program is to develop new tools and methods to elucidate the mechanism of action of
a threat agent, drug, biologic or chemical on living cells within 30 days from exposure. Uncovering the mechanism of action of
such agents in 30 days, compared to the years currently required, could be key to the development of effective countermeasures.
Agreement with AzurRx Biopharma
In December 2014, Protea Biosciences, Inc.,
our wholly-owned subsidiary, completed the sale of 100% of the issued and outstanding capital stock of ProteaBio Europe SAS, to
AzurRx BioPharma, Inc. (“AzurRx”). Pursuant to the terms of the Stock Purchase and Sale Agreement, dated May 18 2014
(the “SPA”), we received the right to be paid upon the satisfaction of certain events, including (a) a one-time milestone
payment of $2,000,000 due within (10) days of receipt of the first approval by the FDA of a New Drug Application or Biologics License
Application for a Business Product (as such term is defined in the SPA); (b) royalty payments equal to 2.5% of net sales of Business
Product up to $100,000,000 and 1.5% of net sales of Business Product in excess of $100,000,000 and (c) ten percent (10%) of the
Transaction Value (as defined in the SPA) received in connection with a sale or transfer of the pharmaceutical development business
of Protea Europe.
Agreement with Agilent
In 2015, we entered into a Memorandum of Understanding
(the “MOU”) with Agilent Technologies, Inc. (NYSE: A) (“Agilent”), to develop new bioanalytical workflows
in order to meet the emerging needs of the growing biopharmaceutical industry. Under the terms of the MOU, Protea, using Agilent
instrumentation provided by Agilent combined with its expertise, will develop workflows to improve the characterization of protein
therapeutics including monoclonal antibodies and new methods for the field of metabolomics.
Yale License Agreement
In April 2016, we entered into an exclusive
license agreement for technology with Yale University related to the differential diagnosis of melanoma, specifically designated
as a "Method of Differentiating Benign Melanocytic Nevi from Malignant Melanoma." The technology was co-invented by Dr.
Rossitza Lazova, of the Department of Dermatology at Yale School of Medicine, and Dr. Erin Seeley our Principal Investigator. Under
the terms of the license agreement, we have been granted the exclusive worldwide rights to commercialize the technology.
We are obligated to pay expenses for the preparation, filing and prosecution of future related patent applications governed by
the license agreement and related license fees. We are obligated to pay a non-refundable royalty of $5,000 payable to Yale University
in May 2016, and an annual license maintenance royalty of $2,500 in April 2017 and an annual license maintenance royalty of $5,000
in each anniversary year thereafter. We also pay a non-refundable royalty of $5,000 upon our making our first sale of a licensed
product, $7,500 when we file for an approval for commercial sale with a government regulatory agency and $10,000 upon our “first
sale” of a licensed product that is approved by such governmental agency. In addition, we will pay Yale an earned royalty
of 2.5% on worldwide cumulative net sales of licensed products by our company or under any sub-license or affiliate arrangements,
to accrue within thirty (30) days from the end of each calendar quarter, subject to the payment of minimum annual royalties of
$10,000, payable on the first day of January in the year following our first sale of licensed products (the “Minimum Royalty
Effective Date”), and increasing to $15,000 on the first anniversary of the Minimum Royalty Effective Date, $20,000 on the
second anniversary of the Minimum Royalty Effective Date, $30,000 on the third anniversary of the Minimum Royalty Effective Date,
$40,000 on the fourth anniversary of the Minimum Royalty Effective Date and $50,000 on the fifth anniversary of the Minimum Royalty
Effective Date and each subsequent anniversary year thereafter. Unless earlier terminated in accordance with its terms, the Yale
license agreement expires upon the later of 20 years from the effective date or the end of the term of the last underlying patent
to expire.
Government Regulation
The Company’s products and services are
sold for research use only and are not subject to U.S. Food and Drug Administration or other government agency approval.
Sources and Availability of Raw Materials
The Company does not believe that it has any
critical issues of availability of raw materials or vendors where there are not multiple sources for the raw materials or vendor
support that its business requires.
Environmental Matters
We are subject to various laws and governmental
regulations concerning environmental matters and employee safety and health in the United States and other countries. U.S. federal
environmental legislation that affects us includes the Toxic Substances Control Act, the Resource Conservation and Recovery Act,
the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act and the Comprehensive Environmental Response Compensation and
Liability Act (CERCLA). We are also subject to regulation by the Occupational Safety and Health Administration (OSHA) concerning
employee safety and health matters. The United States Environmental Protection Agency (EPA), OSHA, and other federal agencies have
the authority to promulgate regulations that have an effect on Protea’s operations. As of the date of this filing, we did
not have any accrued liabilities related to environmental matters.
Employees
As of the date of this filing, we
currently have 25 full time employees, consisting of 11 technicians and scientists (3 PhD level), 8 management/administrative
(1 PhD level), and 6 sales and marketing (1 PhD level). We also employ several part time and temporary employees. None of our employees
are represented by a union.
Sale of European Subsidiary
In December 2014, Protea Biosciences, Inc.,
our wholly-owned subsidiary, completed the sale of 100% of the issued and outstanding capital stock of ProteaBio Europe SAS, to
AzurRx BioPharma, Inc. (“AzurRx”). Pursuant to the terms of the Stock Purchase and Sale Agreement (the “SPA”),
we received the following consideration in exchange for the subsidiary:
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(i)
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an aggregate amount of $300,000 including $200,000 in cash and $100,000 from the forgiveness of outstanding indebtedness of the Company owed to AzurRx;
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(ii)
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100 shares of Series A Preferred Stock of AzurRx (the “Preferred Stock”) that was convertible into 33% of the issued and outstanding Common Stock of AzurRx; and
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(iii)
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the right to receive certain other contingent consideration to be paid upon the satisfaction of certain events, including (a) a one-time milestone payment of $2,000,000 due within (10) days of receipt of the first approval by the FDA of a New Drug Application or Biologics License Application for a Business Product (as such term is defined in the SPA); (b) royalty payments equal to 2.5% of net sales of Business Product up to $100,000,000 and 1.5% of net sales of Business Product in excess of $100,000,000 and (c) ten percent (10%) of the Transaction Value (as defined in the SPA) received in connection with a sale or transfer of the pharmaceutical development business of Protea Europe.
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Effective upon the closing of the SPA, Thijs
Spoor, a former director of the Company, was appointed as the sole director and chairman of AzurRx. While Mr. Spoor was a director
of the Company, he did not receive any compensation for his services rendered as an executive officer or director of Protea. Pursuant
to the SPA, so long as the Company owns such number of shares of Preferred Stock that are convertible into twenty percent (20%)
or more of the issued and outstanding Common Stock of AzurRx, the Company will have the right to designate at least one member
of AzurRx's board of directors.
As a result of the sale of ProteaBio
Europe SAS in 2014, the Company received 100 shares of series a preferred stock of AzurRx, representing a 33% interest in
AzurRx, as calculated on a fully diluted basis under that is the equity method of accounting. AzurRx is a private
biotechnology company formed to focus on the development of the early stage pharmaceutical assets of ProteaBio Europe SAS.
During 2016 and 2015, the Company coverted its series A Preferred shares into 2,439,365 shares of Common Stock of AzurRx.
Also, throughout 2016 and 2015, the Company entered into several transactions to sell 1,706,974 shares and 606,667 shares of
AzurRx, resulting in cash proceeds of $1,502,100, and $910,000, respectively. As a result of these transactions, the
Company’s interest in AzurRx has been reduced to 1.7%. 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.
Capitalization
and Private Financings
In order to obtain working capital to continue
our research and the development of our business and sustain operations, we have relied upon a series of private offerings to accredited
investors of our Common Stock, warrants and debt securities. The terms of these private placements have significantly increased
the number of shares of our Common Stock that are outstanding and are subject to issuance upon exercise of warrants or conversion
of convertible securities.
From November 2013 to December 2013, the
Company issued in a private placement offering (the “2013 Offering”) approximately 77.87 units of Company
securities (the “Units”), each Unit consisting of 200,000 shares of Common Stock, par value $0.001 per share (the
‘Common Stock”), warrants to purchase 200,000 shares of Common Stock (“2013 Class A Warrants”), and
warrants to purchase 100,000 shares of Common Stock (“2013 Class B Warrants”), in exchange for gross proceeds of
approximately $7.8 million ($100,000 per unit). The price per unit translated to of one share of Common Stock valued at $0.50
per share, one 2013 Class A Warrant and one-half 2013 Class B Warrant. A total of 15,524,642 shares of Common Stock,
15,524,642 of 2013 Class A Warrants, and 7,762,321 of 2013 Class B Warrants were issued in the 2013 Offering, and
an additional 3,302,823 of 2013 Class B Warrants were issued to the placement agent in connection with the 2013 Offering.
However, pursuant Unit Purchase Agreement executed in connection with the 2013 Offering, investors were entitled to
receive anti-dilutive shares of Common Stock if the Company subsequently issued or sold Common Stock for consideration of
less than $0.50 per share. As a result of our recent offering of Common Stock at a price of $0.075 per share, the 15,524,642
shares of Common Stock sold in the 2013 Offering increased to approximately 103,500,000 shares.
Between January 2014 and October 2016,
we sold approximately $6,260,940 of notes to 13 investors, approximately $6,145,688 of short-term original issue discount notes
and debentures (the “OID Debentures”), 3,707,775 shares of Preferred Stock, 22,802,759 shares of Common Stock and
warrants to purchase 74,970,359 additional shares of our Common Stock. See “Part II – Sales of Unregistered Equity
Securities” elsewhere in this Annual Report.
As at the date of this Annual Report,
approximately $2,937,111 of our outstanding debt securities, including the majority of our OID Debentures have matured and
are currently in default.
Pursuant to an amended and restated private placement memorandum dated as of October 31, 2016 (the “Memorandum”),
commencing in October 2016 the Company initiated and continues to conduct a private placement offering though March 31, 2017 (the
“2016-17 Offering”) of units of securities (the “Units”) consisting of (i) shares of Common Stock, $0.0001
par value per share (the “Common Stock”) offered at a per share price of $0.075 per share, (ii) Class A Warrants to
purchase additional shares of Common Stock at an exercise price of $0.09 per share (the “2016-17 Class A Warrants”)
and (iii) Class B Warrants to purchase additional shares of Common Stock at an exercise price of $0.1125 per share (the “2016-17
Class B Warrants”). Each Unit, offered for a total of $10,000, consist of (i) 133,333.33 shares of Common Stock, (ii) 133,333.33
of 2016-17 Class A Warrants, and (iii) 133,333.33 of 2016-17 Class B Warrants. Each of the 2016-17 Class A Warrants and 2016-17
Class B Warrants contain “full-ratchet anti-dilution provisions that effectively reduce the exercise prices of both securities
to $0.075 per share. As of December 31, 2016 we sold for an aggregate of $1,407,430, a total of 140.74 Units consisting of 18,765,729
shares of Common Stock and warrants to purchase 37,531,458 shares of our Common Stock.
As of the December 31, 2016, we had outstanding
an aggregate of 162,471,373 shares of our Common Stock and an additional 85,724,996 shares of our Common Stock we are obligated
to issue under anti-dilution provisions of our various outstanding securities. We also have outstanding $2,735,298 of convertible
debt securities outstanding entitling the holders upon conversion to receive up to 32,099,227 shares of our Common Stock, outstanding
warrants to purchase an aggregate of 122,475,881 shares of Common Stock and warrants to purchase an aggregate of 25,244,337
to issue under anti-dilution provisions. The Company also has reserved an aggregate of shares of Common Stock for issuance under
its 2002 Equity Incentive Plan (the “2002 Plan”) and shares of Common Stock have been reserved for issuance under the
Company’s 2013 Equity Incentive Plan (the “2013 Plan”). As of December 31, 2016, options to purchase an aggregate
of 10,780,086 shares of Common Stock have been granted and are outstanding under the 2002 Plan and the 2013 Plan, collectively.
Since January 1, 2017, we have issued Units of our equity securities in our private placement offering consisting of 7,573,332
additional shares of Common Stock and warrants to purchase 15,146,664 shares our Common Stock.
Accordingly, and based on the anti-dilution
provisions contained in the offering documents related to our private placements, as at the date of this Annual Report, our “Fully-Diluted
Common Stock” consists of 585,136,621 shares. Such fully-diluted shares include an aggregate of (a) 210,048,532 shares of
Common Stock issued and outstanding, (b) 85,724,996 shares of Common Stock we are currently obligated to issue under the anti-dilution
provisions of our agreements with and securities issued to various investors, and (c) an additional 289,363,093 shares of Common
Stock issuable upon conversion of convertible securities, issuance of anti-dilution warrants and the exercise of outstanding warrants
and options.
Derivative Liability, Debt Defaults and
Exchange Offers.
The anti-dilution provisions
contained in many of our outstanding securities, including the Unit Purchase Agreements with respect to the Common Stock in both
the 2013 Offering and the current 2016-17 Offering and the 2016-17 Class A Warrants and 2016-17 Class B Warrants included in the
2016-17 Offering has created significant derivative liabilities for the Company. As of December 31, 2016 such derivative liability
has been calculated to be in excess of $3,100,000 and increases as we sell additional warrants. Such derivative liability directly
impacts and reduces the Company’s stockholders equity which could materially and adversely affect our ability in the future
to qualify to list our Common Stock for trading on the Nasdaq Capital Market or other comparable national securities exchange.
In order to cure our defaults in payment of
our debt securities and to reduce, if not eliminate, the derivative liability, on or before April 30, 2017, we intend to:
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·
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Enter into agreements with certain of our creditors, including members of our board of directors, to convert approximately $2,521,719 of our indebtedness and accrued interest of $92,319 owed to such individuals into shares of our Common Stock and 2016-17 Class A Warrants to purchase shares our Common Stock at an exercise price of $0.09 per share, and 2016-17 Class B Warrants to purchase shares our Common Stock at an exercise price of $0.1125 per share, all upon the same terms as the Units of equity securities offered in our 2016-17 Offering, except that the warrants do not contain any full ratchet or weighted average anti-dilution adjustments. See "Related Party Transactions" elsewhere in this Annual private placement. As the date of this Annual Report, 10 of our related parties have agreed to convert an aggregate of $2,521,719 of debt and $92,319 of interest into 34,853,829 shares of our Common Stock and 2016-17 Class A Warrants to purchase 34,853,829 shares our Common Stock at an exercise price of $0.09 per share, and 2016-17 Class B Warrants to purchase 34,853,829 shares our Common Stock at an exercise price of $0.1125 per share.
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·
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Offer to the holder(s) of all $2,270,438 of OID Debentures, an opportunity under Section 3(a)(9) of the Securities Act of 1933, as amended, to exchange their debentures for a new 20% OID convertible debenture due September 30, 2017, plus one share of our Common Stock for each $1.00 outstanding principal amount of the new 20% OID convertible debenture issued to them. As proposed, the contemplated restated 20% OID convertible debenture would be in face amount equal to 100% of the outstanding principal of and accrued interest on the earlier convertible debentures and, upon consummation of any subsequent public offering of our Common Stock that is registered under the Securities Act prior to the new maturity date, would be subject to mandatory conversion at a 20% discount to the initial public offering price of our Common Stock (the “OID Convertible Debenture Exchange Offer”). The OID Convertible Debenture Exchange Offering will be offered for a period expiring on the earlier of June 30, 2017 or acceptance of the OID Convertible Debenture Exchange Offer by 100% of the holders of such OID Debentures.
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·
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Offer to the 156 holders of our Common Stock and Warrants issued in the 2013 Offering, an opportunity under Section 3(a)(9) of the Securities Act of 1933, as amended, to (a) waive for all purposes the “make whole” provisions in their subscription agreement in exchange for one-quarter of a warrant exercisable at $0.09 per share for each of the 103.5 million shares of Common Stock issued and issuable to them in the 2013 Offering (approximately 26. Million additional warrants) which would contain no weighted average or full ratchet anti-dilution provisions, plus (b) exchange all of the outstanding 2013 A Warrants, and 2013 B Warrants issued in the 2013 Offering (approximately 11,000,000 warrants) for one additional share of our Common Stock (the “2013 Exchange Offer”). The proposed 2013 Exchange Offer will be offered for a period expiring on the earlier of June 30, 2017 or acceptance of the 2013 Exchange Offer by 100% of the investors.
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·
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Offer to the 71 holders of our Common Stock and Warrants issued in the 2016-17 Offering, an opportunity under Section 3(a)(9) of the Securities Act of 1933, as amended, to exchange all of their 2016-17 Class A Warrants and 2016-17 Class B Warrants for 1.5 shares of Common Stock for each 2016-17 Class A Warrant and 2016-17 Class B Warrant (the “2016-17 Exchange Offer”). Accordingly, each $10,000 Unit that represented 133,333 shares of Common Stock, plus 133,333 of 2016-17 Class A Warrants and 133,333 of 2016-17 Class B Warrants would be exchanged for 333,333 shares of Common Stock, representing (a) 133,333 shares of Common Stock, plus (ii) 200,000 additional shares of common stock issued in lieu of the 2016-17 Class A Warrants and 2016-17 Class B Warrants. The proposed 2016-17 Exchange Offer will be offered for a period expiring on the earlier of June 30, 2017 or acceptance of the 2016-17 Exchange Offer by 100% of the investors.
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There can be no assurance that we will be
successful in ether extending the maturity dates of our defaulted debt obligations or eliminating any significant amount of our
derivative liabilities in connection with any or all of the above exchange offers. If we are not successful, our creditors could
accelerate our debt obligations in which event we may be forced to seek protection for such creditors under the U.S. Bankruptcy
Act. See “Risk Factors” elsewhere in this Annual Report.
Our Authorized
Common Stock Increase and Reverse Stock Split
Authorized Common
Stock Increase
.
On January 31, 2017,
at a special meeting of the Board of Directors, our Board of Directors approved by unanimous vote to seek shareholder approval
of certain proposals by written consent that, to adopt and effectuate, will require the majority consent of our stockholders. As
of the date of this filing on Form 10-K, we have submitted these proposals to our stockholders pursuant to our definitive proxy
statement on Schedule 14A, filed on March 2, 2017 with the Securities and Exchange Commission ("SEC"). Under the proposals
we are soliciting our stockholders written consent to approve the filing of an amended and restated certificate of incorporation
in Delaware (“Restated Charter”), to increase the number of authorizes shares of our Common Stock, $0.0001 par value
per share (“Common Stock”) from 500,000,000 shares of Common Stock to 750,000,000 shares of Common Stock (the “Authorized
Common Stock Increase”), and with such Authorized Common Stock Increase to be effective at such time and date within one
year after the date such action is approved by the Majority Stockholders, if at all, as determined by the Board of Directors in
its sole discretion (the “Authorized Common Stock Increase Proposal”).
The reason for the Authorized Common
Stock Increase Proposal is that as of April 13, 2017, we had issued and outstanding an aggregate of 209,915,199 shares of
Common Stock, we are currently obligated to issue an additional 85,724,996 shares of Common Stock under the anti-dilution
provisions of our agreements with and securities issued to various investors, and an additional 288,689,343 shares of Common
Stock reserved for issuance upon conversion of convertible notes, the issuance of anti-dilution shares and the exercise of
Common Stock purchase warrants that were then outstanding. Accordingly, as at the date of this Annual Report, our
“Fully-Diluted Common Stock” consists of 584,329,538 shares. In addition, we are continuing to sell units of
securities consisting of Common Stock at a price of $0.075 per shares and warrants to purchase Common stock at prices of
$0.09 and $0.01125 per share to accredited investors in our current private placement offering.
Accordingly, without the increase of our authorized
Common Stock to 750,000,000 shares, we will not have enough shares of Common Stock available to issue to holders of our convertible
securities, options and warrants.
Reverse Stock
Split
Included within our
definitive proxy statement on Schedule 14A, filed as of March 2, 2017 with the SEC, we submitted a proposal to our stockholders
for written consent to approve the filing of an amended and restated certificate of incorporation in Delaware (the “Restated
Charter”) or in a subsequent amendment to the Restated Charter, provisions to effect a reverse split of our issued and outstanding
Common Stock, within a range of not less than one-for-fifteen (1:15) and not more than one-for-fifty (1:50), with such ratio to
be determined by the Board of Directors, in its sole discretion (the “Reverse Split”), and with such Reverse Split
to be effective at such time and date within one year after the date such action is approved by the stockholders, if at all, as
determined by the Board of Directors in its sole discretion (the “Reverse Split Proposal”).
The Reverse Split proposal, including the final
reduced number of shares of Common Stock into which our currently outstanding shares will be converted (within the stockholder-approved
range referred to above), if approved by the consent of a majority of our stockholders, will be determined by our Board of Directors
in order to list our Common Stock on the Nasdaq Capital Market which, in any event, shall become effective only (a) upon the approved
filing of the Restated Charter to consummate the Reverse Split with the Secretary of State of the State of Delaware, including
the final reduced number of shares of Common Stock into which our currently outstanding shares will be converted; and (b) upon
announcement of the Reverse Split by FINRA.
In the event that we receive written
consent from a majority of our stockholders entitled to vote thereunder approving the Reverse Split and, subsequently, our
Board of Directors elects to consummate the Reverse Split on or prior to March 31, 2017, the Board of Directors will
not
effectuate the filing of the Restated Charter to consummate the Authorized Common Stock Increase. However, in the event that
we do not consummate the Reverse Split on or prior to March 31, 2017, we will consummate the Authorized Common Stock Increase
by filing the Restated Charter with the Secretary of State of the State of Delaware as soon as practicable following March
31, 2017. Even if we do consummate the Authorized Common Stock Increase on or about March 31, 2017, our Board of Directors
will still reserve and maintain the right to consummate the Reverse Split at such time and date within one year after the
date such action is approved by our stockholders, if at all, and as determined by the Board of Directors in its sole
discretion (the “Reverse Split Proposal”). On April 4, 2017, the Company’s board of directors approved the Company’s decision to exercise
such discretionary right by extending the deadline to receive written consents under the Consent Solicitation from the original
date of March 30, 2017 to April 28, 2017.
If implemented, the Reverse Stock Split will
only effect our outstanding Common Stock and shares of Common Stock issuable upon conversion of convertible securities and exercise
of warrants and options. It will not effect the number of shares of Common Stock we are authorized to issue under our Restated
Charter.
The purpose of the Reverse Split is to enable
us to qualify our Common Stock for listing on a national stock exchange such as The Nasdaq Capital Market or the NYSE AMEX. Our
Common Stock is currently traded on the OTC Markets OTCQB marketplace. Such trading market is considered to be less efficient than
that provided by a stock exchange such as The Nasdaq Stock Market or NYSE AMEX. In order for us to list our Common Stock on The
Nasdaq Stock Market or NYSE MKT, we must fulfill certain listing requirements, including minimum bid price requirements for our
Common Stock.
In order to list our Common Stock on the
Nasdaq Capital Market or the NYSE AMEX, among other requirements, our Common Stock must maintain a minimum closing bid price of
$4.00 or a closing share price of $3.00 or $2.00, as applicable. As of April 13, 2017, the closing sale price of our Common Stock
was only $0.08 per share on the OTC Markets OTCQB marketplace. We believe that completing the Reverse Split will result in an increase
in our adjusted share price that may enable us to “uplist” our shares on the Nasdaq Capital Markets, assuming all of
the other listing requirements of the Nasdaq Capital Market or the NYSE AMEX have also been satisfied. There can be no assurance
that following Reverse Split the market price of our Common Stock will increase, or will increase in such proportion to permit
us to “uplist” our shares on the Nasdaq Capital Market or the NYSE AMEX. No assurance can be given that, even if we
satisfy the listing requirements of The Nasdaq Capital Market or NYSE MKT, we will apply to have our Common Stock listed on either
exchange, or that, if we do so apply, that our application will be approved, or that, if our Common Stock is listed on either exchange,
we will be able to satisfy the maintenance requirements for continued listing. In addition, no assurances can be given that the
market price for our Common Stock will increase in the same proportion as the reverse split or, if increased, that such price will
be maintained.
The following table depicts the prospective
effects of the Reverse Split on the number of shares of our Common Stock outstanding, the number of shares of our Common Stock
reserved for future issuance upon conversion of convertible debt and exercise of options and warrants and the number of authorized
but unissued and unreserved shares of our Common Stock that would be available for issuance after the Reverse Split. As discussed
above, the number of shares of our Common Stock authorized for issuance under our Certificate of Incorporation would remain unaffected
by the Reverse Split.
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Common Stock
Outstanding (1)
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Shares Reserved for
Issuance (2)
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Shares Available for
Issuance (3)
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Prior to the Reverse Split
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295,640,195
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288,689,343
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(84,329,538
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)
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Pro-forma a 1:15 Reverse Split ratio
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19,709,346
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19,245,956
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461,044,698
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Pro-forma a 1:50 Reverse Split ratio
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5,912,804
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5,773,787
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488,313,409
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(1)
|
Does not give
effect to any changes resulting from the payment of cash or issuance of scrips or warrants in registered form to purchase
Common Stock in lieu of issuing fractional shares pursuant to the Reverse Split.
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(2)
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Represents the total number of shares of our Common Stock reserved for issuance pursuant to the conversion of convertible notes and other convertible securities and exercise of warrants and stock options.
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(3)
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Represents the total number of shares of authorized Common Stock that will be neither outstanding nor reserved for issuance, but without giving effect to any changes resulting from the payment of cash or issuance of scrips or warrants in registered form to purchase Common Stock in lieu of fractional shares.
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Implications of Being an Emerging Growth
Company
We are an "emerging growth company,"
as defined in the Jumpstart Our Business Startups Act of 2012. We will remain an emerging growth company until the earlier of (i)
December 31, 2019, the last day of the fiscal year following the fifth anniversary of the date of the first sale of our Common
Stock pursuant to an effective registration statement under the Securities Act; (ii) the last day of the fiscal year in which we
have total annual gross revenues of $1 billion or more; (iii) the date on which we have issued more than $1 billion in nonconvertible
debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under applicable
SEC rules. We expect that we will remain an emerging growth company for the foreseeable future, but cannot retain our emerging
growth company status indefinitely and will no longer qualify as an emerging growth company on or before December 31, 2019. We
refer to the Jumpstart Our Business Startups Act of 2012 herein as the "JOBS Act," and references herein to "emerging
growth company" have the meaning associated with it in the JOBS Act. For so long as we remain an emerging growth company,
we are permitted and intend to rely on exemptions from specified disclosure requirements that are applicable to other public companies
that are not emerging growth companies.
These exemptions include:
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being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced "Management's Discussion and Analysis of Financial Condition and Results of Operations" disclosure;
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not being required to comply with the requirement of auditor attestation of our internal controls over financial reporting;
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not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements;
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reduced disclosure obligations regarding executive compensation; and
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not being required to hold a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
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For as long as we continue to be an emerging
growth company, we expect that we will take advantage of the reduced disclosure obligations available to us as a result of that
classification. We have taken advantage of certain of those reduced reporting burdens in this prospectus. Accordingly, the information
contained herein may be different than the information you receive from other public companies in which you hold stock.
An emerging growth company can take advantage
of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting
standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would
otherwise apply to private companies. We have irrevocably elected to avail ourselves of this extended transition period and, as
a result, we will not be required to adopt new or revised accounting standards on the dates on which adoption of such standards
is required for other public reporting companies.
We are also a "smaller reporting company"
as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and have elected to take advantage
of certain of the scaled disclosure available for smaller reporting companies.
RISK FACTORS
Our business is subject to many risks and
uncertainties, which may affect our future financial performance. If any of the events or circumstances described below occur,
our business and financial performance could be adversely affected, our actual results could differ materially from our expectations,
and the price of our stock could decline. The risks and uncertainties discussed below are not the only ones we face. There may
be additional risks and uncertainties not currently known to us or that we currently do not believe are material that may adversely
affect our business and financial performance. You should carefully consider the risks described below, together with all other
information included in this annual report including our financial statements and related notes, before making an investment decision.
The statements contained in this annual report that are not historic facts are forward-looking statements that are subject to risks
and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements.
If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that
case, the trading price of our Common Stock could decline, and investors in our securities may lose all or part of their investment.
Risks Related to Our Business
We are an emerging growth company with
a limited operating history and limited sales to date.
The Company is subject to all of the risks
inherent in the establishment of an emerging growth company including the absence of an operating history and the risk that we
may be unable to successfully develop, manufacture and sell our products. There can be no assurance that the Company will be able
to execute its business plan, including without limitation the Company’s plans to develop, then manufacture, market and sell
its technologies, products and services. The Company has engaged in limited manufacturing operations to date and although the Company
believes that its plans to conduct manufacturing of its products internally will work, there is no assurance that this will be
the case. The Company began to sell products and services in the fourth quarter of 2007 and sales to date are limited. There can
be no assurance that the Company’s sales projections and marketing plans will be achieved as anticipated and planned. It
is likely that losses will be incurred during the early stages of operations. The Company believes that its future success will
depend on its ability to develop and introduce its instruments and services for mass spec molecular imaging, to meet a wide range
of customer needs and achieve market acceptance. The Company cannot assure prospective investors that it will be able to successfully
develop and market its products or that it will recover the initial investment that must be made to develop and market such products.
We have incurred net losses since inception.
We incurred a net loss of $15,647,922 for the
year ended December 31, 2016 and $9,574,434 for the year ended December 31, 2015. The Company has a net loss of $ 95,245,530 since
inception. Our independent registered public accountants issued an opinion on our audited financial statements as of and for the
year ended December 31, 2016 that contains an explanatory paragraph regarding substantial doubt about our ability to continue
as a going concern. Our ability to continue as a going concern is dependent upon raising capital from financing transactions. To
stay in business, we will need to raise additional capital through public or private sales of our securities, debt financing or
short-term bank loans, or a combination of the foregoing.
We are in default in payments of
approximately $2,937,111 of our outstanding notes and debentures.
As of April 13, 2017 approximately $686,830
of our Loans Payable to Stockholders, advances from related parties that aren’t papered, and all $2,250,281 of our OID Convertible
Debentures have matured and are currently in default. Although we are attempting to obtain extensions of the maturity date of
these debt obligations, there is no assurance that we will be successful in such endeavors. Even if we are able to renegotiate
the terms of such debt obligations and extend their maturity dates to September 30, 2017, there is no assurance that we will have
the funds available by September 30, 2017 to pay our obligations, if required. In the event that all or substantially all of such
creditors do not agree upon an extension of our defaulted debt securities, or we are unable to pay such debts by September 30,
2017, assuming we are able to obtain extensions of the current maturity dates, the holders of such notes and debentures could
accelerate the indebtedness evidenced thereby in which event we may be forced to cease operations or be required to seek protection
under the United States Bankruptcy Act.
We are required to raise significant
additional capital.
We have been operating at a loss since inception
and our working capital requirements continue to be significant. We have been supporting our business through the sale of debt
and equity since inception. We will need additional funding for developing products and services, increasing our sales and marketing
capabilities, technologies and assets, as well as for working capital requirements and other operating and general corporate purposes.
Our working capital requirements depend and will continue to depend on numerous factors including the timing of revenues, the expense
involved in development of our products, and capital improvements. If we are unable to generate sufficient revenue and cash flow
from operations, we will need to seek additional equity or debt financing to provide the capital required to maintain or expand
our operations, which may have the effect of diluting our existing stockholders or restricting our ability to run our business.
We have been successful in raising capital
to fund our operations since inception, and expect to continue to require substantial funds to advance our operations and develop
and/or acquire new products and services to compliment our business. Between November 2016 and the date of this Annual Report,
we raised an aggregate of $2,095,430 from the 2016-17 Offering of 209.54 units of our equity securities to 71 accredited investors
(the “Units”). The Units consisted of a total of 27,939,060 shares of our Common Stock at a per share purchase price
of $0.075 and two five year warrants, aggregating the right to purchase up to 55,878,120 additional shares of our Common Stock
at exercise prices of $0.09 and $0.1125, respectively.
We plan to meet our working capital 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 with our partners.
In order to pay our obligations and based on our current spending levels, management estimates that the
Company will need to raise approximately $11,000,000 in additional working capital to sustain its current operations through
the next twelve calendar months. We can provide no assurance as to whether our capital raising efforts will be successful or as
to when, or if, we will be profitable in the future. Even if the Company achieves profitability, it may not be able to sustain
such profitability.
There can be no assurance that we will be able
to raise sufficient additional capital on acceptable terms, or at all. If such financing is not available on satisfactory terms
or is not available at all, we may be required to delay, scale back or eliminate the development of business opportunities and
our operations and our financial condition may be materially adversely affected. Debt financing, if obtained, may involve agreements
that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt and could
increase our expenses and require that our assets be provided as a security for such debt. Debt financing would also be required
to be repaid regardless of our operating results. Equity financing, if obtained, could result in additional dilution to our then
existing stockholders.
We depend on the pharmaceutical and biotechnology
industries.
Over the past several years, some areas of
our business have grown significantly as a result of an increase in the sales of our bioanalytical instrument platform known as
“LAESI®” and the increase in pharmaceutical, academic and clinical research laboratory outsourcing of their clinical
drug research support activities. We believe that due to the significant investment in facilities and personnel required to support
drug development, pharmaceutical, academic and clinical research laboratories look to purchase our bioanalytical instrument platforms
and solutions technology to meet and administer their drug research requirements. Our revenues depend greatly on the expenditures
made by these pharmaceutical and academic or clinical research laboratory companies in research and development. In some instances,
companies in these industries are reliant on their ability to raise capital in order to fund their research and development projects.
Accordingly, economic factors and industry trends that affect our clients in these industries also affect our business. If companies
in these industries were to reduce the number of research and development projects they conduct or outsource, our business could
be materially adversely affected.
Changes in government regulation or in
practices relating to the pharmaceutical industry could change the need for the services we provide.
Governmental agencies throughout the world,
but particularly in the United States, strictly regulate the drug development process. Changes in regulation, such as regulatory
submissions to meet the internal research and development standards of pharmaceutical research, a relaxation in existing regulatory
requirements, the introduction of simplified drug approval procedures or an increase in regulatory requirements that we may have
difficulty satisfying or that make our services less competitive, could substantially change the demand for our services. Also,
if the government increases efforts to contain drug costs and pharmaceutical companies profits from new drugs, our customers may
spend less, or reduce their growth in spending on research and development.
We may be affected by health care reform.
In March 2010, the United States Congress
enacted the Patient Protection and Affordable Care Act (“PPACA”) which is intended over time to expand health insurance
coverage and impose health industry cost containment measures. PPACA legislation and the accompanying regulations may significantly
impact the pharmaceutical and biotechnology industries as it is implemented over the next several years. In addition, the
U.S. Congress, various state legislatures and European and Asian governments may consider various types of health care reform in
order to control growing health care costs. We are unable to predict what legislative proposals will be adopted in the future,
if any.
Implementation of health care reform legislation
may have certain benefits but also may contain costs that could limit the profits that can be made from the development of new
drugs. This could adversely affect research and development expenditures by pharmaceutical and biotechnology companies, which could
in turn decrease the business opportunities available to us both in the United States and abroad. In addition, new laws or regulations
may create a risk of liability, increase our costs or limit our service offerings.
Changes in healthcare law and implementing
regulations, including government restrictions on pricing and reimbursement, as well as healthcare policy and other healthcare
payor cost-containment initiatives, may negatively impact our ability to generate revenues.
The pricing and reimbursement environment for
the pharmaceutical and biotechnology industries may change in the future and become more challenging due to, among other reasons,
policies advanced by the current or any new presidential administration, federal agencies, new healthcare legislation passed by
Congress or fiscal challenges faced by all levels of government health administration authorities. If pricing and regulatory changes
pressure our customer base in the pharmaceutical and biotechnology industries our revenue generating ability may be adversely impacted.
A reduction in research and development
budgets at pharmaceutical companies and clinical research institutions may adversely affect our business.
Our customers include researchers at pharmaceutical
companies and academic or clinical research laboratory institutions. Our ability to continue to grow and win new business is dependent
in large part upon the ability and willingness of the pharmaceutical and biotechnology industries to continue to spend on research
and development and to outsource their product equipment and service needs. Fluctuations in the research and development budgets
of these researchers and their organizations could have a significant effect on the demand for our products and services. Research
and development budgets fluctuate due to changes in available resources, mergers of pharmaceutical companies and spending priorities
and institutional budgetary policies of academic or clinical research organizations. Our business could be adversely affected by
any significant decrease in life sciences research and development expenditures by pharmaceutical and academic or clinical research
companies. Similarly, economic factors and industry trends that affect our clients in these industries also affect our business.
We rely on a limited number of key customers,
the importance of which may vary dramatically from year to year, and a loss of one or more of these key customers may adversely
affect our operating results.
Six customers accounted for approximately 53%
of our gross revenue in fiscal 2016 and five customers accounted for approximately 52% of our gross revenues in fiscal 2015. One
large pharmaceutical company accounted for 22% of our gross revenue in 2016, and this customer will continue to be a significant
contributor to revenue in 2017. The loss of a significant amount of business from one of our major customers would materially and
adversely affect our results of operations until such time, if ever, as we are able to replace the lost business. Significant clients
or projects in any one period may not continue to be significant clients or projects in other periods. In any given year, there
is a possibility that a single pharmaceutical, academic or clinical research laboratory company may account for 5% or more of our
gross revenue or that our business may be dependent on one or more large projects. To the extent that we are dependent on any single
customer, we are subject to the risks faced by that customer to the extent that such risks impede the customer's ability to stay
in business and make timely payments to us.
We may bear financial risk if we underprice
our contracts or overrun cost estimates.
Since some of our contracts are structured
as fixed price or fee-for-service, we bear the financial risk if we initially underprice our contracts or otherwise overrun our
cost estimates. Such underpricing or significant cost overruns could have a material adverse effect on our business, results of
operations, financial condition, and cash flows.
A default in our credit facility could
materially and adversely affect our operating results and our financial condition.
The Company has an outstanding line of
credit with United Bank. This credit facility requires us to adhere to certain contractual covenants. If there were an
event of default under our credit facility that was not cured or waived, the lenders of the defaulted debt could cause all
amounts outstanding with respect to that debt to be due and payable immediately. We cannot assure that our assets or cash
flow would be sufficient to fully repay borrowings under the credit facility, either upon maturity or if accelerated, upon an
event of default, or that we would be able to refinance or restructure the payments becoming due on the credit facility.
Please see Note 3 Bank Line of Credit in Part IV, Financial Statement Footnotes in this report for additional detail
regarding our credit facility.
We might incur expenses to develop products
that are never successfully commercialized.
We have incurred and expect to continue to
incur research and development and other expenses in connection with our products business. The potential products to which we
devote resources might never be successfully developed or commercialized by us for numerous reasons including:
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inability to develop products that address our customers’ needs;
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competitive products with superior performance;
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patent conflicts or unenforceable intellectual property rights;
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demand for the particular product;
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other factors that could make the product uneconomical; and
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termination of pre-existing license agreements.
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Incurring expenses for a potential product
that is not successfully developed and/or commercialized could have a material adverse effect on our business, financial condition,
prospects and stock price.
Our business uses biological and hazardous
materials, which could injure people or violate laws, resulting in liability that could adversely impact our financial condition
and business.
Our activities involve the controlled use of
potentially harmful biological materials as well as hazardous materials and chemicals. We cannot completely eliminate the risk
of accidental contamination or injury from the use, storage, handling or disposal of these materials. In the event of contamination
or injury, we could be held liable for damages that result and any liability could exceed our insurance coverage and ability to
pay. Any contamination or injury could also damage our reputation, which is critical to obtaining new business. In addition, we
are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials
and specified waste products. The cost of compliance with these laws and regulations is significant and if changes are made to
impose additional requirements, these costs could increase and have an adverse impact on our financial condition and results of
operations.
Hardware or software failures, delays
in the operations of our computer and communications systems or the failure to implement system enhancements could harm our business.
Our success depends on the efficient and uninterrupted
operation of our computer and communications systems. A failure of our network or data gathering procedures could impede the processing
of data, delivery of databases and services, client orders and day-to-day management of our business and could result in the corruption
or loss of data. While all of our operations have disaster recovery plans in place, they might not adequately protect us. Despite
any precautions we take, damage from fire, floods, hurricanes, power loss, telecommunications failures, computer viruses, break-ins
and similar events at our computer facilities could result in interruptions in the flow of data to our servers and from our servers
to our clients. In addition, any failure by our computer environment to provide our required data communications capacity could
result in interruptions in our service. In the event of a delay in the delivery of data, we could be required to transfer our data
collection operations to an alternative provider of server hosting services. Such a transfer could result in delays in our ability
to deliver our products and services to our clients. Additionally, significant delays in the planned delivery of system enhancements,
improvements and inadequate performance of the systems once they are completed could damage our reputation and harm our business.
Finally, long-term disruptions in the infrastructure caused by events such as natural disasters, the outbreak of war, the escalation
of hostilities and acts of terrorism, particularly involving cities in which we have offices, could adversely affect our businesses.
Although we carry property and business interruption insurance, our coverage might not be adequate to compensate us for all losses
that may occur.
We rely on third parties for important
services.
We depend on third parties to provide us with
services critical to our business. The failure of any of these third parties to adequately provide the needed services including,
without limitation, licensed intellectual property rights, could have a material adverse effect on our business.
We license a significant portion of our
intellectual property from third parties; if the Company fails to regain compliance with these agreements the Company’s business
may be adversely affected.
The Company has entered into a number of technology license agreements with various universities for the exclusive use of a significant portion of the patent-based intellectual property that the Company uses. Generally, the license agreements imposes, and we expect that future license agreements will impose, various diligence, milestone payment, royalty and other obligations on us. If we fail to comply with our obligations under these agreements, or if we file for bankruptcy, we may be required to make certain payments to the licensor, we may lose the exclusivity of our license, or the licensor may have the right to terminate the license, in which event we would not be able to develop or market products covered by the license. As of March 22, 2017, we owe approximately $156,000 of royalties and other obligations under our technology license agreements and $110,374 was due March 28, 2017. The Company has made payment and is in compliance with the LAESI technology agreement.
Additionally, the milestone and other payments
associated with these licenses could materially and adversely affect our business, financial condition and results of operations.
While the Company is currently in compliance with the respective terms of these agreements, if there are one or more breaches thereunder,
such as the failure to pay the applicable royalties, and one or more of these agreements are terminated, the Company will not be
able to use such technology and the Company’s business may be adversely affected.
In some cases, patent
prosecution of our licensed technology may be controlled solely by the licensor. If our licensors fail to obtain and maintain patent
or other protection for the proprietary intellectual property we in-license from them, we could lose our rights to the intellectual
property or our exclusivity with respect to those rights, and our competitors could market competing products using the intellectual
property. In certain cases, we may control the prosecution of patents resulting from licensed technology. In the event we breach
any of our obligations related to such prosecution, we may incur significant liability to our licensing partners. Licensing of
intellectual property is of critical importance to our business and involves complex legal, business and scientific issues. Disputes
may arise regarding intellectual property subject to a licensing agreement, including, but not limited to:
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the
scope of rights granted under the license agreement and other interpretation-related issues;
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the
extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing
agreement;
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the
sublicensing of patent and other rights;
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our
diligence obligations under the license agreement and what activities satisfy those diligence obligations;
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the
ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us
and our collaborators; and
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the
priority of invention of patented technology.
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If disputes over intellectual
property and other rights that we have in-licensed prevent or impair our ability to maintain our current licensing arrangements
on acceptable terms, we may be unable to successfully develop and commercialize the affected drug candidates. If we fail to comply
with any such obligations to our licensor, such licensor may terminate their licenses to us, in which case we would not be able
to market products covered by these licenses. The loss of any of our current licensing arrangements and potentially other licenses
that we enter into in the future, would have a material adverse effect on our business.
We may be unable to obtain or maintain
patent or other intellectual property protection for any products or processes that we may develop.
The Company faces risks and uncertainties related
to intellectual property rights. The Company may be unable to obtain or maintain its patents or other intellectual property protection
for any products or processes that it may develop; third parties may obtain patents covering the manufacture, use or sale of these
products or processes which may prevent the Company from commercializing its technology; or any patents that the Company may obtain
may not prevent other companies from competing with it by designing their products or conducting their activities so as to avoid
the coverage of the Company’s patents.
Since patent applications in the U.S. are maintained
in secrecy for at least portions of their pendency periods (published on U.S. patent issuance or, if earlier, 18 months from the
earliest filing date for most applications) and since other publication of discoveries in the scientific or patent literature often
lags behind actual discoveries, we cannot be certain that we are the first to make the inventions to be covered by our patent applications.
The patent position of biopharmaceutical firms generally is highly uncertain and involves complex legal and factual questions.
The U.S. Patent and Trademark Office has not established a consistent policy regarding the breadth of claims that it will allow
in biotechnology patents.
Proceedings to obtain, enforce or defend patents
and to defend against charges of infringement are time consuming and expensive activities, and it is possible that the Company
could become involved in such proceedings. Unfavorable outcomes in these proceedings could limit the Company’s activities
and any patent rights that the Company may obtain, which could adversely affect its business or financial condition. Even if such
proceedings ultimately are determined to be without merit, they can be expensive and distracting for the Company’s operations
and personnel.
In addition, the Company’s success will
depend in part on the ability of the Company to preserve its trade secrets. The Company cannot ensure investors that the obligations
to maintain the confidentiality of trade secrets or proprietary information will not wrongfully be breached by employees, consultants,
advisors or others or that the Company’s trade secrets or proprietary know how will not otherwise become known or be independently
developed by competitors in such a manner that the Company has no legal recourse.
We are in a highly competitive market.
The Company is engaged in the highly competitive
field of biotechnology. Competition from numerous existing biotechnology companies and others entering the proteomics field is
intense and expected to increase. Many of these companies are larger, more established and recognized in the marketplace, and/or
have substantially greater financial and business resources than the Company. Moreover, competitors who are able to develop and
to commence commercial sales of their products before the Company may enjoy a significant competitive advantage. Likewise, innovations
by competitors could cause the Company’s products or services to become obsolete or less attractive in the marketplace, adversely
affecting sales and/or sales projections. The Company cannot assure investors that its technology will enable it to compete successfully
in the future.
We may expand our business through acquisitions.
We occasionally review acquisition candidates.
Factors which may affect our ability to grow successfully through acquisitions include:
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inability to obtain financing;
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difficulties and expenses in connection with integrating the acquired companies and achieving the expected benefits;
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diversion of management’s attention from current operations;
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the possibility that we may be adversely affected by risk factors facing the acquired companies;
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acquisitions could be dilutive to earnings, or in the event of acquisitions made through the issuance of our Common Stock to the shareholders of the acquired company, dilutive to the percentage of ownership of our existing stockholders;
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potential losses resulting from undiscovered liabilities of acquired companies not covered by the indemnification we may obtain from the seller; and
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loss of key employees of the acquired companies.
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We are dependent on certain key personnel.
The success of the Company is dependent to
a significant degree upon the skill and experience of its founders and other key personnel including Stephen Turner, David Halverson,
Matthew Powell, and others. The loss of the services of any of these individuals would adversely affect the Company’s business.
Although the Company has obtained key man life insurance policies on Mr. Turner, its CEO, there is no assurance that policy proceeds
would cover all potential costs or operational challenges that would result from the loss of services from Mr. Turner and in any
event, such policy would not cover the lives or loss of these other individuals. The Company cannot assure prospective investors
that it would be able to find adequate replacements for these key individuals. In addition, the Company believes that its future
success will depend in large part upon its continued ability to attract and retain highly skilled employees, who are in great demand.
We are developing products in a rapidly
evolving field and there are no assurances that the results of our research and development efforts will not be rendered obsolete
by the research efforts and technological activities of others.
The bioanalytics field in which the Company
is developing products is rapidly evolving. The Company cannot assure prospective investors that any results of the Company’s
research and development efforts will not be rendered obsolete by the research efforts and technological activities of others,
including the efforts and activities of governments, major research facilities and large multinational corporations. While the
Company believes that its initial efforts to develop its bioanalytics technology platform have been successful thus far, there
can be no assurance that the Company will be able to successfully expand its operations in the future, to commercialize, market
and sell products and services at projected levels, or to fully develop the technology in a timely and successful manner.
There is no assurance that the Company’s
manufacturing plans will be successful.
The Company employs internal and contract manufacturing.
There is no assurance that the Company’s manufacturing plans will be successful. While the Company has a quality assurance
program for its products, there nonetheless is inherent in any manufacturing process the risk of product defects or manufacturing
problems that could result in potential liability for product liability risks.
Unfavorable general economic conditions
may materially adversely affect our business.
While it is difficult for us to predict the
impact of general economic conditions on our business, these conditions could reduce customer demand for some of our products or
services which could cause our revenue to decline. Also, our customers that are especially reliant on the credit and capital markets
may not be able to obtain adequate access to credit or equity funding, which could affect their ability to make timely payments
to us. Moreover, we rely on obtaining additional capital and/or additional funding to provide working capital to support our operations.
We regularly evaluate alternative financing sources. Further changes in the commercial capital markets or in the financial stability
of our investors and creditors may impact the ability of our investors and creditors to provide additional financing. In addition,
the financial condition of our credit facility providers, which is beyond our control, may adversely change. Any decrease in our
access to borrowings under our credit facility, tightening of lending standards and other changes to our sources of liquidity could
adversely impact our ability to obtain the financing we need to continue operating the business in our current manner. For these
reasons, among others, if the economic conditions stagnate or decline, our operating results and financial condition could be adversely
affected.
Risks Relating to Ownership of Our
Securities
There is no active public trading market
for our Common Stock and we cannot assure you that an active trading market will develop in the near future.
Our Common Stock is quoted under the symbol
“PRGB” in the over-the-counter markets, including the OTCQB tier of the OTC Markets Group, Inc.; however, it is not
listed on any stock exchange and there is currently very limited trading in our securities. We cannot assure you that an active
trading market for our Common Stock will develop in the future due to a number of factors, including the fact that we are a small
company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community
that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse
and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such
time as we became more seasoned and viable. There may be periods of several days or more when trading activity in our shares is
minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally
support continuous sales. We cannot give you any assurance that an active public trading market for our Common Stock will develop
or be sustained. You may not be able to liquidate your shares quickly or at the market price if trading in our Common Stock is
not active.
Our share price could be volatile and
our trading volume may fluctuate substantially.
The market price of our Common Stock may experience
volatility. Many factors could have a significant impact on the future price of our Common Stock including:
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our failure to successfully implement our business objectives;
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compliance with ongoing regulatory requirements;
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market acceptance of our products;
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technological innovations, new commercial products or drug discovery efforts and clinical activities by us or our competitors;
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changes in government regulations;
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·
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general economic conditions and other external factors;
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·
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actual or anticipated fluctuations in our quarterly financial and operating results;
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·
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the degree of trading liquidity in our Common Stock; and
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·
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our ability to meet the minimum standards required for remaining listed on the OTC Markets.
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These factors also include ones beyond our
control such as market conditions within our industry and changes in the pharmaceutical and biotechnology industries. In addition,
in recent years, the stock market has experienced significant price and volume fluctuations. The stock market, and in particular
the market for pharmaceutical and biotechnology company stocks, has also experienced significant decreases in value in the past.
This volatility and valuation decline has affected the market prices of securities issued by many companies, often for reasons
unrelated to their operating performance, and might adversely affect the price of our Common Stock.
We have established Preferred Stock which
can be designated by the Company’s Board of Directors without shareholder approval.
The Company has authorized 10,000,000 shares
of Preferred Stock, of which none are issued and outstanding. The shares of Preferred Stock of the Company may be issued from time
to time in one or more series, each of which shall have a distinctive designation or title as shall be determined by the Board
of Directors of the Company prior to the issuance of any shares thereof. The Preferred Stock shall have such voting powers, full
or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications,
limitations or restrictions thereof as adopted by the Board of Directors. In each such case, we will not need any further action
or vote by our stockholders. One of the effects of undesignated Preferred Stock may be to enable the Board of Directors to render
more difficult or to discourage an attempt to obtain control of us by means of a tender offer, proxy contest, merger or otherwise,
and thereby to protect the continuity of our management. The issuance of shares of Preferred Stock pursuant to the Board of Directors’
authority described above may adversely affect the rights of holders of Common Stock. For example, Preferred Stock issued by us
may rank senior to the Common Stock as to dividend rights, liquidation preference or both, may have full or limited voting rights
and may be convertible into shares of Common Stock. Accordingly, the issuance of shares of Preferred Stock may discourage bids
for the Common Stock at a premium or may otherwise adversely affect the market price of the Common Stock.
Sales of securities that are currently
subject to market standoff provisions would cause our stock price to decrease.
Stockholders holding aggregate of 29,485,109 shares of our Common Stock and an aggregate of 2,600,113
shares of our Common Stock to be issued in connection with anti-dilution provisions, including our directors, officers and certain
key employees, are subject to a market standoff agreement which provides that the purchaser will not sell, assign or otherwise
transfer or dispose of any Common Stock, warrants or other securities of the Company until September 30, 2017. The price of our Common
Stock could decline if there are substantial sales of our Common Stock following the “lock-up” period, particularly
sales by our directors, executive officers and significant stockholders, or if there is a large number of shares of our Common
Stock available for sale.
Our Certificate of Incorporation provides
our directors with limited liability.
Our Certificate of Incorporation states that
our directors shall not be personally liable to us or any stockholder for monetary damages for breach of fiduciary duty as a director,
except for any matter in respect of which such director shall be liable under Section 174 of the Delaware General Corporation Law
(the “DGCL”) or shall be liable because the director (i) shall have breached his duty of loyalty to us or our stockholders,
(ii) shall have acted not in good faith or in a manner involving intentional misconduct or a knowing violation of law or, in failing
to act, shall have acted not in good faith or in a manner involving intentional misconduct or a knowing violation of law, or (iii)
shall have derived an improper personal benefit. Article Seven further states that the liability of our directors shall be eliminated
or limited to the fullest extent permitted by the DGCL, as it may be amended. These provisions may discourage stockholders from
bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by
stockholders on our behalf against a director.
Certain provisions of our Certificate
of Incorporation and Delaware law make it more difficult for a third party to acquire us and make a takeover more difficult to
complete, even if such a transaction were in the stockholders’ interest.
Our Certificate of Incorporation and the DGCL
contain provisions that may have the effect of making it more difficult or delaying attempts by others to obtain control of the
Company, even when these attempts may be in the best interests of our stockholders.
We also are subject to the anti-takeover provisions
of the DGCL, which prohibit us from engaging in a “business combination” with an “interested stockholder”
unless the business combination is approved in a prescribed manner and prohibit the voting of shares held by persons acquiring
certain numbers of shares without obtaining requisite approval. This statute has the effect of making it more difficult to effect
a change in control of a Delaware company.
Our financial
controls and procedures may not be sufficient to ensure timely and reliable reporting of financial information, which, as a public
company, could materially harm our stock price.
As a public reporting company, we require significant
financial resources to maintain our public reporting status. We cannot assure you we will be able to maintain adequate resources
to ensure that we will not have any future material weakness in our system of internal controls. The effectiveness of our controls
and procedures may in the future be limited by a variety of factors including:
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·
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faulty human judgment and simple errors, omissions or mistakes;
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·
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fraudulent action of an individual or collusion of two or more people;
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·
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inappropriate management override of procedures; and
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·
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the possibility that any enhancements to controls and procedures may still not be adequate to assure timely and accurate financial information.
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Our internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Our
internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect
on the financial statements.
Despite these controls, because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined
to be effective can provide only reasonable assurance of achieving their control objectives. Furthermore, smaller reporting companies
like us face additional limitations. Smaller reporting companies employ fewer individuals and can find it difficult to employ resources
for complicated transactions and effective risk management. Additionally, smaller reporting companies tend to utilize general accounting
software packages that lack a rigorous set of software controls.
Our management assessed
the effectiveness of our internal control over financial reporting as of December 31, 2016 based on the criteria established in
“Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, our management concluded as a result of material weaknesses in our internal control over financial reporting,
our disclosure controls and procedures were not effective as of December 31, 2016. The ineffectiveness of our disclosure controls
and procedures was due to the following material weaknesses our internal control over financial reporting, which are common to
many small companies: (i) lack of sufficient personnel commensurate with the Company’s reporting requirements; (ii) the Company
did not consistently establish appropriate authorities and responsibilities in pursuit of the Company’s financial reporting
objectives; and (iii) insufficient written documentation or training of internal control policies and procedures which provide
staff with guidance or framework for accounting and disclosing financial transactions.
If we fail to have
effective controls and procedures for financial reporting in place, we could be unable to provide timely and accurate financial
information and be subject to investigation by the Securities and Exchange Commission (the “SEC”) and civil or criminal
sanctions.
We must implement
additional and expensive procedures and controls in order to grow our business and organization and to satisfy new reporting requirements,
which will increase our costs and require additional management resources.
As a public reporting
company, we are required to comply with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and the related rules
and regulations of the SEC, including the requirements that we maintain disclosure controls and procedures and adequate internal
control over financial reporting. In the future, if our securities are listed on a national exchange, we may also be required to
comply with marketplace rules and heightened corporate governance standards. Compliance with the Sarbanes-Oxley Act and other SEC
and national exchange requirements will increase our costs and require additional management resources. We recently have begun
upgrading our procedures and controls and will need to continue to implement additional procedures and controls as we grow our
business and organization and to satisfy new reporting requirements. If we are unable to complete the required assessment as to
the adequacy of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act or if we fail
to maintain internal control over financial reporting, our ability to produce timely, accurate and reliable periodic financial
statements could be impaired.
If we do not maintain
adequate internal control over financial reporting, investors could lose confidence in the accuracy of our periodic reports filed
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Additionally, our ability to obtain additional
financing could be impaired or a lack of investor confidence in the reliability and accuracy of our public reporting could cause
our stock price to decline.
We are an “emerging growth company”
under the JOBS Act of 2012 and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies
will make our Common Stock less attractive to investors.
We are an “emerging growth company,”
as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and we 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 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy
statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder
approval of any golden parachute payments not previously approved. We cannot predict if investors will find our Common Stock less
attractive because we may rely on these exemptions. If some investors find our Common Stock less attractive as a result, there
may be a less active trading market for our Common Stock and our stock price may be more volatile.
In addition, Section 107 of the JOBS Act also
provides that an “emerging growth company” can take advantage of the extended transition period provided in Section
7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth
company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
We are choosing to take advantage of the extended transition period for complying with new or revised accounting standards.
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 the last day of our most recently completed
second fiscal quarter.
Our status as an “emerging growth
company” under the JOBS Act may make it more difficult to raise capital as and when we need it.
Because of the exemptions from various reporting
requirements provided to us as an “emerging growth company” and because we will have an extended transition period
for complying with new or revised financial accounting standards, we may be less attractive to investors and it may be difficult
for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies
in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are
unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially
and adversely affected.
Our directors, officers and principal
stockholders have significant voting power and may take actions that may not be in the best interests of our other stockholders.
Our officers, directors and principal stockholders
collectively beneficially own approximately 18% of our outstanding Common Stock. As a result, these stockholders, if they act together,
will be able to control the management and affairs of our Company and most matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of
delaying or preventing a change in control and might adversely affect the market price of our Common Stock. This concentration
of ownership may not be in the best interests of our other stockholders.
We have not paid dividends in the past
and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our stock.
We have never paid cash dividends on our Common
Stock and do not anticipate paying cash dividends on our Common Stock in the foreseeable future. We currently intend to retain
any future earnings to support the development of our business and do not anticipate paying cash dividends in the foreseeable future.
Our payment of any future dividends will be at the discretion of our Board of Directors after taking into account various factors,
including, but not limited to, our financial condition, operating results, cash needs, growth plans and the terms of any credit
agreements that we may be a party to at the time. In addition, our ability to pay dividends on our Common Stock may be limited
by Delaware state law. Accordingly, investors must rely on sales of their Common Stock after price appreciation, which may never
occur, as the only way to realize a return on their investment. Investors seeking cash dividends should not purchase our Common
Stock.
IRS CIRCULAR 230 DISCLOSURE: TO ENSURE COMPLIANCE
WITH REQUIREMENTS IMPOSED BY THE INTERNAL REVENUE SERVICE, WE INFORM YOU THAT ANY U.S. TAX ADVICE CONTAINED HEREIN (INCLUDING ANY
ATTACHMENTS) IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF AVOIDING PENALTIES UNDER THE INTERNAL
REVENUE CODE. IN ADDITION, ANY U.S. TAX ADVICE CONTAINED HEREIN (INCLUDING ANY ATTACHMENTS) IS WRITTEN TO SUPPORT THE “PROMOTION
OR MARKETING” OF THE MATTER(S) ADDRESSED HEREIN. YOU SHOULD SEEK ADVICE BASED ON YOUR PARTICULAR CIRCUMSTANCES FROM YOUR
OWN INDEPENDENT TAX ADVISOR.
IN ADDITION TO THE ABOVE RISKS, BUSINESSES
ARE OFTEN SUBJECT TO RISKS NOT FORESEEN OR FULLY APPRECIATED BY MANAGEMENT. IN REVIEWING THIS FILING, POTENTIAL INVESTORS SHOULD
KEEP IN MIND THAT OTHER POSSIBLE RISKS MAY ADVERSELY IMPACT THE COMPANY’S BUSINESS OPERATIONS AND THE VALUE OF THE COMPANY’S
SECURITIES.
1B. Unresolved Staff Comments
None
The Company leases its facility of approximately
10,412 square feet located at White Birch Towers II, 1311 Pineview Drive, Suite 501, Morgantown, WV 26505. The lease has an initial
five-year term beginning on April 1, 2012. The rent during the initial term is equal to $16.10 per square foot per year or $13,969
per month. The Company has the exclusive option to renew the term of the lease for an additional five years following the expiration
of the Initial Term. The renewal option must be exercised at least 120 days prior to the end of the initial term. If the renewal
option is exercised, the rent payable during the renewal period will be equal to $17.75 per square foot per year or $15,401 per month. We had the option
to terminate the lease after reaching the thirty-seventh month of the initial term upon 90 days advance written notice to the lessor
and the payment of an amount equal to two months’ rent. On December 1, 2016, the Company exercised the renewal option.
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Item
3.
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Legal
Proceedings
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From time to time, we may become involved in
various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties,
and an adverse result in these or other matters may arise from time to time that may harm business.
There are currently no pending legal proceedings to which the Company
or any of its subsidiaries is a party or of which any of their property is the subject that we believe will have, individually
or in the aggregate, a material adverse effect on our business, financial condition or operating results. As far as we are aware,
no governmental authority is contemplating any such proceeding.
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Item
4.
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Mine
Safety Disclosures.
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Not applicable.
PART II
Item 5. Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information
Our Common Stock is quoted on OTC Markets
under the symbol “PRGB”; however, it is not listed on any stock exchange, and there is currently very limited trading
in our securities. The quotation of our Common Stock began on or about April 7, 2014. There has been very limited trading in our
Common Stock to date. On April 13, 2017, the last reported sale price for our Common Stock was $0.08 per share.
As of the date of this report, the Company
had 209,915,199 shares of our Common Stock issued and outstanding held by approximately 574 stockholders of record and is obligated
to issue an additional 85,724,996 shares of Common Stock under anti-dilution provisions of various outstanding securities.
The Company has outstanding:
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Warrants to purchase up to 214,438,568 shares of our Common Stock at exercise prices ranging between
$0.075 and $2.25 per share, and obligated to issue additional warrants to purchase up to 25,244,336 shares of Common Stock
under anti-dilution provisions, subject to adjustment in certain circumstances as provided therein; and
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Options to purchase up to 10,910,086 shares of our Common Stock at a weighted average exercise price of $0.33
per share, subject to adjustment in certain circumstances as provided therein.
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·
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Warrant issuable to the placement agent for our winter 2015 private placement to purchase an aggregate of
up to 741,000 shares of Common Stock at exercise price equal to $0.25 per share, and for 2016 bridge financing to purchase an aggregate
of up to 491,250 shares of Common Stock at exercise price of $0.25 per share, for the 2016 OID Notes financing to purchase an aggregate
of up to 1,519,000 at an exercise price of $0.25, for the 2016-17 Offering 7,695,320 at an exercise price of $0.075.
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The following table sets forth the high and
low closing bid prices for our Common Stock for the fiscal quarter indicated as reported on the OTC Market. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. Our Common Stock
is very thinly traded and, thus, pricing of our Common Stock on the OTC Market does not necessarily represent its fair market value.
Period
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High
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Low
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Quarter ending June 30, 2014 (from April 11, 2014)
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$
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2.100
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$
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0.700
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Quarter ending September 30, 2014
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0.880
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0.510
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Quarter ending December 31, 2014
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0.550
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0.200
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Quarter ending March 31, 2015
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0.600
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0.116
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Quarter ending June 30, 2015
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0.480
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0.200
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Quarter ending September 30, 2015
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0.470
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0.160
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Quarter ending December 31, 2015
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0.250
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0.101
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Quarter Ending March 31, 2016
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0.350
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0.111
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Quarter ending June 30, 2016
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0.240
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0.101
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Quarter ending September 30, 2016
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0.185
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0.080
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Quarter ending December 31, 2016
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0.121
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0.062
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Quarter Ending March 31, 2017 (through March 31, 2017)
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0.140
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0.053
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Dividends
We have not declared any cash dividends since
inception and we do not anticipate paying any dividends in the foreseeable future. Instead, we anticipate that all of our earnings
will be used to provide working capital, to support our operations, and to finance the growth and development of our business,
including potentially the acquisition of, or investment in, businesses, technologies or products that complement our existing business.
The payment of dividends is within the discretion of the board of directors and will depend on our earnings, capital requirements,
financial condition, prospects, applicable Delaware law, which provides that dividends are only payable out of surplus or current
net profits, and other factors our board might deem relevant. There are no restrictions that currently limit our ability to pay
dividends on our Common Stock other than those generally imposed by applicable state law.
Sales of Unregistered Equity Securities
Common Stock
Except as previously disclosed in Quarterly
Reports on Form 10-Q or Current Reports on Form 8-K that we have filed with the SEC, or as set forth below, during the period covered
by this Report we have not sold any of our equity securities that were not registered under the Securities Act.
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 Resources, Inc. (“Summit”), and $8,060 of account payable 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 and a five-year term.
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.
In December 2016, the Company’s Board
of Directors authorized the conversion of an aggregate of $5,000 of Loans Payable to Stockholders into 66,667 shares of Common
Stock at the rate of $0.075 per share. The Stockholder was also issued a Class A Warrant and a Class B Warrant with the same terms
and agreement as the current offering. 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 $5,480.
In December 2016, the Company’s Board
of Directors authorized the conversion of an aggregate of $50,000 of accounts payable to a vendor into 666,667 shares of Common
Stock at the rate of $0.075 per share. The vendor was also issued a Class A Warrant and a Class B Warrant with the same terms and
agreement as the current offering. 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 $54,800.
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. 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.
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.
Consulting Agreements
In November 2016, the Company entered
into a consulting agreement with a consulting firm for certain services to be rendered to the Company over a thirteen-month period
(the “Agreement”). Besides cash compensation, the Agreement requires the Company to issue 500,000 shares of Common
Stock and a Warrant to purchase 500,000 shares of Common Stock at $0.11 per share to the consulting firm within 30 days of the
Agreement. For each quarter thereafter, for the remainder of the consulting period, 250,000 shares of Common Stock and a Warrant
to purchase 250,000 shares Common Stock shall be issued within 30 days of the commencement of the quarter. As of December 31,
2016, 250,000 shares have been issued to the consulting firm. The fair value of the shares issued was estimated at $27,500, which
was recorded as consulting expense in the month of issuance. See Note 9 Stock Warrants.
On December 31 2016, the Company entered into
a consulting agreement with a consultant to provide professional advisory and introductory services for a three-month period ending
March 31, 2017, unless extend by mutual written agreement. In lieu of cash compensation, the Agreement requires the Company to
issue the Consultant 250,000 shares of Common Stock. The fair value of the shares issued was estimated at $30,000, which was recorded
as consulting expense in the month of issuance.
On December 31, 2016, the Company entered into
a consulting agreement with a consultant to provide business advisory services for a six-month period ending June 30, 2017. Besides
reimbursement of reasonable and documented expenses, the Agreement requires the Company to issue 250,000 shares of Common Stock
within 30 days of the agreement and upon completion of the Company’s current private placement offering units of the Company’s
security, the Company will issue an additional 200,000 shares of Common Stock. The fair value of the shares issued was estimated
at $30,000, which was recorded as consulting expense in the month of issuance.
2016-2017 Unit Offering
In a series of closings between November
1, 2016 and December 31, 2016, the Company received $1,407,403 in aggregate gross cash proceeds from 50 accredited investors in
connection with the sale of approximately 140.74 units (each a “Unit” and collectively, the “Units”) of
its securities in a private placement offering to accredited investors (as defined in Regulation D under the Securities Act).
A minimum of $500,000 and up to a maximum of $5,000,000 was offered, with each Unit (sold at $10,000 per Unit) consisting of (a)
133,333.33 shares of the Company’s Common Stock (at a price of $0.075 per share) (b) 2016-17 Class A Warrants to purchase
133,333 shares of Common Stock at an exercise price of $0.09 per share, and (c) 2016-17 Class B Warrants to purchase 133,333 shares
of Common Stock at an exercise price of $0.1125 per share. Through December 31, 2016, the Company issued an aggregate of 18,765,729
shares of the Company’s Common Stock, 2016-17 Class A Warrants to purchase 18,765,729 shares of Common stock and 2016-17
Class B Warrants to purchase an aggregate of 18,765,729 shares of Common Stock (collectively, the “2016-17 Offering”).
In connection with the 2016-17 Offering,
from January 1, 2017 to March 21, 2017, the Company received $688,000 in aggregate gross cash proceeds from 21 additional accredited
investors in connection with the sale of approximately 68.8 Units.
In connection with each closing, the Company
also paid to a FINRA registered broker dealer that acted as the placement agent (the “Placement Agent”) an aggregate
of $258,092 in cash compensation, representing fees and an expense allowance. In addition, the Company agreed to issue warrants
(the “Placement Agent Warrant”) to purchase an aggregate of 7,695,321 shares of Common Stock at exercise prices equal
to $0.075 per share.
All of the Units and securities underlying
the Units issued in the 2016-17 Offering were issued to accredited investors in accordance with Rule 506 of Regulation D under
the Securities Act. The Company did not engage in any general advertisement or general solicitation in connection with the offering
of the Units. The investors received written disclosures that the securities had not been registered under the Securities Act and
that any resale must be made pursuant to a registration or an available exemption from such registration. The sale of the foregoing
securities was made without any form of general solicitation or advertising and all of the foregoing securities are deemed restricted
securities for purposes of the Securities Act.
The Company agreed to file a registration
statement forty five (45) days following the final closing date with the SEC to register for resale (i) all Common Stock issued
in, and the shares of Common Stock issuable upon exercise of the 2016-17 Class A Warrants and 2016-17 Class B Warrants and the
Placement Agent Warrants issued in, the 2016 Offering.
Convertible Note Issuance
Convertible Promissory Notes with WVJITB.
In March 2012, the Company issued an 18-month
note in the amount of $290,000 from the West Virginia Jobs Investment Trust Board (“WVJITB”). The note bears interest
at 6% providing for monthly interest-only payments starting April 2012 through August 2013, then final interest and principal payments
due September 2013. The note has an adjustable conversion price, initially $2.00 per share, and includes a stock warrant for 72,500
shares. On December 13, 2013, the Company and the WVJITB entered into a Loan Modification Agreement whereby the maturity date changed
from September 14, 2013 to $100,000 due on March 15, 2014 and the remaining $190,000 due on June 15, 2014. The WVJITB and the Company
signed three addendums to the note extending the maturity date and deferring interest and principal payments until March 2, 2015.
During 2014, the Company made interest only payments through October 31, 2014. On February 2, 2015, the Company and WVJITB entered
into a Loan Modification Agreement whereby the interest payable for the periods of October 31, 2014 through June 30, 2015 would
be due on June 30, 2015. On December 30, 2015, the Company and WVJITB entered into another Loan Modification Agreement to extend
the maturity date and unpaid accrued interest payment until 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 January 17, 2017,
the Company and WVJITB entered into another addendum whereby the maturity date of the promissory note was extended until December
31, 2017. In March 2017, all accrued unpaid interest is due in full and starting in April 2017 principal payments of $25,000 and
interest is due monthly until maturity is reached. In return of the extension, the Company granted WVJITB another five-year
warrant to purchase 750,000 shares of the Company’s Common Stock at an exercise price of $0.10 and assigned the September
30, 2016 warrants exercise price at $0.10 per share.
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.
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.
On September 6, 2016 the Company paid $655,000
to St. George Investments LLC in satisfaction of the obligation (see also September 2016 20% OID Secured Promissory Note below).
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.
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.
The September 2016 20% OID Note is
currently in default. The Company is negotiating with the Investor to replace the note with a 20% OID Note due September 30,
2017 and subject to Automatic Conversion into Common Stock at a conversion price equal to 80% of the per share offering price
in the Company next public offering of Common Stock prior to such maturity date. In addition, we offered the investor an
aggregate of 1 shares of our Common Stock for every $1 of debt in consideration for its financial accommodation. To date, we
[have not] reached final terms of an agreement with such investor.
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 20% 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; the Company obtained shareholder approval for
the increase in October 2016. See Note 15 Warrants in Part IV, Financial Statement Footnotes in the report, 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.
In connection with the issuance of the July
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.
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 and November 2016, the Company reached
the same such agreement for the exchange of notes and warrants with three additional holders of the Summer 2016 Convertible Debentures.
The Exchange Notes shall have a principal amount totaling $127,313 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 May 16, 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.
The relative fair value of the new warrants
was estimated to be $306,231, 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.
All of the Second Quarter 2016 Debentures
and all of the July 2016 Convertible Debentures aggregating $2,220,159 principal amount and accrued interest through March 31,
2017 are currently in default. In March 2017, we offered to the holder(s) of all $2,220,159 such debt securities, an opportunity
under Section 3(a)(9) of the Securities Act of 1933, as amended, to exchange their debentures for a new 20% OID convertible debenture
due September 30, 2017, plus one share of our Common Stock for each $1.00 outstanding principal amount of the new 20% OID convertible
debenture issued to them. The proposed convertible restated 20% OID convertible debenture note would be in face amount equal to
100% of the outstanding principal of and accrued interest on the earlier convertible debentures and, upon consummation of any
subsequent public offering of our Common Stock that is registered under the Securities Act prior to the new maturity date, would
be subject to mandatory conversion at a 20% discount to the initial public offering price of our Common Stock (the “OID
Convertible Debenture Exchange Offer”).
September 2016 10% OID Secured Promissory
Note
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 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 on any unpaid principal balance as of October 15, 2016, maturity date. The
Company used the proceeds from the offering to repay the March 2016 Short-Term Convertible Note (see March 2016 Convertible Note
above) 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.
On November 22, 2016, a payment of $240,000 was made on the September 2016 10% OID Secured Promissory
Note leaving an unpaid balance of $480,000 and accrued interest of $12,467 at December 31, 2016. Subsequently, in February 2017
the Company made a payment of $200,000 leaving a $280,000 principal balance on the note.
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 Investor may assert all of its rights and remedies available under the Security Agreement and applicable
law, including foreclosing on its collateral.
Convertible Related Party Notes
In 2017, certain Related Parties agreed
to convert $2,521,719 of our outstanding notes payable and accrued interest of $92,319 into units of our securities consisting
of (a) 34,785,344 shares of our Common Stock (a conversion price of $0.075 per share) plus (b) an eighteen-month warrant to purchase
an additional 34,785,344 shares of Common Stock at an exercise price of $0.09 per share and (c) a five-year warrant to purchase
an additional 34,785,344 shares of Common Stock at an exercise price of $0.1125 per share. See Item 13. “Certain Relationships
and Related Transactions and Director Independence.”
In March 2017, we issued to our legal counsel,
CKR Law LLP a $308,439 convertible note due September 30, 2017, representing accrued and unpaid legal fees through December 31,
2016 and in connection with the preparation and filing of our recent proxy statement. Such note is convertible into shares of our
common stock at a price equal to 85% of the initial per share offering price of our Common Stock we may offer in connection with
any public offering we consummate prior to the maturity date of such note.
Stock Purchase Warrants
In 2016, the Company issued warrants to
purchase 133,334 shares of Common Stock to private lenders. The warrants are exercisable at an exercise price of $0.09 per
share for an eighteen-month term and $0.1125 per share for a five-year term.
In February 2016, as a part of our transaction
with Summit, we issued warrants to purchase 450,000 shares of Common Stock. The warrants have an exercise price of $0.40 per share
and a five-year term (see
Conversion of Accrued Interest and Accounts Payable
above).
In 2016, stock warrants were issued as
part of units of our securities consisting of (a) 18,765,729 shares of our Common Stock (a conversion price of $0.075 per share)
plus (b) an eighteen-month warrant to purchase an additional 18,765,729 shares of Common Stock at an exercise price of $0.09 per
share and (c) a five-year warrant to purchase an additional 18,765,729 shares of Common Stock at an exercise price of $0.1125
per share. The proposed transaction is subject to receipt of a court order to the effect that such conversion is fair and
in the interests of the Company.
Anti-Dilution Triggering Events
Laidlaw 2016 (1
st
Quarter) Warrant
In connection with the sale of the March 2016 Convertible Note, the Company issued warrants to purchase
an aggregate of approximately 1,637,500 shares of our Common Stock (or its designees) at an exercise price of $0.75 per share and
a term of five (5) years (the “Laidlaw 2016 (1
st
Quarter) Warrant”)
The anti-dilution provisions of the Laidlaw 2016 (1
st
Quarter) Warrant
provide that if the Company issues or sells Common Stock for consideration of less than $0.75 per share of Common Stock (such
lower price constituting the “Base Price”), the exercise price then in effect will be reduced to reflect the Base
Price. In addition, the number of shares of Common Stock issuable upon exercise were increased, provided that such increase in
the number of shall not exceed a number equal to three times the original number under the Laidlaw 2016 (1
st
Quarter)
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).
Laidlaw 2016 (2
nd
Quarter) Warrant
In connection with the sale of the Summer 2016 Convertible Debentures offering, the Company issued debt,
that may be converted in whole or in part, into shares of Common Stock at a conversion price equal to $0.25 per share and issued
three-year warrants to purchase up to 5,850,001 shares of our Common Stock at an exercise price of $0.325 per share (the “Laidlaw
2016 (2
nd
Quarter) Warrant”).
The anti-dilution provisions of the Laidlaw
2016 (2
nd
Quarter) Warrant provide that if the Company issues or sells Common Stock for consideration of less than $0.325
per share of Common Stock, the exercise price (of the Laidlaw 2016 (2
nd
Quarter) Warrant) then in effect will be reduced.
In the event of a dilutive issuance, the reduction in the exercise price is based on a weighted average formula, as set forth under
the terms of the Laidlaw 2016 (2
nd
Quarter) Warrant, that considers both shares of Common Stock outstanding (on a fully
diluted basis) and the capital raised in the dilutive issuance. Subsequent to issuance of any anti-dilution shares under the Laidlaw
2016 (2
nd
Quarter) Warrant, the anti-dilution terms were changed such that in the event of a dilutive issuance, the
exercise price would be reduced to equal the per share price of the dilutive issuance, and the number of warrant shares issuable
shall be increased so that the aggregate exercise price payable, after considering the per share price of the dilutive issuance,
shall equal the aggregate exercise price prior to the adjustment to the exercise price.
Under the terms of the Laidlaw 2016 (2
nd
Quarter) Warrant, the sale of the 2016-17 Unit Offering
triggered the anti-dilution provisions contained in certain outstanding financial instruments to the Laidlaw 2016 (2
nd
Quarter) Warrant. As a result, to satisfy the Company’s obligations under such provisions, the Company expects to issue warrants
to purchase 19,500,003 shares of Common Stock at an exercise price of $0.075 per share under the same terms as the Laidlaw 2016
(2
nd
Quarter) Warrant including anti-dilution warrants owed to Placement Agents.
Laidlaw 2016 (3rd Quarter) Warrant
In connection with the sale of the September
2016 20% OID Note and July 2016 Convertible Debentures, the Company issued investors three-year warrants to purchase up to 660,000
shares of Common Stock at an exercise price of $0.325 per share (the “Laidlaw 2016 (3
rd
Quarter) Warrant).
The anti-dilution provisions of the Laidlaw
2016 (3
rd
Quarter) Warrant provide that if the Company issues or sells Common Stock for consideration of less than $0.325
per share, the exercise price of the Laidlaw 2016 (3rd Quarter) Warrant then in effect will be reduced. In the event of a dilutive
issuance, the exercise price shall be reduced to equal the per share price of the dilutive issuance and the number of warrant shares
issuable shall be increased so that the aggregate exercise price payable, after considering the per share price of the dilutive
issuance, shall equal the aggregate exercise price prior to the adjustment to the exercise price. Subsequent to issuance of any
anti-dilution shares under the Laidlaw 2016 (2
nd
Quarter) Warrant for the July 2016 Convertible Debentures, the anti-dilution
terms were changed such that in the event of a dilutive issuance, the exercise price would be reduced to equal the per share price
of the dilutive issuance, and the number of warrant shares issuable shall be increased so that the aggregate exercise price payable,
after considering the per share price of the dilutive issuance, shall equal the aggregate exercise price prior to the adjustment
to the exercise price. The September 2016 20% OID Note already included full ratchet anti-dilutive provisions.
Under the terms of the Laidlaw 2016 (3
nd
Quarter) Warrant, the sale of the 2016-17 Unit Offering
triggered the anti-dilution provisions contained in certain outstanding financial instruments to the Laidlaw 2016 (3
rd
Quarter) Warrant. As a result, to satisfy the Company’s obligations under such provisions, the Company expects to issue warrants
to purchase 2,559,333 shares of Common Stock at an exercise price of $0.075 per share under the same terms as the Laidlaw 2016
(3
rd
Quarter) Warrant including anti-dilution warrants owed to Placement Agents.
2016-2017 Offering Investors
Pursuant to the terms of the Company 2016-17 Class A Warrants and 2016-17 Class B Warrants issued and issuable to investors in the 2016-17 Offering, if the Company issues or sells Common Stock for per share consideration of less than the exercise price then in effect (immediately before the 2016-17 Offering), such exercise prices will be reduced to equal the per share price of the dilutive issuance, and the number of warrant shares issuable shall be increased so that the aggregate exercise price payable, after considering the per share price of the dilutive issuance, shall equal the aggregate exercise price prior to the adjustment to the exercise price. As a result, if the Company sells additional shares of Common Stock or securities convertible or exercisable for Common Stock at prices below the exercise of both the 2016-17 Class A Warrants and 2016-17 Class B Warrants under the 2016-17 Offering would be reduced to the lower purchase, conversion or exercise price.
The anti-dilution provisions under the terms
of the 2016-17 Offering, with respect to the Common Stock and 2016-17 Class A Warrants and 2016-17 Class B Warrants, has created
significant derivative liabilities for the Company as of December 31, 2016 of as much as $817,512 that directly reduces the Company’s
net worth and could materially and adversely affect the Company’s ability to qualify to list its Common Stock for trading
on the Nasdaq Capital Market or other comparable national securities exchange.
2013 Offering Investors
From November 2013 to December 2013, the Company issued in a private placement offering (the “2013 Offering”)
approximately 77.87 units of Company securities (the “2013 Units”), each 2013 Unit consisting of 200,000 shares of
Common Stock, warrants to purchase 200,000 shares of Common Stock (“2013 Class A Warrants”), and warrants to purchase
100,000 shares of Common Stock (“2013 Class B Warrants”, together with the 2013 Class A Warrants, the “2013 Warrants”),
in exchange for gross proceeds of approximately $7.8 million ($100,000 per unit). The price per unit translated to of one share
of Common Stock valued at $0.50 per share, one 2013 Class A Warrant and one-half 2013 Class B Warrant. A total of 15,524,642 shares
of Common Stock, 15,524,642 2013 Class A Warrants, and 7,762,321 2013 Class B Warrants were issued in the 2013 Offering, and an
additional 3,302,823 2013 Class B Warrants were issued to the placement agent in connection with the 2013 Offering.
Pursuant to the terms of
the 2013 Offering, investors are entitled to receive anti-dilutive shares of Common Stock if the Company subsequently issues or
sells Common Stock for consideration of less than $0.50 per share of Common Stock (a “Down Round Financing”), as a
result of which the Investor (including the Holder) received a number of additional anti-dilutive shares of Common Stock having
an effective purchase price equal to the offering price of the Down Round Financing; and (b) the terms of the 2013 Class B Warrants,
such Warrants are subject to weighted average anti-dilution provisions in connection with any one or more Down Round Financing.
The anti-dilution
provisions contained under the terms of the 2013 with respect to the Common Stock and 2013 Class B Warrants included in the
Purchase Agreement entered into with the Holder and other Investors in the 2013 Offering has created significant derivative
liabilities for the Company of as much as $1,922,403 at December 31, 2016, that directly reduces the Company’s net
worth and could materially and adversely affect the Company’s ability to qualify to list its Common Stock for trading
on the Nasdaq Capital Market or other comparable national securities exchange.
The securities described above were issued
pursuant to the exemption from registration provided by Rule 506 of Regulation D or Section 4(a)(2) of the Securities Act of 1933,
as amended. In determining that the issuance of the securities qualified for an exemption under Section 4(a)(2) of the Securities
Act, the Company relied on the following facts:(i) the recipients were either accredited investors or sophisticated investors as
defined in Rule 501 promulgated under the Securities Act who had access to information about the Company that was generally the
same as information required to be delivered in a registered offering; and (ii) the Company did not use any form of general solicitation
or advertising to offer the securities issued.
Stock Options
In 2016, the Company granted non-qualified
options to purchase an aggregate of 100,000 shares of Common Stock to a non-employee of the Company in recognition of their patience
and service to the Company at an exercise price of $0.25 per share.
In 2016, the Company granted options to purchase
an aggregate of 3,250,000 shares of Common Stock to several key employees in recognition of their services to the Company at an
exercise price of $0.15 per share.
Consultant Shares
In November 2016, the Company entered into
a consulting agreement with a consulting firm for certain services to be rendered to the Company over a thirteen-month period (the
“Agreement”). Besides cash compensation, the Agreement requires the Company to issue 500,000 shares of Common Stock
and a Warrant to purchase 500,000 shares of Common Stock at $0.11 per share to the consulting firm within 30 days of the Agreement.
For each quarter thereafter, for the remainder of the consulting period, 250,000 shares of Common Stock and a Warrant to purchase
250,000 shares Common Stock shall be issued within 30 days of the commencement of the quarter. As of December 31, 2016, 250,000
shares have been issued to the consulting firm. The fair value of the shares issued was estimated at $27,500, which was recorded
as consulting expense in the month of issuance.
On December 31 2016, the Company entered into
a consulting agreement with a consultant to provide professional advisory and introductory services for a three-month period ending
March 31, 2017, unless extend by mutual written agreement. In lieu of cash compensation, the Agreement requires the Company to
issue the Consultant 250,000 shares of Common Stock. The fair value of the shares issued was estimated at $30,000, which was recorded
as consulting expense in the month of issuance.
On December 31, 2016, the Company entered into
a consulting agreement with a consultant to provide business advisory services for a six-month period ending June 30, 2017. Besides
reimbursement of reasonable and documented expenses, the Agreement requires the Company to issue 250,000 shares of Common Stock
within 30 days of the agreement and upon completion of the Company’s current private placement offering units of the Company’s
security, the Company will issue an additional 200,000 shares of Common Stock. The fair value of the shares issued was estimated
at $30,000, which was recorded as consulting expense in the month of issuance.
As of December 31, 2016, we were indebted
to CKR Law LLP, our legal counsel, for accrued and unpaid legal fees in the amount of $256,646.47. In March 2017, we issued
to our legal counsel, CKR Law LLP a $308,439 convertible note due September 30, 2017, representing accrued and unpaid legal fees
through December 31, 2016 and additional legal fees incurred in connection with the preparation and filing of our recent proxy
statement. Such note will, at the option of the holder, either be paid out of the net proceeds of any public offering of our Common
Stock we consummate prior to the maturity date of such note, or be convertible into shares of our common stock at a price equal
to 85% of the initial per share offering price of our Common Stock we may offer in connection with such public offering. We have
agreed to register the shares of Common Stock issuable upon conversion of the note in the registration statement relating to such
public offering.
The shares described above were issued in connection
with the exemption from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and the rules promulgated
thereunder. The investors received written disclosures that the securities had not been registered under the Securities Act and
that any resale must be made pursuant to a registration or an available exemption from such registration. The sale of the foregoing
securities was made without any form of general solicitation or advertising and all of the foregoing securities are deemed restricted
securities for purposes of the Securities Act.
Securities Authorized for Issuance under Equity Compensation
Plans
In 2002, the Board of Directors of the
Company adopted the 2002 Equity Incentive Plan (the “2002 Plan”) that governs equity awards to employees, directors
and consultants of the Company. There were 4,150,000 shares of Common Stock reserved for issuance under the Plan. Following the
Reverse Merger, and in accordance with the Plan, the Company’s Board of Directors approved the substitution of
the shares of the Company’s Common Stock underlying the options granted under the Plan with shares of Common Stock of the
Company, subject to any further approvals or actions as may be required to ensure that the implementation of the substitution is
in accordance with all state and federal rules and regulations that may be applicable.
The Plan had a term of ten years and expired
in July 2012. The types of awards permitted under the Plan include qualified incentive stock options and non-qualified stock options,
and restricted stock. Each option shall be exercisable at such times and subject to such terms and conditions as the Board may
specify. Stock options generally vest over four years and expire no later than ten years from the date of grant.
On February 8, 2013, the Board of Directors
of the Company adopted, and the Company’s stockholders subsequently approved, the 2013 Equity Incentive Plan, (the “2013
Plan”), which governs equity awards to employees, directors and consultants of the Company. The 2013 Plan has a term of ten
years and permits the grant of qualified incentive stock options, non-qualified stock options, restricted stock awards as well
as performance based cash compensation awards. Under the 2013 Equity Incentive Plan, an additional 5,000,000 shares of Common Stock
are reserved for issuance.
As of December 1, 2014, our stockholders approved
an amendment to the 2013 Plan to permit the Board to increase the number of shares of Common Stock issuable under the 2013 Plan
on January 1 of each year in an amount equal to the lesser of: (i) 10,000,000 shares of Common Stock or the equivalent of such
number of shares after the Administrator (as defined in the 2013 Plan), in its sole discretion, has interpreted the effect of any
stock split, stock dividend, combination, recapitalization or similar transaction in accordance with Section 11(a) of the 2013
Plan; (ii) 15% of the shares of Common Stock issued and outstanding as of the last day of the prior year; or (iii) an amount determined
by the Board. On December 18, 2015, the Board of Directors approved an increase, effective January 1, 2016 of 7,500,000 shares
to total of 12,500,000 shares of Common Stock issuable under the 2013 Equity Incentive Plan.
The Board of Directors has the power to amend,
suspend or terminate the 2013 Plan without stockholder approval or ratification at any time or from time to time. No change may
be made that increases the total number of shares of our Common Stock reserved for issuance pursuant to incentive awards or reduces
the minimum exercise price for options or exchange of options for other incentive awards, unless such change is authorized by our
stockholders within one year.
Equity Compensation Plan Information
Plan category
|
|
Number of securities to be
issued upon exercise of
outstanding options
|
|
|
Weighted-average
exercise price of
outstanding options
|
|
|
Number
of securities remaining available for
future
issuance under equity compensation
plans
(excluding securities reflected in
column
(a)
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity compensation plans approved by security holders – 2013 Plan
|
|
|
8,765,336
|
|
|
$
|
0.35
|
|
|
|
3,734,664
|
|
Equity compensation plans not approved by security holders – 2002 Plan
|
|
|
2,014,750
|
|
|
$
|
1.53
|
|
|
|
-
|
|
Total
|
|
|
10,780,086
|
|
|
$
|
0.57
|
|
|
|
3,734,664
|
|
As of December 31, 2016, options to purchase
up to 10,780,086 shares of Common Stock have been granted under the 2002 Plan and the 2013 Plan of which 5,680,899 shares are vested.
The following table summarizes information
about stock options granted at December 31, 2016 under both the 2002 Plan and the 2013 Plan
:
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Exercise Price
|
|
|
Outstanding
|
|
|
Weighted Average
Remaining
contractual life (in
years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Exercisable
|
|
|
Weighted
Average
Exercise Price
|
|
$
|
0.15
|
|
|
|
3,250,000
|
|
|
|
|
|
|
|
|
|
|
|
203,125
|
|
|
|
|
|
$
|
0.25
|
|
|
|
1,573,336
|
|
|
|
|
|
|
|
|
|
|
|
774,586
|
|
|
|
|
|
$
|
0.48
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
46,875
|
|
|
|
|
|
$
|
0.50
|
|
|
|
79,000
|
|
|
|
|
|
|
|
|
|
|
|
79,000
|
|
|
|
|
|
$
|
0.53
|
|
|
|
405,000
|
|
|
|
|
|
|
|
|
|
|
|
151,875
|
|
|
|
|
|
$
|
0.55
|
|
|
|
3,312,000
|
|
|
|
|
|
|
|
|
|
|
|
2,414,688
|
|
|
|
|
|
$
|
1.25
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
$
|
1.50
|
|
|
|
1,646,000
|
|
|
|
|
|
|
|
|
|
|
|
1,646,000
|
|
|
|
|
|
$
|
2.00
|
|
|
|
214,750
|
|
|
|
|
|
|
|
|
|
|
|
214,750
|
|
|
|
|
|
|
$0.15 - $2.00
|
|
|
|
10,780,086
|
|
|
|
7.30
|
|
|
$
|
0.57
|
|
|
|
5,680,899
|
|
|
$
|
0.84
|
|
|
Item
6.
|
Selected
Financial Data
|
The Company is a smaller reporting company and is not required to
provide this information.
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
|
The following discussion of our financial condition
and results of operations should be read in conjunction with our financial statements and the notes to those statements included
elsewhere in this report. In addition to the historical financial information, the following discussion and analysis contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking
statements as a result of certain factors.
Overview
The Company is engaged in developing and commercializing
proprietary life science technologies, products and services that are used to identify the molecules that are produced by living
cells and all life forms. The Company has developed a platform technology which enables the direct analysis, mapping and display
of molecular information in living cells and tissue samples. The technology platform offers novel molecular information capabilities
useful for the pharmaceutical, diagnostic, agricultural and life science industries.
Since inception, the Company has relied primarily
on sales of its securities to fund its operations. The Company has never been profitable, and we cannot assure you that we will
be profitable in the future. From inception through December 31, 2016, our loss from operations totaled $95,245,530 and our net
loss for the year ended December 31, 2016 totaled $15,647,922. The Company has a credit facility of $3 million with United Bank,
Inc. with a balance of $3 million outstanding as of December 31, 2016. Interest is payable monthly and the loan is now due July
2018. During 2016, the Company raised $627,438 in short term borrowings from stockholders, of which $103,983 was repaid to various
stockholders, $5,000 was converted to Common Stock to one stockholder and $3,645,688 from short term convertible debentures, of
which $655,000 was repaid upon maturity and $240,000 was paid in November 2016. In 2016, the Company raised an aggregate of approximately
$1,407,430 in connection with sales of its securities.
The Company will continue to require substantial
funds to advance the research and development of our core technologies to continue to develop new products and services based upon
our proprietary molecular information technologies. We intend to continue to meet our operating cash flow requirements by raising
additional funds from the sale of equity or debt securities and possibly, developing corporate development partnerships to advance
our drug and molecular information technology development activities for sharing the costs of development and commercialization. We
may also consider the sale of certain assets, or entering into a transaction such as a merger with a business complimentary to
ours. While we have been successful in raising funds to fund our operations since inception and we believe that we will be successful
in obtaining the necessary financing to fund our operations going forward, there are no assurances that we will be able to secure
additional funding.
Going Concern
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. The Company is in default in payment
of significant obligations to creditors and other third parties and will require additional financing to continue its operations.
If we cannot obtain financing, then we may be forced to further curtail our operations or consider other strategic alternatives,
including relief under the U.S. Bankruptcy Act. Even if we are successful in raising the additional financing, there is no
assurance regarding the terms of any additional investment and any such investment or other strategic alternative would likely
substantially dilute our current stockholders. These factors raise substantial doubt about our ability to continue as a going concern.
Our financial statements do not include
any adjustments to reflect the possible future effects of the recoverability and classification of assets or the amount and classification
of liabilities that may result from the outcome of this uncertainty.
We have 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 (See Item 5, “Sale
of Unregistered Securities” above for information relating to outstanding options and warrants to purchase our Common Stock
held by such persons, which information is incorporated herein by reference. 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 credit facility
with United Bank, Inc.. 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 December 31, 2016 the Company’s
accounts payable balance of $1,796,416 included $1,652,009 that was overdue by terms, $1,503,966 of which that was more than 90
days past due. Included in the balance are amounts the Company owes for rent, royalties due under certain license arrangements,
legal fees and consulting.
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 October 31, 2016, to cover a bank
overdraft, the Company received a $255,000 advance from a related party, an officer of the Company and a member of its Board
of Director. The Company is responsible for repaying the related party note directly to the bank by November 30, 2016. The
note maturity was extended to February 28, 2017 and extended again to August 28, 2017.
As discussed under Note 3 Bank Line of Credit
in Part IV, Financial Statement Footnotes to this report, fiscal year 2016, the Company has reclassified the outstanding balance
of its bank line of credit to current liabilities as of December 31, 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 December 31, 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. In
November 2016, the Company reached the same such agreement with one final holder of those certain short term convertible
notes with a principal amount totaling $30,000 issued in July 2016. The Exchange Notes for such additional investors shall
have a principal amount totaling $31,500 with extended maturity dates and such investors shall exchange their existing
warrants for warrants that contain full-ratchet anti-dilution provisions.
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 December 31, 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.
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.
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.
RESULTS OF OPERATIONS
Fiscal Year Ended December 31, 2016 Compared to the Fiscal Year
Ended December 31, 2015
The Company recorded a net loss for the year ended December 31, 2016 of $15,647,922. This result is an
increase of $6,073,488 over the net loss of $9,574,434 recorded for the year ended December 31, 2015. This increase is due primarily
to an increase in the estimated fair value of the anti-dilutive provisions included in certain of the Company’s outstanding
financial instruments of $7,970,851 and an increase in interest expense of $351,110, offset by an increase in revenues of $584,993,
a decrease in total operating expenses of $1,061,931 (cost of revenue, SG&A and R&D expenses) and gains increase totaling
$592,100 resulting from the Company’s sales of AzurRx Common Stock.
Gross revenue for the year ended December 31,
2016 increased by 31% over the gross revenue recognized for the year ended December 31, 2015. Revenue from molecular information
services increased by 91%. The increase reflects increases in both the number of customers for whom we performed services and the
number of services projects completed in the period.
We recorded revenue from the sale of four LAESI® devices in the year ended December 31, 2015. However,
we sold only two of these devices in the year ended December 31, 2016. As a result, the revenues from this component decreased
44% versus the year ended December 31, 2015. The lack of a sale in the recent completed quarter is more reflective of the Company
changing focus of revenue to Lab Services more than the sale of LAESI instruments.
Revenue from research products increased by
6%. This increase primarily reflects an increase in revenue from the sales of consumables.
Selling, general and administrative (“SG&A”)
expenses recognized during the year ended December 31, 2016 were $5,631,978, which was 19% less than the SG&A expenses of
$6,923,228 for the year ended December 31, 2015. The change reflects both the Company’s adoption of a new methodology to
estimate cost of revenue for molecular information services during the three months ended June 30, 2016, September 30, 2016 and
December 31, 2016 and efforts to reduce personnel costs, outside services, consulting expenses, and other activity recorded as
SG&A expenses, in particular during the year ended December 31, 2015.
For the year ended December 31, 2016 compared
to the year ended December 31, 2015, R&D expenses decreased 55% primarily due to a decrease in costs associated with the development
of the LAESI® instrument platform and Nanopost Array (“NAPA
”)
technologies. As mentioned above, both of
these products are now considered commercial products. In addition, funding for certain expenses incurred by the Company in support
of its ongoing participation in the DARPA program referred to as the Rapid Threat Assessment program is recorded in this line
item. The funding was $101,808 for the year ended December 31, 2016 versus $141,484 for the year ended December 31, 2015.
The amount and timing of future expenses and expense recovery related to our participation in this program are difficult to forecast
considering the research and development nature of the collaboration.
The gains from sales of investment of $1,502,100
recorded during the year ended December 31, 2016 reflects the sale of 1,706,941 shares of AzurRx Common Stock, including 1,016,941,
550,000 and 140,000 shares in the first, second and third quarter of 2016, respectively. The gains are equivalent to the proceeds
resulting from the sales of the shares less transaction costs as the basis for the Company’s AzurRx investment had previously
been reduced to $0.
For the year ended December 31, 2016
interest expense was $1,968,138 versus $1,617,028 for the year ended December 31, 2015, an increase of 22%, reflecting both
an overall increase in outstanding debt and the interest expense associated with those obligations, including the
amortization of issuance costs and accretion of original-issue-discount and the fair value of warrants issued in conjunction
with certain debt issuances. As of December 31, 2016, total interest-bearing indebtedness was $10,329,070 versus $7,166,752
as of December 31, 2015. Although there were no debt conversion inducement costs recognized in the year ended December 31,
2016 the Company recognized debt conversion inducement costs of $60,419 in the comparable period in 2015 for the fair value
of warrants issued to Summit Resources, Inc. (“Summit”) related to the conversion of certain amounts due to
Summit into Common Stock.
The Company recorded an expense
of $9,602,437 for the net increase in the fair value of derivative liabilities during the year ended December 31, 2016.
These derivative liabilities are certain anti-dilution provisions contained in various financial instruments issued by the
Company, in particular convertible notes and warrants. There have been no changes in the assumptions underlying the
calculation of estimated fair value of these liabilities in 2016, except for a decrease in the estimated unit price at which
a future capital raise is modeled, now $0.075 per share of Common Stock which triggered anti-dilution. The triggering of anti-dilution caused the derivative expense to increase
$7,970,851 over 2015. The amount recorded of $1,631,586 for the year
ended December 31, 2015 reflects an increase in the estimated fair value of anti-dilution provisions contained in certain of
the Company’s outstanding financial instruments.
The Company did not recognize a provision for
income taxes for the year ended December 31, 2016 or for the year ended December 31, 2015. The Company has evaluated its income
tax position in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification Topic 740, Income
Taxes, and determined that a full valuation allowance against its deferred tax asset was appropriate as of December 31, 2016 and
December 31, 2015, the two balance sheet dates included in the Consolidated Balance Sheets included in this report. As of December
31, 2016, the Company had a deferred tax asset of $31,104,000 million with a full, offsetting valuation allowance. Net operating
loss (“NOL”) carryforwards totaled approximately $76,531,000 million as of December 31, 2016. These NOLs begin to expire
in 2021 for both federal and state income tax purposes.
Cash Requirements
The Company’s Consolidated Financial
Statements included in Part I, Item 1 of 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 December 31, 2016 the Company’s accounts payable balance of $1,796,416 included
$1,652,009 that was overdue by terms, which includes $1,503,966 that was more than 90 days past due. Also, as of December 31, 2016,
the Company has a positive cash balance with its bank. Throughout the year the Company had occasionally carried a bank overdraft.
The Company had rectified the deficit position with its bank primarily from borrowing from an existing stockholder. As discussed
below, the Company was unable to repay its September 2016 10% OID Secured Promissory Note when it matured on October 15, 2016 in
full. Payment of $240,000 and $200,000 has been made in November 2016 and February 2017, respectively. The Company is also in arrears
on scheduled interest and principal payments on certain other debt obligations, as discussed in more detail in Note 4 Loans Payable
to Stockholders and Note 5 Long-term Debt, both of which are included in Part IV, Financial Statements Footnotes in this report.
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 with the goal of raising $15,000,000 from the sale of shares of the
Company’s Common Stock. The filing 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. 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
an agreement with an “accredited investor” (as defined in Rule 501(a) under the Securities Act of 1933, as amended,
or “Accredited Investor”) pursuant to which the Accredited Investor purchased a 10% original issue discount secured
promissory note of the Company in the face amount of $720,000 due on October 15, 2016 (the “September 2016 10% OID Secured
Promissory Note”). The Company used the proceeds from the offering to repay the March 2016 Short-Term Convertible Note that
matured on September 4, 2016. As mentioned above, the Company was unable to repay the September 2016 10% OID Secured Promissory
Note when it matured on October 15, 2016. The Company is currently negotiating with the Accredited Investor to extend the maturity
date for this note; however, the Company currently does not have the financial resources to pay the investor the full maturity
value of 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.
On September 9, 2016, the Company offered investors
in its Second Quarter 2016 Convertible Debentures the option to exchange those debentures and accompanying warrants for debentures
and accompanying warrants (which are referred to hereafter as the “Exchange Notes”) that would, in effect, extend the
maturity dates for these obligations until March 2017 (the exact maturity date being six months from the day each investor accepted
the Company’s exchange offer). The new debentures would also accrue interest at 10.0% per annum. The rate at which the new
debentures could be converted into Common Stock and the exercise prices for the accompanying warrants would be unchanged from the
debentures being exchanged and the warrants originally issued with these debentures, which would be cancelled; however, both the
new debentures and accompanying warrants include protection against the Company issuing future dilutive financial instruments (i.e.,
“anti-dilution provisions”). The offer would permit the exchange of the face amount of the original debentures, which
includes original issue discount, plus accrued interest on the debentures in an amount that would have been payable to an investor
had the obligation been outstanding through the original maturity date, for the new debentures. See Note 5 Long-term Debt included
in Part IV, Financial Statements Footnotes in this report for additional information regarding the Exchange Notes, including conversion
terms and conditions. In September 2016, 33 of the 36 investors in the Second and Third Quarter Convertible Debentures accepted
the Company’s offer resulting in payments totaling $410,813 and $1,576,313 (including accrued interest) due in November 2016
and December 2016, respectively, being deferred until March 2017. In October 2016, two additional investors accepted the Company’s
offer resulting in payments totaling $60,375 and $35,438 (including accrued interest) due in November 2016 and January 2017, respectively,
being deferred until March 2017 and April 2017, respectively. In November 2016, one final investor accepted the Company’s
offer resulting in payments totaling $31,500 (including accrued interest) due in January 2017 being deferred until May 2017. 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.
In November and December 2016, the
Company sold Common Stock and accompanying warrants resulting in gross proceeds of $1,119,530 and $287,900, respectively. After
transaction costs the Company received $929,646 and $239,152 in November and December, respectively.
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 year
ended December 31, 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
agreement under which the counterparty can purchase these shares from the Company for $1.00 per share.
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 detailed in Note 15 Evaluation of Subsequent Events included in Part IV, Financial Statement Footnotes of this report, the Company’s
sale of Common Stock in early November 2016 triggered anti-dilution provisions included in certain outstanding financial instruments
and resulted in substantial dilution to the Company’s existing investors that did not have such protection. See also Note
2 Derivative Liabilities included in Part IV, Financial Statement Footnotes of this report 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 December 31, 2016.
The Company continues to explore its alternatives
as far as obtaining additional financial resources. 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 has worked closely with various
state agencies that financed our long and short term debt and has obtained various extensions and modifications related to the
repayment of these obligations.
The Company continues to have an immediate
need for additional working capital to sustain its current level of operations. Based on our current projections, management estimates
that the Company will need approximately $8.0 – $11.0 million in additional working capital to maintain the current level
of operations, meet scheduled interest and principal payments on outstanding debt, and meet payment obligations related to debt
reaching maturity, for the next twelve calendar months. This projection has increased from the previous quarter 10-Q to reflect
the reclassification of the Bank Line of Credit from long-term to short-term as previously mentioned in Note 5 Long-term Debt
of Part IV, Financial Statement Footnotes of this report. As discussed above, the Company has recently raised additional funds
through the issuance of convertible promissory notes and Common Stock; however, the Company must raise additional capital resources
to sustain operations and meet existing obligations. There can be no assurance that we will be successful in our efforts to extend
the terms of the September 2016 10% OID Secured Note and raising the additional capital needed to sustain operations and continue
as a going concern.
With a goal of raising additional capital during
the first quarter of 2017, the Company will be working closely with our financial advisors to determine our tactical approach to
the equity markets, with particular emphasis on identifying the best deal structure to attract and retain meaningful capital sponsorship
from retail and/or institutional investing communities
Based on our current spending levels, management
estimates that the Company will need to raise approximately $11,000,000 in additional working capital, net of cash flows from
revenue, to maintain current operations through the next twelve calendar months. There can be no assurance that we will be able
to raise additional capital when required, on terms acceptable to us or at all. If we cannot obtain financing, then we may be
forced to further curtail our operations or consider other strategic alternatives.
Liquidity and Capital Resources
As of December 31, 2016, the Company’s
current assets totaled $728,924, current liabilities $15,550,489, and working capital was a deficit of $14,821,565. As of December
31, 2015, current assets totaled $411,591, current liabilities $9,590,170, and working capital was a deficit of $9,178,579. Current
assets increased as accounts receivable, net, increased due primarily to an increase in sales in the quarter ended December 31,
2016 as compared to December 2015 and the Company held a higher investment in inventory related to an increase in sales activity.
The 62% increase in current liabilities is due primarily to increase in short-term convertible notes in the second and third quarter
of 2016, an increase in accounts payables, and an increase in the liability established for the fair value of derivative liabilities.
As discussed in Note 3 Bank Line of Credit in Part IV, Financial Statement Footnotes of this report, the Company reclassified the
outstanding balance of the line of credit to current liabilities as of December 31, 2016.
As detailed in Note 4 Loans Payable to Stockholders
and Note 5 Long-term Debt in Part IV, Financial Statement Footnotes of this report, the Company continues to have a substantial
amount of indebtedness outstanding that is payable within twelve months. In May 2016 – September 2016, the Company issued
short-term notes that require payments at maturity totaling $2,770,705; these notes had six-month terms and originally matured
in November 2016 – March 2017. As discussed in additional detail in Note 5 Long-term-Debt in Part IV, Financial Statement
Footnotes of this report, a majority of these notes were exchanged for notes that resulted in the maturity dates for the obligations
being extended to March 2017. The exception was a note issued in September 2016 referred to as the September 2016 10% OID Secured
Promissory Note for which the maturity date was October 15, 2016. As discussed in additional detail in Note 5 Long-term Debt in
Part IV, Financial Statement Footnotes 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.
As of the date of this report through March 31, 2017, scheduled interest and principal payments on outstanding debt (including
capital leases) and payments related to debt obligations reaching maturity, total $10,329,070, excluding the balance of the line
of credit, which the Company has reclassified as a current liability, but for which, by terms, does not mature until July 2018.
As discussed under Cash Requirements below, the Company is in arrears on certain scheduled interest and principal payments on
outstanding debt and has deferred payments to certain vendors and suppliers past stated terms. The Company also expects cash flows
from operating activities to be a deficit during this period putting an additional burden on the Company to raise additional financial
resources in order to meet its obligations and otherwise sustain operations.
Net cash used in operating activities for
the year ended December 31, 2016 totaled $4,228,360, which represents a decrease of $1,336,094 or 24% from the net cash used
in operating activities of $5,564,454 for the year ended December 31, 2015. The largest factors for the improvement include a
lower overall cost structure in 2016 and delaying payment of certain accounts payable and other current liabilities (see
related discussion below under Cash Requirements).
Net cash provided by investing activities for
the year ended December 31, 2016 totaled $1,479,227, which represents the net proceeds from the sale of AzurRx Common Stock received
during the period and proceeds from sale of equipment. Net cash used by investing activities for the year ended December 31, 2015
was $1,034,352, which is the net amount resulting from the sales and purchases of certain equipment.
Net cash provided by financing activities for
the year ended December 31, 2016 was $2,821,496, which represents a decrease of $1,391,750 or 33% from the net cash provided by
financing activities of $4,213,246 for the year ended December 31, 2015. During 2016, the net proceeds from the issuance of debt
to third parties of $2,528,281 with net proceeds from the issuance of debt to third parties of $1,690,656 during the comparable
period in 2015. However, net activity involving stockholder advances and debt was $963,600 higher during the year of 2015. During
2016 proceeds of 1,108,296 were received from the sale of Common Stock while 2015 included both proceeds of $575,042 and $1,112,303
from the sale of preferred stock and Common Stock, respectively. Additional information regarding the Company’s issuance
of debt to third parties during the year ended December 31, 2016 can be found in Note 5 Long-term Debt in Part IV, Financial Statement
Footnotes of this report. Additional information regarding activity involving stockholder advances and debt can be found in Note
4 Loans Payable to Stockholders in Part IV, Financial Statement Footnotes to Consolidated Financial Statements included in Part
I, Item 1 of this report. As discussed below, the Company requires additional capital resources to fund future operations, service
outstanding debt, and continue as a going concern.
Off-Balance Sheet Arrangements
We do not have off-balance sheet arrangements.
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as structured finance or special purpose entities, often established
for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies
The discussion and analysis of our financial
condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting
principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses for each period. The following represents a summary
of our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial
condition and results of operations and that require management’s most difficult, subjective or complex judgments, often
as a result of the need to make estimates about the effects of matters that are inherently uncertain.
Revenue Recognition
The Company follows the provisions of FASB
ASC 605, “Revenue Recognition.” We recognize revenue of products when persuasive evidence of a sale arrangement exists,
the price to the buyer is fixed or determinable, delivery has occurred/title has passed, and collectability of the sales price
is reasonably assured.
The Company accounts for shipping and handling
fees and costs in accordance with the provisions of FASB ASC 605-45-45, “Revenue Recognition – Principal Agent Considerations”,
which requires all amounts charged to customers for shipping and handling to be classified as revenues. Shipping and handling costs
charged to customers are recorded in the period the related product sales revenue is recognized.
Regarding short-term service contracts, the
majority of these service contracts involve the processing of imaging and bioanalytical samples for pharmaceutical and academic
or clinical research laboratories. These contracts generally provide for a fixed fee for each method developed or sample processed
and revenue is recognized when the analysis is complete and a report is delivered.
For longer-term contracts involving multiple
elements, the items included in the arrangement (deliverables) are evaluated to determine whether they represent separate units
of accounting. We perform this evaluation at the inception of an arrangement and as each item in the arrangement is delivered.
Generally, we account for a deliverable (or a group of deliverables) separately if: (i) the delivered item(s) have standalone value
to the customer, and the delivery or performance of the service(s) is probable and substantially in our control. Revenue on multiple
revenue arrangements is recognized using a proportional method for each separately identified element. All revenue from contracts
determined not to have separate units of accounting is recognized based on consideration of the most substantive delivery factor
of all the elements in the contract or, if there is no predominant deliverable, upon delivery of the final element of the arrangement.
Revenues from grants are based upon internal
costs that are specifically covered by the grants, and where applicable, an additional facilities and administrative rate that
provides funding for overhead expenses. These revenues are recognized when expenses have been incurred by the Company that are
related to the grants.
Net Loss per Share
Basic and diluted loss per common share is computed based on the weighted average number of common shares
outstanding. Common share equivalents (which may consist of convertible preferred stock and dividends, options, warrants and convertible
debt) are excluded from the computation of diluted loss per share since the effect would be anti-dilutive. Common share equivalents
which could potentially dilute basic earnings per share in the future, and which were excluded from the computation of diluted
loss per share, totaled approximately 185,501,000 and 77,317,249 at December 31, 2016 and 2015, respectively.
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 capital raises and Common Stock purchase warrants. The Company evaluates all 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 ASC 810-10-05-4 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. In the event that 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.
Fair value of financial assets and liabilities
– Derivative Instruments
The Company measures 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 and contracts; such as, equity financing arrangements for the issuance of Common Stock, which include anti-dilution
arrangements and detachable stock 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. These instruments are recorded as derivative liabilities,
at fair value at the issuance date. Subsequent changes in fair value are recorded through the statement of operations.
The Company’s derivative liabilities
are related to Common Stock issuances, detachable Common Stock purchase warrants (“warrants”) issued in conjunction
with debt and Common Stock, or warrants issued to the placement agents for financial instrument issuances. We estimate fair values
of the warrants that do contain “Down Round Protections” utilizing valuation models and techniques that have been developed
and are widely accepted that take into account the additional value inherent in “Down Round Protection.” These widely
accepted techniques include “Modified Binomial,” “Monte Carlo Simulation” and the “Lattice Model.”
The “core” assumptions and inputs to the “Binomial” model are the same as for “Black-Scholes”,
such as trading volatility, remaining term to maturity, market price, strike price, and risk free rates; all Level 2 inputs. Fair
value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. A measurement
may therefore be classified within Level 3 even though there may be significant inputs that are readily observable. However, a
key input to a “Binomial” model (in our case, the “Monte Carlo Simulation” for which we engaged an independent
valuation firm to perform) is the probability of a future capital raise. By definition, this input assumption does not
meet the requirements for Level 1 or Level 2 outlined above; therefore, the entire fair value calculation is deemed to be Level
3 under accounting requirements due to this single Level 3 assumption. This input to the Monte Carlo Simulation model was developed
with significant input from management based on its knowledge of the business, current financial position and the strategic business
plan with its best efforts.
As discussed above, financial liabilities are
considered Level 3 when their fair values are determined using pricing models or similar techniques and at least one significant
model assumption or input is unobservable. For the Company, the Level 3 financial liability is the derivative liability
related to the Common Stock and warrants that include “Down Round Protection” and they were valued using the “Monte
Carlo Simulation” technique. This technique, while the majority of inputs are Level 2, necessarily incorporates
a Capital Raise Assumption which is unobservable and, therefore, a Level 3 input.
Stock Based Compensation
We follow the provisions of FASB ASC 718,
“Stock
Based Compensation”
. Stock-Based compensation expense is estimated as of the grant date based on the fair value of the
award and is recognized as expense over the requisite service period, which generally represents the vesting period. Fair value
of stock options issued by the Company is estimated using the Black-Scholes option-pricing model. The associated compensation expense
is recognized on a straight-line basis over the requisite service period, net of estimated forfeitures.
Estimating the fair value for stock options
for each grant requires judgment, including estimating stock-price volatility, expected term, expected dividends and risk-free
interest rates. The expected volatility rates are estimated based on the volatility of similar entities whose share information
is publicly available. The expected term represents the average time that options are expected to be outstanding and is estimated
based on the average of the contractual term and the vesting period of the options as provided in SEC Staff Accounting Bulletin
110 as the “simplified” method. The risk-free interest rate for periods approximating the expected term of the options
is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividends are zero as we have no plans to issue
dividends on Common Stock.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, please
see Note 2 to our financial statements, which are included in this report.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
The Company is a smaller reporting company
and is not required to provide this information.
Item
8.
Financial Statements and Supplementary
Data
The financial statements
and supplementary data required to be included in this Item 8 are set forth beginning at page F-1 of this report.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.
Controls and Procedures
Report on Disclosure Controls and Procedures
Regulations under the Exchange Act require
public companies to maintain “disclosure controls and procedures,” which are defined as controls and other procedures
that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under
the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed
to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act
is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
The Company conducted an evaluation, with the
participation of our Chief Executive Officer, of the effectiveness of our disclosure controls and procedures as of December 31,
2016. Based on that evaluation, in light of the weaknesses in internal controls over financial reporting, described below, our
Chief Executive Officer concluded that as of December 31, 2016, our disclosure controls and procedures were ineffective.
Management’s Report on Internal Control
over Financial Reporting
Management is responsible for establishing
and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f)
and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer, who
is also acting interim principal financial officer, the Company conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in
Internal Control — Integrated Framework
issued by the Committee
of Sponsoring Organizations of the Treadway Commission in 1992 (COSO). The Company has not adopted the new framework due to its
size and limited resources available for developing an internal control program compliant with the new framework.
Our internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Our
internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect
on the financial statements.
Despite these controls, because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined
to be effective can provide only reasonable assurance of achieving their control objectives. Furthermore, smaller reporting companies,
like us, face additional limitations. Smaller reporting companies employ fewer individuals and can find it difficult to employ
resources for complicated transactions and effective risk management. Additionally, smaller reporting companies tend to utilize
general accounting software packages that lack a rigorous set of software controls.
Our management, including our Chief Executive
Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2016 based on the criteria
established in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations
of the Treadway Commission in 1992. This evaluation included review of the documentation of controls, evaluation of the design
effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on this
evaluation, our management concluded our internal control over financial reporting was not effective as of December 31, 2016. The
ineffectiveness of our internal control over financial reporting was due to the following material weaknesses which are indicative
of many small companies: (i) lack of a sufficient complement of personnel commensurate with the Company’s reporting requirements;
(ii) the Company did not consistently establish appropriate authorities and responsibilities in pursuit of the Company’s
financial reporting objectives; and (iii) insufficient written documentation or training of our internal control policies and procedures
which provide staff with guidance or framework for accounting and disclosing financial transactions.
This annual report does not include an attestation
report of our registered public accounting firm regarding our internal controls over financial reporting. Management’s report
was not subject to attestation by our registered public accounting firm pursuant to Section 404(c) of the Sarbanes-Oxley Act that
permit us to provide only management’s report in this annual report.
Despite the existence of the material weaknesses
above, we believe that our consolidated financial statements contained in this Form 10-K fairly present our financial position,
results of operations and cash flows as of and for the periods presented in all material respects.
Changes in Internal Control over Financial
Reporting
Except as discussed below, there have been
no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15 (f) under the
Exchange Act) during 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Material Weakness
In connection with our annual audit for the
year ended December 31, 2016, management determined that controls as described above; constitute material weaknesses in disclosure
controls and internal control over financial reporting. As a result, it was determined that a control deficiency that constitutes
a material weakness in the design and operation of our internal control over financial reporting was present. Management believes
that these material weaknesses did not have an effect on our financial results. However, management believes that the lack of these
items results in ineffective internal controls, which could result in a material misstatement in our financial statements in future
periods.
During 2015, the Company’s then Chief
Financial Officer resigned and as of the date of this filing has not been replaced. This departure left insufficient resources
in the accounting and finance department and within the management of the organization. Due to our size and nature, segregation
of duties within our internal control system may not always be possible or economically feasible. Likewise, we may not be able
to engage sufficient resources to enable us to have adequate staff and supervision within our accounting function.
Remediation
Our management team is taking immediate action
to remediate the material weaknesses disclosed above, including:
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·
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Engaging additional resources to evaluate and write the necessary policies;
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·
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Providing increased training on our internal controls and procedures, including these remedial measures, to our personnel.
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·
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Engaging an experienced consultant on a part-time basis as an interim Chief Financial Officer until the Company can retain a permanent replacement.
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The aforementioned assumes that we are able
to secure sufficient additional working capital. While certain aspects of these remedial actions have been completed, we continue
to actively plan for and implement additional control procedures to improve our overall control environment and expect these efforts
to continue throughout 2017.
Item 9B. Other Information
No
Notes to Consolidated Financial Statements
1. Description of Company and Nature of Business
Protea Biosciences Group, Inc. (referred to
as “Protea,” “the Company,” “we,” “us” and “our”) is an emerging growth
molecular information company that has developed a revolutionary platform technology, which 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 (“R&D”), 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.
Going Concern
The Company’s financial statements 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. The Company 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.
These factors raise substantial doubt about
our ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future
effects of the recoverability or classification of assets or the amounts and classification of liabilities that may result.
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 by raising additional funds from the sale of equity
and 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 December 31, 2016 the Company’s accounts payable balance of $1,796,416
included $1,652,009 that was overdue by terms, $1,503,966 of which that was more than 90 days past due (see Note 16 Commitments
and Contingencies for related information). Included in the $1,503,966 balance are amounts the Company owes for rent, royalties
due under certain license arrangements, legal fees and consulting. During 2016, the Company had held an overdraft position with
the bank. The Company has since rectified the deficit position with its bank primarily through the receipt of a cash advance from
an existing stockholder (see Note 4 Loans Payable to Stockholders). As of December 31, 2016, the Company has a positive balance
at the bank. As discussed below, the Company was unable to repay the entire balance of 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 4 Loans Payable to Stockholders and Note 5 Long-term 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.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
1. Description of Company and Nature of Business
(continued)
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 5 Long-term 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 15 Evaluation of Subsequent events for related information.
As discussed under Note
3 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. In November 2016, the Company reached the same such agreement
with one final holder of those certain short term convertible notes with a principal amount totaling $30,000 issued in July 2016.
The Exchange Notes for such additional investors shall have a principal amount totaling $31,500 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 5 Long-term 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. The maturity of the note has been extended to
February 28, 2017 and again to August 28, 2017. See Note 4 Loans Payable to Stockholders for more information.
In November and December
2016, the Company issued 18,765,729 shares of its Common Stock and warrants to purchase an aggregate of 37,531,458 shares of Common
Stock resulting in gross proceeds of $1,407,430. See Note 6 Common Stock for additional information about the transactions.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
1. Description of Company and Nature of Business
(continued)
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.
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 85,724,996 shares of Common Stock resulting in significant dilution
to investors without such protection. See Note 2 Fair Value of Financial Assets and Liabilities – Derivative Financial Instruments.related
to the estimated fair value of the anti-dilution provisions included in the Company’s financial instruments that were outstanding
as of December 31, 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.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of Protea Biosciences Group, Inc. and its wholly-owned subsidiary, Protea Biosciences, Inc. All material accounts
and transactions have been eliminated in consolidation.
Estimates and Assumptions
The presentation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies
(continued)
Cash and Cash Equivalents
The Company considers all highly liquid debt
instruments purchased with a maturity date of three months or less to be cash equivalents. The Company has cash on deposit at banks
that may exceed the federally-insured limits at times.
Trade Accounts Receivable
Trade accounts receivable are reported at the
amount management expects to collect from outstanding balances. Differences between the amount due and the amount management expects
to collect are reported in the statement of operations of the year in which those differences are determined, with an offsetting
entry to a valuation allowance for trade accounts receivable. Balances that are still outstanding after management has used reasonable
collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable. The Company
performs ongoing credit evaluations of its customers and generally has not required collateral.
The Company maintains allowances for doubtful
accounts based on management’s analysis of historical losses from uncollectible accounts and risks identified for specific
customers who may not be able to make required payments. If the financial condition of customers were to deteriorate, resulting
in an impairment of their ability to make payments, additional allowances may be required. An allowance of $7,000 and $3,000 was
deemed necessary as of December 31, 2016 and December 31, 2015, respectively.
Investments in AzurRx
As a result of the sale of its subsidiary
in 2014, the Company received 100 shares of Series A Preferred Stock, a then 33% interest (on a fully diluted basis) in AzurRx
BioPharma, Inc. (“AzurRx”) that was accounted for on the equity method. AzurRx is a private biotechnology company
formed to focus on the development of the early stage pharmaceutical assets of ProteaBio Europe During 2016 and 2015, the Company
converted its preferred shares into 2,439,365 shares of Common Stock of AzurRx. Also, throughout 2016 and 2015, the Company entered
into numerous transactions to sale 1,706,941 shares and 606,667 shares, respectively, resulting in cash proceeds of $1,502,100,
and $910,000, respectively. As a result of these transactions, the Company’s interest in AzurRx has been reduced to 1.7%.
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.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies
(continued)
Inventory
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:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Finished goods
|
|
$
|
8,725
|
|
|
$
|
12,650
|
|
Work in progress
|
|
|
83,519
|
|
|
|
98,437
|
|
Total Inventory
|
|
$
|
92,244
|
|
|
$
|
111,087
|
|
Property and Equipment
Expenditures for maintenance and repairs are
charged to expense and the costs of significant improvements that extend the life of underlying assets are capitalized.
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:
Laboratory equipment
|
5 - 10 years
|
Computers
|
5 years
|
Leasehold improvements
|
Life of lease
|
Software
|
3 years
|
Property and equipment consists of the following at:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Lab equipment
|
|
$
|
5,698,009
|
|
|
$
|
6,617,038
|
|
Computer equipment
|
|
|
552,423
|
|
|
|
540,212
|
|
Office equipment
|
|
|
191,248
|
|
|
|
191,248
|
|
Leasehold improvements
|
|
|
212,730
|
|
|
|
212,730
|
|
|
|
|
6,654,410
|
|
|
|
7,561,228
|
|
Accumulated depreciation
|
|
|
(4,188,285
|
)
|
|
|
(4,934,321
|
)
|
Property and equipment, net
|
|
$
|
2,466,125
|
|
|
$
|
2,626,907
|
|
Depreciation expense is charged to either research
and development or selling, general and administrative expenses and totals $678,538 in 2016 and $686,820 in 2015.
The Company evaluates the potential impairment
of property and equipment whenever events or changes in circumstances indicate that the carrying value of a group of assets may
not be recoverable. An impairment loss would be recognized when the carrying amount of the asset group exceeds the estimated undiscounted
future cash flows expected to be generated from the use of the asset group and its eventual disposition. The amount of impairment
loss to be recorded is measured as the excess of the carrying value of the asset group over its fair value. Fair value is generally
determined using a discounted cash flow analysis or market prices for similar assets. During 2016, the Company recognized an impairment
expense of $122,894 related to equipment that was no longer being used in operations and had limited salvage value. There was no
impairment expense recognized for the year ended December 31, 2015.
Other Noncurrent assets
Other receivables, which reflect amounts from
non-trade activity and other noncurrent assets, consist of the following at:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Deposits
|
|
$
|
19,041
|
|
|
$
|
5,248
|
|
Other noncurrent assets
|
|
$
|
19,041
|
|
|
$
|
5,248
|
|
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies
(continued)
Revenue Recognition
We follow the provisions of FASB ASC 605, “Revenue
Recognition.” We recognize revenue of products when persuasive evidence of a sale arrangement exists, the price to the buyer
is fixed or determinable, delivery has occurred /title has passed, and collectability of the sales price is reasonably assured.
The Company recognizes revenue from the sale of its ProteaPlot software when bundled with the LAESI platform, which facilitates
operating the instrument and storage and display of datasets. The Company also recognizes revenue of standalone sales of ProteaPlot,
which generally consists of additional user licenses. Revenue is recognized once the title is passed to the customer.
We account for shipping and handling fees and
costs in accordance with the provisions of FASB ASC 605-45-45, “Revenue Recognition - Principal Agent Considerations,”
which requires all amounts charged to customers for shipping and handling to be classified as revenues. Shipping and handling costs
charged to customers are recorded in the period the related product sales revenue is recognized.
Regarding short-term service contracts, the
majority of these service contracts involve the processing of imaging and bioanalytical samples for pharmaceutical and academic
or clinical research laboratories. These contracts generally provide for a fixed fee for each method developed or sample processed
and revenue is recognized when the analysis is complete and a report is delivered.
For longer-term contracts involving multiple
elements, the items included in the arrangement (deliverables) are evaluated to determine whether they represent separate units
of accounting. We perform this evaluation at the inception of an arrangement and as each item in the arrangement is delivered.
Generally, we account for a deliverable (or a group of deliverables) separately if: (i) the delivered item(s) have standalone value
to the customer, and the delivery or performance of the service(s) is probable and substantially in our control. Revenue on multiple
revenue arrangements is recognized using a proportional method for each separately identified element. All revenue from contracts
determined not to have separate units of accounting is recognized based on consideration of the most substantive delivery factor
of all the elements in the contract or, if there is no predominant deliverable, upon delivery of the final element of the arrangement.
Revenues from grants are based upon internal
costs that are specifically covered by the grants, and where applicable, an additional facilities and administrative rate that
provides funding for overhead expenses. These revenues are recognized when expenses have been incurred by the Company that is related
to the grants. The Company has revenue from three major components: molecular information services, LAESI instrument platform,
and research products.
Revenue by component was as follows:
|
|
Year Ended
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Molecular information services
|
|
$
|
1,778,006
|
|
|
$
|
929,076
|
|
LAESI instrument platform
|
|
|
358,334
|
|
|
|
640,060
|
|
Research products
|
|
|
310,455
|
|
|
|
292,666
|
|
Gross revenue
|
|
$
|
2,446,795
|
|
|
$
|
1,861,802
|
|
A small number of customers have accounted
for a substantial portion of our revenues in 2016. Six customers represented 53% of gross revenues for the year ended December
31, 2016. One large pharmaceutical company accounted for 22% of our gross revenue in 2016.
Other Payables and Accrued Expenses
Other payables and accrued expenses, which
reflect amounts due from non-trade activity, consist of the following at:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Accrued expenses
|
|
$
|
68,411
|
|
|
$
|
28,112
|
|
Accrued interest
|
|
|
264,507
|
|
|
|
108,731
|
|
Accrued warranties
|
|
|
45,000
|
|
|
|
50,000
|
|
Accrued payroll and benefits
|
|
|
119,619
|
|
|
|
124,183
|
|
Accrued sales tax
|
|
|
103
|
|
|
|
616
|
|
Unearned revenue
|
|
|
58,407
|
|
|
|
79,666
|
|
Other payables and accrued expenses
|
|
$
|
556,047
|
|
|
$
|
391,308
|
|
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies
(continued)
Warranty Costs
The Company provides for a one-year warranty
with the sale of its LAESI instrument. Additionally, the Company sells extended warranties for an additional cost. During 2016,
the Company sold no extended LAESI warranties. All other product warranties are 90 days from the date of delivery of the goods.
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 product. During the year ended December
31, 2016 and 2015, the Company recorded accrued warranty expense of $45,000 and $50,000, respectively.
Foreign Currency
The Company records foreign currency adjustments
resulting from international sales of its products and services are reflected in accumulated other comprehensive income (loss).
Advertising
The Company follows the policy of charging
the costs of advertising to expense as incurred.
Research and Development Credit
The Company follows the policy of charging
the costs of research and development to expense as incurred.
Net Loss per Share
Basic and diluted loss per common share is computed based on the weighted average number of common shares
outstanding. Common share equivalents (which may consist of convertible preferred stock and dividends, options, warrants and convertible
debt) are excluded from the computation of diluted loss per share since the effect would be anti-dilutive. Common share equivalents
which could potentially dilute basic earnings per share in the future, and which were excluded from the computation of diluted
loss per share, totaled approximately 185,501,000 and 77,317,000 at December 31, 2016 and 2015, respectively.
Income Taxes
Deferred income taxes are reported using the
liability method. Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities
and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of enactment.
Stock-Based Compensation
The Company follows the provisions of FASB
ASC 718, “
Stock-Based Compensation”
. Stock-Based compensation expense is estimated as of the grant date based
on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting
period. Fair value of Company stock options is estimated using the Black-Scholes option-pricing model. The associated compensation
expense is recognized on a straight-line basis over the requisite service period, net of estimated forfeitures.
Estimating the fair value for stock options
for each grant requires judgment, including estimating stock-price volatility, expected term, expected dividends and risk-free
interest rates. The expected volatility rates are estimated based on the volatility of similar entities whose share information
is publicly available. The expected term represents the average time that options are expected to be outstanding and is estimated
based on the average of the contractual term and the vesting period of the options as provided in SEC Staff Accounting Bulletin
#110 as the “simplified” method. The risk-free interest rate for periods approximating the expected term of the options
is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividends are zero as the Company has no plans
to issue dividends on Common Stock.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies
(continued)
Due to a lack of trading history, 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 companies considering their industry, stage of life cycle, size, and financial
leverage. (See Note 8, Stock Options and Stock-Compensation).
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 capital raises and Common Stock purchase warrants. The Company evaluates all 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 ASC 810-10-05-4 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. In the event that 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.
Fair value of financial assets and liabilities
- Derivative 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 and contracts such as, equity financing arrangements for the issuance of Common Stock, which include anti-dilution
arrangements and detachable stock 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. These instruments are recorded as derivative liabilities
at fair value at the issuance date. Subsequent changes in fair value are recorded through the statement of operations.
The Company’s derivative liabilities
are related to Common Stock issuances, detachable Common Stock purchase warrants (“warrants”) issued in conjunction
with debt and Common Stock, or warrants issued to the placement agents for financial instrument issuances. The Company estimates
fair values of the warrants that do contain “Down Round Protections” utilizing valuation models and techniques that
have been developed and are widely accepted that take into account the additional value inherent in “Down Round Protection.”
These widely accepted techniques include “Modified Binomial,” “Monte Carlo Simulation” and the “Lattice
Model.” The “core” assumptions and inputs to the “Binomial” model are the same as for “Black-Scholes,”
such as trading volatility, remaining term to maturity, market price, strike price, and risk free rates; all Level 2 inputs. Fair
value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. A measurement
may therefore be classified within Level 3 even though there may be significant inputs that are readily observable. However, a
key input to a “Binomial” model (in our case, the “Monte Carlo Simulation” for which we engaged an independent
valuation firm to perform) is the probability of a future capital raise. By definition, this input assumption does not
meet the requirements for Level 1 or Level 2 outlined above; therefore, the entire fair value calculation is deemed to be Level
3 under accounting requirements due to this single Level 3 assumption. This input to the Monte Carlo Simulation model was developed
with significant input from management based on its knowledge of the business, current financial position and the strategic business
plan with its best efforts.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies
(continued)
As discussed above, financial liabilities are
considered Level 3 when their fair values are determined using pricing models or similar techniques and at least one significant
model assumption or input is unobservable. For the Company, the Level 3 financial liability is the derivative liability
related to the Common Stock and warrants that include “Down Round Protection” and they were valued using the “Monte
Carlo Simulation” technique. This technique, while the majority of inputs are Level 2, necessarily incorporates
a Capital Raise Assumption which is unobservable and, therefore, a Level 3 input.
A range of key quantitative assumptions related
to the Common Stock and warrants issued during 2016 and 2015 are as follows:
|
|
December 31, 2016
|
|
|
Expected
Life (Years)
|
|
Risk Free Rate
|
|
Volatility
|
|
|
Probability of a Capital
Raise
|
|
Derivative liabilities
|
|
0.25-5.00
|
|
0.51% and 1.20%
|
|
|
81.62
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Expected
Life (Years)
|
|
Risk Free Rate
|
|
Volatility
|
|
|
Probability of a Capital
Raise
|
|
Derivative liabilities
|
|
2-3.33
|
|
0.16% and1.31%
|
|
|
75.54
|
%
|
|
|
100
|
%
|
Financial Assets and Liabilities Measured
at Fair Value on a Recurring Basis
The Company’s derivative liabilities
are related to Common Stock issuances, detachable warrants issued in conjunction with debt and Common Stock, or warrants issued
to the placement agents for financial instrument issuances. The derivative liabilities measured at fair value on a recurring basis
are summarized below:
|
|
Fair Value Measurements at December 31, 2016
|
|
|
|
Carrying Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liabilities - Common Stock
|
|
$
|
2,016,370
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
2,016,370
|
|
Derivative liabilities - warrants
|
|
|
854,553
|
|
|
|
-
|
|
|
|
-
|
|
|
|
854,553
|
|
Derivative liabilities – Convertible debentures
|
|
|
226,998
|
|
|
|
|
|
|
|
|
|
|
|
226,998
|
|
Total
|
|
$
|
3,097,921
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,097,921
|
|
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 $0.075 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 December 31, 2016.
|
|
Fair Value Measurements at 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
|
|
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies
(continued)
For the year ended December 31, 2015, the Company
revised its assessment of the probability of future down-rounds, due to a probability of closing on subsequent capital raises at
levels that are unlikely, but could possibly result in anti-dilution triggers, currently at $0.25 per share. This is based on the
Company’s best estimate of its future capital raise activities. The assumptions used for estimating future capital raises
could be materially different from the actual results. These differences could materially impact the derivative liability and have
a materially adverse effect on the Company’s results of operations and financial condition in the near term.
The table below provides a summary of the changes
in fair value of the derivative liabilities measured at fair value on a recurring basis:
|
|
Year Ended December 31, 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
|
|
Issuance of warrants
|
|
|
–
|
|
|
|
6,878
|
|
|
|
–
|
|
|
|
6,878
|
|
Anti-dilution shares to be issued
|
|
|
(6,429,375
|
)
|
|
|
(1,044,420
|
)
|
|
|
–
|
|
|
|
(7,473,795
|
)
|
Unrealized loss on derivative liabilities outstanding as of December 31, 2016
|
|
|
7,668,743
|
|
|
|
1,380,974
|
|
|
|
–
|
|
|
|
9,049,717
|
|
Fair value of variable conversion rate for convertible debentures issued in 2016
|
|
|
–
|
|
|
|
–
|
|
|
|
226,998
|
|
|
|
226,998
|
|
Fair value of derivative liabilities associated with other financial instruments issued in 2016
|
|
|
–
|
|
|
|
325,722
|
|
|
|
–
|
|
|
|
325,722
|
|
Balance as of December 31, 2016
|
|
$
|
2,016,370
|
|
|
$
|
854,553
|
|
|
$
|
226,998
|
|
|
$
|
3,097,921
|
|
|
|
Year Ended December 31, 2015
|
|
|
|
Derivative
liabilities -
Common Stock
|
|
|
Derivative
liabilities -
Warrants
|
|
|
Total Fair Value
Measurements
Using Level 3
Inputs
|
|
Balance as of December 31, 2014
|
|
$
|
88,871
|
|
|
$
|
65,187
|
|
|
$
|
154,058
|
|
Issuance of warrants
|
|
|
-
|
|
|
|
5,948
|
|
|
|
5,948
|
|
Anti-dilution shares to be issued
|
|
|
(945,451
|
)
|
|
|
-
|
|
|
|
(945,451
|
)
|
Unrealized (gain) loss on derivative liabilities
|
|
|
1,551,703
|
|
|
|
79,883
|
|
|
|
1,631,586
|
|
Recognition of derivative liabilities
|
|
|
81,879
|
|
|
|
34,381
|
|
|
|
116,260
|
|
Balance as of December 31, 2015
|
|
$
|
777,002
|
|
|
$
|
185,399
|
|
|
$
|
962,401
|
|
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU 2014-09, “
Revenue
from Contracts with Customers (Topic 606)
” a standard on revenue recognition that provides a single, comprehensive revenue
recognition model for all contracts with customers. The standard is principle-based and provides a five-step model to determine
the measurement of revenue and timing of when it is recognized. The core principle is that a company will recognize revenue to
reflect the transfer of goods or services to customers at an amount that the Company expects to be entitled to in exchange for
those goods or services. This standard is to be applied retrospectively and is effective for fiscal years beginning after December
15, 2017 as deferred by the FASB in July 2015.
Subsequently, the FASB has issued the following
standards related to ASU 2014-09: ASU 2016-08, “Revenue from Contracts with Customers (Topic 606), Principal versus Agent
Considerations (Reporting Revenue Gross versus Net),” (“ASU 2016-08”); ASU 2016-10, “Revenue from Contracts
with Customers (Topic 606), Identifying Performance Obligations and Licensing,” (“ASU 2016-10”); and ASU 2016-20,
“Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” (“ASU 2016-20”),
which are intended to provide additional guidance and clarity to ASU 2014-09. The Company must adopt ASU 2016-08, ASU 2016-10,
ASU 2016-12 and ASU 2016-20 along with ASU 2014-09 (collectively, the “New Revenue Standards”).
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
(continued)
The New Revenue Standards may be applied using
one of two retrospective application methods: (1) a full retrospective approach for all periods presented, or (2) a modified retrospective
approach that presents a cumulative effect as of the adoption date and additional required disclosures. The Company expects to
adopt the New Revenue Standards in the first quarter of 2018. The Company is currently in the process of evaluating the impact
of adoption of this standard on our consolidated financial statements and related disclosures.
In July 2015, the FASB issued ASU 2015-11,
“
Simplifying the Measurement of Inventory
.” This standard requires that inventory be valued at the lower of
cost or net realizable value, which is defined as the estimated selling price in the ordinary course of business, less reasonably
predictable costs of completion, disposal, and transportation. The update is effective for fiscal years beginning after December
15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the impact that this standard
will have on its consolidated financial statements and related disclosures.
In February 2016, the FASB
issued ASU 2016-02, “
Leases” (Topic 842)
, which changes current lease accounting standard by requiring the recognition
of lease assets and lease liabilities for all leases, including those currently classified as operating leases. This new guidance
is to be applied under a modified retrospective application to the earliest reporting period presented for reporting periods beginning
after December 15, 2018. Early adoption is permitted. While the Company is evaluating the comprehensive impact of this guidance,
this new guidance would require us to capitalize, at the appropriate discount rate, our operating lease commitments as disclosed
in Note 14 Commitments and Contingencies
.
In March 2016, the FASB issued
ASU 2016-09 “
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Accounting
“,
which simplifies aspects of accounting for share-based payment awards. The standard changes how companies account for certain aspects
of share-based payment awards to employees, including the accounting for income taxes, forfeitures , and statutory tax withholding
requirements, as well as the classification of realted matters in the statement of cash flows. The update is effective on January
1, 2017, with early adoption permitted. The Company is currently evaluating the impact that this standard will have on its consolidated
financial statements and disclosures.
In August 2016, the FASB issued
ASU 2016-18 “
Statement of Cash Flows (Topic 230): Classification of Certain Cash Recepits and Cash Payments (a consensus
of the Emerging Issues Task Force)
“, which makes eight targeted changes to how cash receipts and payments are presented
and classified in the statement of cash flows. This update is effective on January 1, 2018and will require adoption on a retrospective
basis. The Company is currently evaluating the impact that this standard will have on its consolidated financial statements.
3. Bank Line of Credit
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 December 31, 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. As the date of this report, this obligation has
been presented as a current liability as the Company was in arrears with its interest of $14,675 at December 31, 2016. The Company
is currently delinquent on the interest payments.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
4. Loans Payable to Stockholders
During 2014, the Company received advances
equal to an aggregate of $1,415,000 from Summit. In exchange for a portion of the advances received, the Company entered into Note
and Warrant Purchase Agreements and issued (a) one-year promissory notes bearing simple interest at the rate of 10% per annum to
Summit in an aggregate principal amount of $1,415,000 and (b) five-year warrants to purchase up to 1,415,000 shares of Common Stock
at an exercise price of $0.80 per share. On June 3, 2014, the Board approved an increase in the total offering amount of the promissory
notes issuable to $1,500,000 from $900,000. The fair value of these warrants was estimated to be $101,177, which was recorded as
a discount to the promissory note, and will be accreted based on the repayment of the obligation. The Company repaid $250,000 as
of December 31, 2014. Accretion expense of $10,950 was recognized during the year ended December 31, 2014. The outstanding balance,
net of discount, was $1,074,773 as of December 31, 2014. On March 20, 2015, the Company converted the $165,000 of outstanding principal
and unpaid accrued interest of $105,078, and issued Summit 1,080,312 shares of Common Stock at a conversion price of $0.25 per
share and as an inducement to convert, warrants in aggregate of 540,156 to purchase shares of Common Stock at an exercise price
of $0.50 per share. The Company recognized accretion expense of $7,227 during the three months ended March 31, 2015. In addition,
the Company recognized debt conversion inducement cost related to the fair value of the warrants issued to Summit of $31,455 during
the three months ended March 31, 2015. As of December 31, 2016, the outstanding balance was $1,000,000 or $917,000, net of discount.
During 2015, the Company received
aggregate gross proceeds of $200,000 from one director and issued a 10% Convertible Promissory Note due on December 31, 2015.
This note has been extended until January 31, 2016. Subsequently, the note was further extended with $25,000 due on March 31,
2016 and the remaining balance due on May 31, 2016. The note is convertible into Common Stock at a conversion price of $0.33
per share. The Company also issued 90,910 shares of Common Stock as commitment fee to the director. 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 December 31, 2016 of $9,729. As of the date of this report, the
Company is in discussions with the related party regarding terms to pay all accrued unpaid interest in cash and convert the
principal balance of the note. Such related party has acknowledged that the Company is not currently in default under the
note.
During 2014, the Company received advances
equal to an aggregate of $170,00 from various directors and current stockholders of the Company.
During 2015, the Company received advances
equal to an aggregate of $1,402,500 from various directors and current stockholders of the Company. The Company repaid $115,000
to these related parties in 2015 and $57,500 in 2016. No terms of repayment have been specified on the remaining $1,400,000 aforementioned
advances as of the filing date.
During 2016, the Company received advances
equal to an aggregate of $372,440 from various directors and current stockholders of the Company. The Company repaid $51,040 to
three directors during 2016. No terms of repayment have been specified on the remaining $1,400,000 aforementioned advances as of
the filing date.
On October 31, 2016, the Company received
a promissory note 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. The bank has agreed to extend the maturity date to February 28, 2017.
On March 14, 2017, the bank has agreed to extend the maturity date to August 28, 2017.
In December 2016, the Company’s Board
of Directors authorized the conversion of an aggregate of $5,000 of Loans Payable to Stockholders into 66,667 shares of Common
Stock at the rate of $0.075 per share. The Stockholder was also issued an A Warrant and B Warrant with the same terms and agreement
as the current offering. See Note 9 Stock Warrants and Note 6 Common Stock.
As of December 31, 2016, the outstanding balance
of advances and other loans payable to stockholders was $3,087,956, which included two interest-bearing promissory notes with a
combined outstanding balance of $1,111,556 with two stockholders and $1,721,400 in outstanding advances from other stockholders
and a related party interest-bearing promissory note of $255,000 due to the bank on August 28, 2017. The advances have no terms of
repayment and do not bear interest.
See Note 6 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 15 Evaluation of Subsequent Events
for activity related to advances and other loans payable to stockholders after December 31, 2016.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
5. Long-term Debt
1)
Note Payable to the West Virginia Development Office (“WVDO”)
In March 2007, the Company obtained an 8-year
loan in the amount of $685,000 from the WVDO. The note bears interest at 3% providing for 96 monthly principal and interest payments
of $8,035 through April 2015, at which time the note was due and payable. The note was secured by equipment costing $1,057,167.
On February 4, 2015, the repayment terms were modified, whereby the WVDO approved a deferral of principal and interest until January
31, 2016 with the final payment due January 2017.
As of December 31, 2016, the Company was ten
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 $86,909. As of the date of this report, the Company had fallen another
month behind, or an additional $5,964.
In February 2017, the Company and WVDO reached
an agreement whereby the Company would defer payment for another year. See Note 15 Evaluation of Subsequent Events.
2)
Note Payable to the West Virginia Economic Development Authority (“WVEDA”)
In August 2009, the Company obtained a 10-year
loan in the amount of $242,631 from the WVEDA. The note bears interest at 4% providing for 120 monthly principal and interest payments
of $2,457 through August 2019, at which time the note was due and payable. The note was secured by 50% of equipment costing $531,522.
Effective May 1, 2015, the Company and WVEDA entered into the First Amendment to Promissory Note; whereby, the original note was
modified so that the remaining principal balance is payable in five annual installments; the next payment of $33,880 will be due
on December 31, 2015 with final payment due August 3, 2019. During 2015, the Company repaid $1,832 on the note. On December 17,
2015, the Company elected to defer the remaining 2015 payment until December 2016. On January 31, 2017, the Company elected to
defer the 2016 payment until December 31, 2017. On January 30, 2017, the Company received approval from WVEDA to defer the 2016
annual payment until December 2017 which increased the interest rate by 1.5%. If the Company fails to make any of the remaining
payments, the WVEDA shall increase the interest rate by 1.5% on each successive payment failure with all principal and unpaid interest
due on August 3, 2019. See Note 15 Evaluation of Subsequent Events.
3)
Note Payable to the West Virginia Infrastructure and Jobs Development Council (“WVIJDC”)
In August 2009, the Company obtained a
10-year loan in the amount of $242,630 from the WVIJDC. The note bears interest at 3.25% providing for 120 monthly principal and
interest payments of $2,371 through August 2019, at which time the note was due and payable. The note was secured by 50% of equipment
costing $531,522. On February 4, 2015, the repayment terms were modified whereby, the WVIJDC approved a deferral of principal
and interest until December 31, 2015 with monthly payments of $2,404 beginning in January 2016 and final payment due April 2021.
During 2015, the Company repaid $1,832 of principal on the note. On January 6, 2016, the WVIJDC approved another deferral of principal
and interest until January 2017. In February 2017, the Company and WVDO reached an agreement whereby the Company would defer principal
and interest until January 2018. See Note 15 Evaluation of Subsequent Events.
4)
Note Payable to the West Virginia Economic Development Authority (“WVEDA”)
In October 2010, the Company issued a
10-year note in the amount of $900,000 from the WVEDA. The note bears interest at 3.26% providing for 120 monthly principal
and interest payments of $8,802 through October 2020, at which time the note was due and payable. The note was secured by
equipment costing $477,095. Effective May 1, 2015, the Company and WVEDA entered into the First Amendment to Promissory Note;
whereby, the original note was modified so that the remaining principal balance is payable in six annual installments; the
next payment of $125,990 will be due on December 31, 2015 with final payment due October 21, 2020. During 2015, the Company
repaid $57,513 on the note. On December 17, 2015, the Company elected to defer the remaining 2015 payment until December
2016. On January 30, 2017, the Company received approval from WVEDA to defer the 2016 annual payment until December 2017
which increased the interest rate by 1.5%. If the Company fails to make any of the remaining payments, the WVEDA shall
increase the interest rate by 1.5% on each successive payment failure with all principal and unpaid interest due on October
21, 2020. See Note 15 Evaluation of Subsequent Events
5)
Note Payable to the West Virginia Infrastructure & Jobs Development Council (“WVIJDC”)
In December 2010, the Company issued a
10-year note in the amount of $900,000 from the WVIJDC. The note bears interest at 3.25% providing for 120 monthly principal and
interest payments of $8,781 through December 2020, at which time the note was due and payable. The note was secured by equipment
costing $1,098,249. On February 4, 2015, the repayment terms were modified whereby, the WVIJDC approved a deferral of principal
and interest until December 31, 2015 with monthly payments of $8,902 beginning in January 2016 and final payment due August 2022.
During 2015, the Company repaid $57,513 on the note. On January 6, 2016, the WVIJDC approved another deferral of principal and
interest until January 2017. On February 6, 2017, the WVIJDC approved another deferral of principal and interest until January
2018. See Note 15 Evaluation of Subsequent Events.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
5. Long-term Debt
(continued)
6)
Convertible Promissory Note Payable to the West Virginia Jobs Investment Trust Board (“WVJITB”)
In March 2012, the Company issued an 18-month
note in the amount of $290,000 from the WVJITB. The note bears interest at 6% providing for monthly interest-only payments starting
April 2012 through August 2013, then final interest and principal payments due September 2013. The note has an adjustable conversion
price, initially $2.00 per share, and includes a stock warrant for 72,500 shares. On December 13, 2013, the Company and the WVJITB
entered into a Loan Modification Agreement whereby the maturity date changed from September 14, 2013 to $100,000 due on March 15,
2014 and the remaining $190,000 due on June 15, 2014. The WVJITB and the Company signed three addendums to the note extending the
maturity date and deferring interest and principal payments until March 2, 2015. During 2014, the Company made interest only payments
through October 31, 2014. On February 2, 2015, the Company and WVJITB entered into a Loan Modification Agreement whereby the interest
payable for the periods of October 31, 2014 through June 30, 2015 would be due on June 30, 2015. On December 30, 2015, the Company
and WVJITB entered into another Loan Modification Agreement to extend the maturity date and unpaid accrued interest payment until
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 January 17, 2017, the
Company and WVJITB entered into another addendum whereby the maturity date of the promissory note was extended until
December 31, 2017. In March 2017, all accrued unpaid interest is due in full and starting in April 2017 principal payments of
$25,000 and interest is due monthly until maturity is reached. In return of the extension, the Company granted WVJITB
another five-year warrant to purchase 750,000 shares of the Company’s Common Stock at an exercise price of $0.10 and
assigned the September 30, 2016 warrants exercise price at $0.10 per share. See Note 15 Evaluation of Subsequent Events and
Note 9 Stock Warrants.
7)
Convertible Promissory Note Payable to the West Virginia Jobs Investment Trust Board (“WVJITB”)
In April 2012, the Company issued a 3-month
note in the amount of $400,000 from the WVJITB. The note bears interest at 10% providing for monthly interest-only payments starting
May 2012 through June 2012, then final interest and principal payments due July 2012. The note includes a stock warrant for 88,889
shares. The WVJITB and the Company have signed several addendums to the note extending the maturity date and reducing the price
of converting into common shares to $0.50 per share. The WVJITB further extended the maturity date until November 29, 2013, with
a $100,000 principal payment due on or before November 15, 2013. The Company repaid the $100,000 as agreed, which reduced the principal
outstanding balance to $300,000. The WVJITB and the Company signed four addendums to the note extending the maturity date and deferring
interest and principal payments until March 2, 2015. During 2014, the Company made interest only payments through October 31, 2014.
On February 2, 2015, the Company and WVJITB entered into a Loan Modification Agreement whereby the interest payable for the periods
of October 31, 2014 through June 30, 2015 would be due on June 30, 2015. The maturity date of the loan was also modified and extended
to December 31, 2015. On December 30, 2015, the Company and WVJITB entered into another Loan Modification Agreement to extend the
maturity date and unpaid accrued interest payment 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. In December 2016, the
Company started negotiations with the lender to extended the notes maturity. A loan modification fee of $2,500 was paid along
with accrued interest of $59,250. On January 17, 2017, the Company and WVJITB entered into another addendum whereby the
maturity dates of both promissory notes were extended until December 31, 2017. In March 2017, all accrued unpaid interest is
due in full and starting in April 2017 principal payments of $25,000 and interest is due monthly until maturity is
reached. In return of the extension, the Company granted WVJITB another five-year warrant to purchase 750,000 shares of
the Company’s Common Stock at an exercise price of $0.10 and assigned the September 30, 2016 warrants exercise price at
$0.10 per share. See Note 15 Evaluation of Subsequent Events and Note 9 Stock Warrants.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
5. Long-term Debt
(continued)
8)
Note Payable to the West Virginia Economic Development Authority (“WVEDA”)
In June 2012, the Company issued a
10-year note in the amount of $200,000 from the WVEDA. The note bears interest at 2% providing for 120 monthly principal and
interest payments of $1,840 through June 2022, at which time the note was due and payable. The note was secured by 50% of
equipment costing $447,320. On May 1, 2015, the Company and WVEDA entered into the First Amendment to Promissory Note;
whereby, the original note was modified so that the remaining principal balance is payable in eight annual installments; the
next payment of $26,673 will be due on December 31, 2015 with final payment due June 11, 2022. On December 17, 2015, the
Company elected to defer the 2015 payment until December 2016. On January 31, 2017, the Company elected to defer the 2016
payment until December 2017 which increased the interest rate by 1.5%. If the Company fails to make any of remaining
payments, the WVEDA shall increase the interest rate by 1.5% on each successive payment failure with all principal and unpaid
interest due on June 11, 2022. See Note 15 Evaluation of Subsequent Events.
9)
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 15 Evaluation of Subsequent
Events, the Company obtained shareholder approval for the increase in October 2016. See Note 9 Stock 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).
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
5. Long-term Debt
(continued)
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 9 Stock 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 9 Stock 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 and November 2016, the Company reached
the same such agreement for the exchange of notes and warrants with three additional holders of the Summer 2016 Convertible Debentures.
The Exchange Notes shall have a principal amount totaling $127,313 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 May 16, 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.
The relative fair value of the new
warrants was estimated to be $306,231, 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 9 Stock Warrants.
10)
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 on any unpaid principal balance as of 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.
On November 22, 2016, a payment of $240,000
was made on the September 2016 10% OID Secured Promissory Note leaving an unpaid balance of $480,000 and accrued interest of $12,467.
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. On February 9, 2017 the Company made a $200,000 payment leaving the unpaid balance
of $280,000. See Note 15 Evaluation of Subsequent events for related information.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
5. Long-term Debt
(continued)
11)
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 9 Stock 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 9 Stock Warrants.
12)
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 9 Stock Warrants below related to the triggering of an anti-dilution provision included in the St. George
Investments Warrant in May 2016.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
5. Long-term Debt
(continued)
13)
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 December 31, 2016, the Company had seven capital lease
obligations outstanding with imputed interest rates ranging from 5.86% to 9.45%. The leases require 24-60 monthly payments and
begin to expire in December 2016 through October 2020. These leases are secured by equipment with an aggregate cost of $1,868,809.
As of December 31, 2016, the Company was one month behind on one lease payment of $13,793.
Total outstanding debt, including capital
lease obligations, are as follows (table excludes the outstanding balance of the bank line of credit because it was presented
as a current liability, as discussed in Note 3 Bank Line of Credit; table also excludes obligations to stockholders, which
are detailed in Note 4 Loans Payable to Stockholders and presented as a separate line item on the Company’s Consolidated
Balance Sheets):
Total debts outstanding are as follows:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
1)
Note Payable to the WVDO
|
|
$
|
92,873
|
|
|
$
|
100,656
|
|
2)
Note Payable to the WVEDA
|
|
|
143,312
|
|
|
|
143,312
|
|
3)
Note Payable to the WVIJDC
|
|
|
139,229
|
|
|
|
139,229
|
|
4)
Note Payable to the WVEDA
|
|
|
572,148
|
|
|
|
572,148
|
|
5)
Note Payable to the WVIJDC
|
|
|
581,987
|
|
|
|
581,987
|
|
6)
Note Payable to the WVJITB
|
|
|
290,000
|
|
|
|
290,000
|
|
7)
Note Payable to the WVJITB
|
|
|
300,000
|
|
|
|
300,000
|
|
8)
Note Payable to the WVEDA
|
|
|
168,362
|
|
|
|
168,362
|
|
9)
Convertible Debenture 2
nd
& 3
rd
Quarters
|
|
|
2,114,438
|
|
|
|
-
|
|
10)
September 10% OID Secured Promissory Note
|
|
|
480,000
|
|
|
|
-
|
|
11)
September 2016 20% OID Note
|
|
|
156,250
|
|
|
|
-
|
|
12)
Short-term Convertible Note in March 2016
|
|
|
-
|
|
|
|
-
|
|
13)
Capital leases
|
|
|
928,530
|
|
|
|
754,058
|
|
Total
|
|
|
5,967,129
|
|
|
|
3,049,752
|
|
Less: current portion
|
|
|
(4,012,149
|
)
|
|
|
(1,323,594
|
)
|
Less: unamortized original issue discount
|
|
|
(22,001
|
)
|
|
|
-
|
|
Less: unamortized debt issuance costs
|
|
|
(163,624
|
)
|
|
|
-
|
|
Long-term portion
|
|
$
|
1,769,355
|
|
|
$
|
1,726,158
|
|
Future required minimum principal repayments over the next five
years are as follows:
Year ending December 31:
|
|
Future required minimum principal repayments
|
|
2017
|
|
|
4,264,898
|
|
2018
|
|
|
539,235
|
|
2019
|
|
|
478,274
|
|
2020
|
|
|
333,970
|
|
2021 & Thereafter
|
|
|
350,752
|
|
Total
|
|
$
|
5,967,129
|
|
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
6. Common Stock
The Company is authorized to issue a total
of 510,000,000 of shares of stock, of which 500,000,000 shares are designated Common Stock and 10,000,000 shares are designated
Preferred Stock.
Common Stock
- par value of $.0001 per
share with one vote in respect of each share held. Holders of Common Stock do not have cumulative voting rights. The members of
the Board are elected by the affirmative vote of the holders of a majority of the Company’s outstanding Common Stock.
As of December 31, 2016, the Company was authorized to issue a total of 510,000,000 shares of stock, of which
500,000,000 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 year ended December 31, 2016. In January
2017, the Board of Directors agreed to increase the Company’s authorized shares to 750,000,000. See Note 15 Evaluation of
Subsequent Events for additional information related to the authorized share increase.
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”). In January 2017, the Board of Directors agreed
to further the reverse stock split range to no less than one-for-fifteen (1:15) and no more than one-for-fifty (1:50), 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 15 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 15 Evaluation of Subsequent Events
related to the Company’s sale of Common Stock in first quarter 2017.
Sale of Common Stock
In November and December 2016 (the “Closing”),
the Company received an aggregate of $1,407,430 in gross cash proceeds from 50 accredited investors (the “Purchasers”)
in connection with the sale of approximately 140.74 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-50
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 $186,132 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 5,367,320 shares of Common Stock, with
an exercise price of $0.075 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.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
6. Common Stock
(continued)
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 sale of Common Stock in November and December
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 is
required to issue 85,724,996 shares of Common Stock, issue 25,244,333 Warrants to purchase shares of Common Stock, reduce the conversion
rate for the Exchange Notes to $0.075 per share (See Note 5 Long-term Debt) and reduce the exercise price of 49,459,532 warrants.
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.
In December 2016, the Company’s
Board of Directors authorized the conversion of an aggregate of $5,000 of Loans Payable to Stockholders into 66,667 shares of
Common Stock at the rate of $0.075 per share. The Stockholder was also issued an A Warrant and B Warrant with the same terms
and agreement as the current offering. 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 $5,480. See Note 9 Stock Warrants and Note 4 Loans
Payable to Stockholders.
In December 2016, the Company’s Board
of Directors authorized the conversion of an aggregate of $50,000 of accounts payable to a vendor into 666,667 shares of Common
Stock at the rate of $0.075 per share. The vendor was also issued an A Warrant and B Warrant with the same terms and agreement
as the current offering. 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 $54,800. See Note 9 Stock Warrants.
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.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
6. Common Stock
(continued)
Consulting Agreements
In November 2016, the Company entered into
a consulting agreement with a consulting firm for certain services to be rendered to the Company over a thirteen-month period (the
“Agreement”). Besides cash compensation, the Agreement requires the Company to issue 500,000 shares of Common Stock
and a Warrant to purchase 500,000 shares of Common Stock at $0.11 per share to the consulting firm within 30 days of the Agreement.
For each quarter thereafter, for the remainder of the consulting period, 250,00 shares of Common Stock and a Warrant to purchase
250,000 shares Common Stock shall be issued within 30 days of the commencement of the quarter. As of December 31, 2016, 250,000
shares have been issued to the consulting firm. The fair value of the shares issued was estimated at $27,500, which was recorded
as consulting expense in the month of issuance. See Note 9 Stock Warrants.
On December 31 2016, the Company entered into
a consulting agreement with a consultant to provide professional advisory and introductory services for a three-month period ending
March 31, 2017, unless extend by mutual written agreement. In lieu of cash compensation, the Agreement requires the Company to
issue the Consultant 250,000 shares of Common Stock. The fair value of the shares issued was estimated at $30,000, which was recorded
as consulting expense in the month of issuance.
On December 31, 2016, the Company entered into
a consulting agreement with a consultant to provide business advisory services for a six-month period ending June 30, 2017. Besides
reimbursement of reasonable and documented expenses, the Agreement requires the Company to issue 250,000 shares of Common Stock
within 30 days of the agreement and upon completion of the Company’s current private placement offering units of the Company’s
security, the Company will issue an additional 200,000 shares of Common Stock. The fair value of the shares issued was estimated
at $30,000, which was recorded as consulting expense in the month of issuance.
Directors Compensation
On December 31, 2016, the Company issued certain
Board of Directors shares of Common Stock as compensation for their work in 2016. This form of compensation was approved at the
February 17, 2015 Board of Directors meeting.
Common Stock issues during 2016 are as follows:
Common Stock
|
|
# Shares
Issued
|
|
|
Par
Value
|
|
|
Price
Per
Share
|
|
|
Gross
Proceeds
|
|
|
Value of
Services
Obtained
|
|
|
Par
Value
|
|
|
Additional
Paid in
Capital (1)
|
|
Balance at December 31, 2015
|
|
|
133,146,250
|
|
|
$
|
.0001
|
|
|
|
Various
|
|
|
$
|
58,393,786
|
|
|
$
|
2,359,303
|
|
|
$
|
13,315
|
|
|
$
|
60,740,153
|
|
Issuance of stock (2)
|
|
|
18,765,730
|
|
|
|
.0001
|
|
|
$
|
0.075
|
|
|
|
1,407,430
|
|
|
|
-
|
|
|
|
1,877
|
|
|
|
1,108,296
|
|
Issuance of stock (3)
|
|
|
371,364
|
|
|
|
.0001
|
|
|
$
|
0.25
|
|
|
|
-
|
|
|
|
92,841
|
|
|
|
37
|
|
|
|
92,804
|
|
Issuance of stock (4)
|
|
|
3,567,666
|
|
|
|
.0001
|
|
|
$
|
Various
|
|
|
|
-
|
|
|
|
467,620
|
|
|
|
356
|
|
|
|
467,264
|
|
Issuance of stock (5)
|
|
|
108,696
|
|
|
|
.0001
|
|
|
|
0.25
|
|
|
|
-
|
|
|
|
27,174
|
|
|
|
11
|
|
|
|
27,163
|
|
Issuance of stock (6)
|
|
|
66,667
|
|
|
|
.0001
|
|
|
$
|
0.075
|
|
|
|
-
|
|
|
|
5,000
|
|
|
|
6
|
|
|
|
4,994
|
|
Issuance of stock (7)
|
|
|
6,445,000
|
|
|
|
.0001
|
|
|
$
|
0.07047
|
|
|
|
-
|
|
|
|
(645
|
)
|
|
|
645
|
|
|
|
-
|
|
Balance at December 31, 2016
|
|
|
162,471,373
|
|
|
|
|
|
|
|
|
|
|
$
|
59,801,216
|
|
|
$
|
2,951,293
|
|
|
$
|
16,247
|
|
|
$
|
62,440,674
|
|
|
(1)
|
Balance does not include issuance costs, deferred financing, warrants portion of convertible debentures and stock options.
|
|
(2)
|
Shares issued under certain an anti-dilution provision per current offering provisions.
|
|
(3)
|
Shares issued for conversion of interest and accounts payment.
Shares do not contain an anti-dilution provision.
|
|
(4)
|
Shares issued to directors for compensation for their service to the Company 1,417,666, consulting services 1,350,000, accounts
payment conversion 666,667, and shares issued as for services rendered for an offering 133,333. Share do not contain anti-dilution
provision.
|
|
(5)
|
Shares issued to as part of debt services. Shares do not
contain anti-dilution provision.
|
|
(6)
|
Shares issued for conversion of debt. Shares do not contain anti-dilution provision.
|
|
(7)
|
Shares issued for cashless exercise of warrants. Shares do not contain anti-dilution provision.
|
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
6. Common Stock
(continued)
Common Stock issues during 2015 are as follows:
Common Stock
|
|
# Shares
Issued
|
|
|
Par
Value
|
|
|
Price
Per
Share
|
|
|
Gross
Proceeds
|
|
|
Value of
Services
Obtained
|
|
|
Par
Value
|
|
|
Additional
Paid in
Capital (1)
|
|
Balance at December 31, 2014
|
|
|
66,588,600
|
|
|
$
|
.0001
|
|
|
|
Various
|
|
|
$
|
53,708,521
|
|
|
$
|
1,814,673
|
|
|
$
|
6,659
|
|
|
$
|
55,516,535
|
|
Issuance of stock (2)
|
|
|
13,051,058
|
|
|
|
.0001
|
|
|
$
|
0.25
|
|
|
|
3,262,765
|
|
|
|
-
|
|
|
|
1,305
|
|
|
|
3,261,460
|
|
Issuance of stock (3)
|
|
|
30,286,520
|
|
|
|
.0001
|
|
|
$
|
0.25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,029
|
|
|
|
(2,650
|
)
|
Issuance of stock (4)
|
|
|
15,524,642
|
|
|
|
.0001
|
|
|
$
|
0.25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,552
|
|
|
|
(1,552
|
)
|
Issuance of stock (5)
|
|
|
1,134,520
|
|
|
|
.0001
|
|
|
|
Various
|
|
|
|
-
|
|
|
$
|
319,630
|
|
|
|
114
|
|
|
|
319,516
|
|
Issuance of stock (6)
|
|
|
90,910
|
|
|
|
.0001
|
|
|
$
|
0.33
|
|
|
|
-
|
|
|
$
|
30,000
|
|
|
|
9
|
|
|
|
29,991
|
|
Issuance of stock (7)
|
|
|
780,000
|
|
|
|
.0001
|
|
|
$
|
0.25
|
|
|
|
-
|
|
|
$
|
195,000
|
|
|
|
78
|
|
|
|
194,922
|
|
Issuance of stock (8)
|
|
|
5,690,000
|
|
|
|
.0001
|
|
|
$
|
0.25
|
|
|
|
1,422,500
|
|
|
|
-
|
|
|
|
569
|
|
|
|
1,421,931
|
|
Balance at December 31, 2015
|
|
|
133,146,250
|
|
|
|
|
|
|
|
|
|
|
$
|
58,393,786
|
|
|
$
|
2,359,303
|
|
|
$
|
13,315
|
|
|
$
|
60,740,153
|
|
|
(1)
|
Balance does not include issuance costs, deferred financing, warrants portion of convertible debentures and stock options.
|
|
(2)
|
Shares issued for conversion of an aggregate of $2,841,085 principal amount and $394,173 of accrued interest on promissory
notes/convertible debenture and $27,506 of accounts payable. Shares do not contain an anti-dilution provision.
|
|
(3)
|
Conversion of preferred stock and accrued dividends into shares of Common Stock and contain an anti-dilution provision.
|
|
(4)
|
Shares issued under certain anti-dilution privileges.
|
|
(5)
|
Shares issued to consultants for services rendered. Shares do not contain anti-dilution provision.
|
|
(6)
|
Shares issued to a director as a commitment fee as part of Promissory Note. Shares do not contain anti-dilution provision.
|
|
(7)
|
Shares issued to directors for compensation for their service to the Company. Share do not contain anti-dilution provision.
|
|
(8)
|
Shares issued contain an anti-dilution provision that expire upon the earlier of 1) three years from date of issuance or 2)
uplisting to a senior stock exchange.
|
7. Preferred Stock
Preferred Stock
- par value of $.0001
per share with one vote in respect of each share held. The Company is authorized to issue Preferred Stock in one or more series
and containing such rights, privileges and limitations, including voting rights, dividend rates, conversion privileges, redemption
rights and terms, redemption prices and liquidation preferences, as the Board may, from time to time, determine. No shares of the
Preferred Stock were issued during 2016.
Preferred Stock issues during 2015 are as follows:
Preferred Stock
|
|
# Shares
Issued
|
|
|
Par
Value
|
|
|
Price
Per
Share
|
|
|
Gross
Proceeds
|
|
|
Par
Value
|
|
|
Additional
Paid in
Capital (1)
|
|
Balance at December 31, 2014
|
|
|
3,337,725
|
|
|
$
|
.0001
|
|
|
$
|
2.00
|
|
|
$
|
6,675,452
|
|
|
$
|
334
|
|
|
$
|
6,675,118
|
|
Issuance of stock (2)
|
|
|
370,050
|
|
|
|
.0001
|
|
|
$
|
2.00
|
|
|
|
740,100
|
|
|
|
37
|
|
|
|
740,063
|
|
Stock dividend
|
|
|
78,040
|
|
|
|
.0001
|
|
|
$
|
2.00
|
|
|
|
(156,056
|
)
|
|
|
8
|
|
|
|
156,048
|
|
Conversion of preferred stock
|
|
|
(3,785,815
|
)
|
|
|
.0001
|
|
|
$
|
2.00
|
|
|
|
(7,259,496
|
)
|
|
|
(379
|
)
|
|
|
(7,571,229
|
)
|
Total December 31, 2015
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
(1) Activity does not include issuance costs, deferred financing,
warrants portion of convertible debentures and stock options.
(2) Shares issued contain an anti-dilution provision expiring upon
the conversion to Common Stock.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
7. Preferred Stock
(continued)
During 2015, the Company sold units of Preferred
Stock consisting of 50,000 shares of Series A convertible Preferred Stock and a three year warrant to purchase 200,000 shares of
Common Stock at an exercise price of $0.375 per share. Each share of Preferred Stock has a stated value equal to $2.00. The Preferred
Stock automatically converted into shares of Common Stock determined by dividing the stated value by $0.25 per share on March 31,
2015. Under certain circumstances, the holders of the Preferred Stock had voluntary conversion rights, were entitled to receive
stock dividends at the rate of 6.0% per annum and are entitled to certain anti-dilution protections.
8. 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, directors and consultants of the Company.
Under the 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 the 2002 Plan to 4,150,000 shares. During the first quarter 2013,
the Board adopted the 2013 Equity Incentive Plan (the “2013 Plan”) and together with the 2002 Plan (the “Plans”)
governs the equity awards to employees, directors and consultants of the Company. Under the 2013 Plan, an additional 5,000,000
shares of Common Stock has been reserved for issuance. On June 18, 2013, the 2013 Plan was approved by holders of a majority of
the issued and outstanding shares of Common Stock of the Company. On December 18, 2015, the Board approved an increase of 7,500,000
shares of Common Stock to be reserved for issuance on January 1, 2016; thus, increasing the total reserved shares to 12,500,000.
The types of awards permitted under the Plan include qualified incentive
stock options (ISO) and non-qualified stock options (NQO), and restricted stock. Each option shall be exercisable at such times
and subject to such terms and conditions as the Board may specify. Stock options generally vest over four years and expire no later
than ten years from the date of grant.
A summary of stock option activity is as follows:
|
|
Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average Remaining
Contractual Life (in years)
|
|
Outstanding at December 31, 2014
|
|
|
7,019,750
|
|
|
$
|
0.92
|
|
|
|
6.69
|
|
Granted
|
|
|
3,957,836
|
|
|
$
|
0.33
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(927,500
|
)
|
|
$
|
0.90
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
10,050,086
|
|
|
$
|
0.69
|
|
|
|
7.26
|
|
Granted
|
|
|
3,350,000
|
|
|
$
|
0.15
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(2,620,000
|
)
|
|
$
|
0.52
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
10,780,086
|
|
|
$
|
0.57
|
|
|
|
7.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2015
|
|
|
4,938,664
|
|
|
$
|
1.01
|
|
|
|
5.59
|
|
Exercisable at December 31, 2016
|
|
|
5,680,899
|
|
|
$
|
0.84
|
|
|
|
5.70
|
|
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
8. Stock Options and Stock-based Compensation
(continued)
The following table summarizes information about stock options at
December 31, 2016:
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Exercise Price
|
|
|
Outstanding
|
|
|
Weighted Average
Remaining
contractual life (in
years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Exercisable
|
|
|
Weighted
Average
Exercise Price
|
|
$
|
0.15
|
|
|
|
3,250,000
|
|
|
|
|
|
|
|
|
|
|
|
203,125
|
|
|
|
|
|
$
|
0.25
|
|
|
|
1,573,336
|
|
|
|
|
|
|
|
|
|
|
|
774,586
|
|
|
|
|
|
$
|
0.48
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
46,875
|
|
|
|
|
|
$
|
0.50
|
|
|
|
79,000
|
|
|
|
|
|
|
|
|
|
|
|
79,000
|
|
|
|
|
|
$
|
0.53
|
|
|
|
405,000
|
|
|
|
|
|
|
|
|
|
|
|
151,875
|
|
|
|
|
|
$
|
0.55
|
|
|
|
3,312,000
|
|
|
|
|
|
|
|
|
|
|
|
2,414,688
|
|
|
|
|
|
$
|
1.25
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
$
|
1.50
|
|
|
|
1,646,000
|
|
|
|
|
|
|
|
|
|
|
|
1,646,000
|
|
|
|
|
|
$
|
2.00
|
|
|
|
214,750
|
|
|
|
|
|
|
|
|
|
|
|
214,750
|
|
|
|
|
|
|
$0.25 - $2.00
|
|
|
|
10,780,086
|
|
|
|
7.30
|
|
|
$
|
0.57
|
|
|
|
5,680,899
|
|
|
$
|
0.84
|
|
At December 31, 2016, the total aggregate intrinsic
value for options currently exercisable and options outstanding was $0. These values represent the total pre-tax intrinsic value
based on the estimated fair value of the Company’s stock price of $0.12 as of December 31, 2016. During the year ended December
31, 2016 no shares were exercised.
The following table summarizes the activity
of the Company’s stock options that have not vested for the year ended December 31, 2016:
|
|
Shares
|
|
|
Weighted Average
Grant-date Fair Value
|
|
Nonvested at December 31, 2014
|
|
|
2,423,283
|
|
|
$
|
0.258
|
|
Granted
|
|
|
3,957,836
|
|
|
$
|
0.155
|
|
Forfeited
|
|
|
(927,500
|
)
|
|
$
|
0.386
|
|
Vested
|
|
|
(342,197
|
)
|
|
$
|
0.283
|
|
Nonvested at December 31, 2015
|
|
|
5,111,422
|
|
|
$
|
0.153
|
|
Granted
|
|
|
3,350,000
|
|
|
$
|
0.153
|
|
Forfeited
|
|
|
(1,594,216
|
)
|
|
$
|
0.314
|
|
Vested
|
|
|
(1,526,519
|
)
|
|
$
|
0.076
|
|
Nonvested at December 31, 2016
|
|
|
5,340,687
|
|
|
$
|
0.125
|
|
The fair value of non-vested options to be
recognized in future periods is $612,632, which is expected to be recognized over a weighted average period of 2.52 years. The
total fair value of options vested during the year ended December 31, 2016 was $235,965 compared to $267,638 for the year ended
December 31, 2015.
Stock-based compensation expense is as follows:
|
|
Year ended
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Selling, general, and administrative expense
|
|
$
|
222,195
|
|
|
$
|
230,016
|
|
Research and development expense
|
|
|
13,892
|
|
|
|
37,622
|
|
Total stock-based compensation expense
|
|
$
|
236,087
|
|
|
$
|
267,638
|
|
The weighted average grant-date fair value
of options granted during the year ended December 31, 2016 was $0.0959 and for the year ended December 31, 2015 was $0.155 per
option.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
8. Stock Options and Stock-based Compensation
(continued)
The fair value of the option grants was estimated
using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
Year ended
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Risk-free interest rate
|
|
|
1.36
|
%
|
|
|
1.82
|
%
|
Volatility factor
|
|
|
66.26
|
%
|
|
|
65.78
|
%
|
Weighted average expected life (in years)
|
|
|
7
|
|
|
|
7
|
|
Dividend rate
|
|
|
0.0
|
%
|
|
|
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 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 SAB 110 “Simplified” method).
9. Stock Warrants
From 2008 through 2016, the Company issued
warrants to purchase shares of Common Stock. The warrants are exercisable for three to five years from date of issuance and are
exercisable at exercise prices that range from $0.075 to $2.25 per share.
In connection with the issuance of the
Summer 2016 Convertible Debentures and the September 2016 20% OID Note (see Note 5 Long-term 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 6,510,001. The relative fair value of these warrants was estimated at $24,886, which was
recorded as a discount to these debentures and is being accreted over the term of the underlying debentures. The Placement
Agent compensated with cash and warrants. The total number of shares of Common Stock issuable upon exercise of these warrants
is 1,519,000. The relative fair value of these warrants was estimated at $3,316, 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.
In October and November 2016, the Company reached
an agreement with one holder of certain short-term convertible notes issued in May, the Second Quarter 2016 Convertible Debentures
and an agreement with holders of certain short-term convertible notes issued in July 2016, the July 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 $14,950,
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 $3,488, 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.
The St. George Investments Warrant (see
Note 5 Long-term 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
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
9. Stock Warrants
(continued)
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 5 Long-term Debt, this debenture matured on September 6, 2016. The Company recognized accretion
expense of $104,947 related to the adjustment.
In November 2016, St George Investments
provided notice of exercise of warrant to the Company and the cashless exercise option. Exhibit A in the Warrant to purchase
shares of Common Stock. Upon review of the cashless exercise, the Company contacted legal counsel who in turn collaborated
with St George Investments counsel. A settlement of 6,445,000 shares was agreed upon by both parties and issued in December
2016 exhausting all warrants to purchase shares. This settlement agreement was approved by the Board of Directors on January
31, 2017. See Note 15 Evaluation of Subsequent Events
See Note 5 Long-term Debt and Note 6
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 6,841,569 shares of Common Stock, respectively during the year ended December 31, 2016. Note,
the amount of warrants issued to the placement agent are net of warrants cancelled in September 2016.
In November and December 2016, pursuant
to the “Closing”, issued 18-month Class A Warrants of 18,765,729 shares of Common Stock at an exercise price of $0.09
per share and issued five year Class B Warrants of 18,765,729 shares of Common Stock at an exercise price of $0.1125 per share.
See Note 6 Common Stock for information regarding the “Closing.”
See also Note 15 Evaluation of Subsequent
Events for information related to warrants issued in conjunction with the Company’s sale of Common Stock in January through
March 2017.
The sale of Common Stock in November and December 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 85,724,996 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 6 Common Stock) and reduce the exercise price of 49,459,532 warrants.
In December 2016, the Company’s Board
of Directors authorized the conversion of an aggregate of $5,000 of Loans Payable to Stockholders into 66,667 shares of Common
Stock at the rate of $0.075 per share. The Stockholder was also issued an 18-month Class A Warrant of 66,667 shares of Common Stock
to purchase at an exercise price of $0.09 and a five-year Class B Warrant of 66,667 shares Common Stock to purchase at an exercise
price of $0.1125 with the same terms and agreement as the current offering. 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 $5,480. See Note 6 Common Stock.
In December 2016, the Company’s
Board of Directors authorized the conversion of an aggregate of $50,000 of accounts payable to a vendor into 666,667 shares of
Common Stock at the rate of $0.075 per share. The Vendor was also issued an 18-month Class A Warrant of 66,667 shares of Common
Stock to purchase at an exercise price of $0.09 and a five-year Class B Warrant of 66,667 shares Common Stock to purchase at an
exercise price of $0.1125 with the same terms and agreement as the current offering. 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 $54,800. See
Note 6 Common Stock.
As of December 31, 2016, warrants to
purchase 122,475,881 shares of Common Stock were outstanding and exercisable. During the year ended December 31, 2016, the
Company recognized a total of $202,982 in interest expense resulting from the accretion of the fair value of issued
warrants.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
9. Stock Warrants
(continued)
|
|
Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average Remaining
Contractual Life (in years)
|
|
Outstanding at December 31, 2015
|
|
|
71,342,894
|
|
|
$
|
0.77
|
|
|
|
2.37
|
|
Granted
|
|
|
60,435,862
|
|
|
$
|
0.21
|
|
|
|
2.65
|
|
Exercised
|
|
|
(4,912,500
|
)
|
|
|
-
|
|
|
|
|
|
Cancelled or expired
|
|
|
(4,390,375
|
)
|
|
$
|
2.01
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
122,475,881
|
|
|
$
|
0.43
|
|
|
|
2.13
|
|
The following table summarizes information
about stock warrants at December 31, 2016:
Warrants Outstanding
|
|
Exercise Price
|
|
|
Outstanding
|
|
|
Weighted Average Remaining
Contractual Life (in years)
|
|
|
Weighted Average
Exercise Price
|
|
$
|
0.075
|
|
|
|
5,367,319
|
|
|
|
|
|
|
|
|
|
$
|
0.09
|
|
|
|
19,632,396
|
|
|
|
|
|
|
|
|
|
$
|
0.10
|
|
|
|
590,000
|
|
|
|
|
|
|
|
|
|
$
|
0.1125
|
|
|
|
19,632,396
|
|
|
|
|
|
|
|
|
|
$
|
0.25
|
|
|
|
4,808,145
|
|
|
|
|
|
|
|
|
|
$
|
0.26
|
|
|
|
7,500,000
|
|
|
|
|
|
|
|
|
|
$
|
0.30
|
|
|
|
2,845,000
|
|
|
|
|
|
|
|
|
|
$
|
0.33
|
|
|
|
7,875,001
|
|
|
|
|
|
|
|
|
|
$
|
0.35
|
|
|
|
14,831,098
|
|
|
|
|
|
|
|
|
|
$
|
0.38
|
|
|
|
741,000
|
|
|
|
|
|
|
|
|
|
$
|
0.40
|
|
|
|
1,040,000
|
|
|
|
|
|
|
|
|
|
$
|
0.45
|
|
|
|
1,730,000
|
|
|
|
|
|
|
|
|
|
$
|
0.50
|
|
|
|
2,250,523
|
|
|
|
|
|
|
|
|
|
$
|
0.75
|
|
|
|
11,556,394
|
|
|
|
|
|
|
|
|
|
$
|
0.80
|
|
|
|
1,602,500
|
|
|
|
|
|
|
|
|
|
$
|
1.10
|
|
|
|
18,866,850
|
|
|
|
|
|
|
|
|
|
$
|
1.12
|
|
|
|
263,750
|
|
|
|
|
|
|
|
|
|
$
|
2.00
|
|
|
|
138,800
|
|
|
|
|
|
|
|
|
|
$
|
2.20
|
|
|
|
98,320
|
|
|
|
|
|
|
|
|
|
$
|
2.25
|
|
|
|
1,106,389
|
|
|
|
|
|
|
|
|
|
|
$0.075 - $2.25
|
|
|
|
122,475,881
|
|
|
|
2.13
|
|
|
$
|
0.43
|
|
10. Treasury Stock
Treasury stock is accounted for using the par
value method and is constructively cancelled when received.
11. Income Taxes
The provision for income taxes, if any, is
comprised of current and deferred components. The current component, if any, presents the amount of federal and state income taxes
that are currently reportable to the respective tax authorities and is measured by applying statutory rates to the Company’s
taxable income as reported in its income tax returns. The Company has evaluated its income tax positions in accordance with FASB
ASC 740. There were no changes to unrecognized tax benefits during 2014. The tax years 2011 through 2014 remain open to review
by various taxing authorities.
ASC Topic 740, Income Taxes
defines
the confidence level that a tax position must meet in order to be recognized in the financial statements. Accordingly, we have
assessed uncertain tax positions in each of the tax jurisdictions in which we have operations and account for the related financial
statement implications. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the
tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax
benefits recognized in the financial statements on a particular tax position are measured based on the largest benefit that has
a greater than 50% likelihood of being realized upon settlement. The amount of unrecognized tax benefits is adjusted as appropriate
for changes in facts and circumstances, such as significant amendments to existing tax law, new regulations or interpretations by the taxing authorities,
new information obtained during a tax examination, or resolution of an examination. We recognize both accrued interest and penalties,
where appropriate, related to unrecognized tax benefits in income tax expense.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
11. Income Taxes
(continued)
Significant management judgment is required
in determining the provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded in connection
with the deferred tax assets.
The Company provides for a full valuation allowance
against the deferred tax asset. Net operating loss carryforwards start to expire beginning 2021 for both federal and state purposes.
The net operating tax loss carryforward totals approximately $76,530,000 and $68,600,000 at December 31, 2016 and December 31,
2015, respectively.
We have recorded a full valuation
allowance of $31,103,721 and $27,916,317 as of December 31, 2016 and 2015, respectively, due to uncertainties related to our
ability to utilize the Company’s deferred tax assets, primarily consisting of certain net operating losses carried
forward.
The valuation allowance is based on management’s
current estimates of taxable income for the jurisdictions in which we operate and the period over which the deferred tax assets
will be recoverable.
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Current deferred income tax asset:
|
|
|
|
|
|
|
|
|
Tax net operating loss carry forward
|
|
$
|
29,846,911
|
|
|
$
|
26,751,533
|
|
Tax-deferred stock option expense
|
|
|
1,256,810
|
|
|
|
1,164,784
|
|
Total current deferred income tax asset
|
|
|
31,103,721
|
|
|
|
27,916,317
|
|
Valuation Allowance
|
|
|
(31,103,721
|
)
|
|
|
(27,916,317
|
)
|
Net deferred income tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
In the event that actual results differ from
these estimates, or these estimates are adjusted in future periods, and realization of these deferred tax assets for which the
valuation allowance has been provided occur, the provision for income taxes may decrease, raising income and positively impacting
the Company’s financial position.
12. Lease Commitments
The Company leases its facility under an operating
lease beginning April 2012 through March 2017. The Company also has one equipment operating lease with a term of five years.
Future minimum rental payments are as follows
for the year ending December 31, 2015:
Year ending
|
|
Future minimum rental payments
|
|
2016 (payment in arrears)
|
|
$
|
21,754
|
|
2017
|
|
|
185,317
|
|
2018
|
|
|
189,613
|
|
2019
|
|
|
188,813
|
|
2020
|
|
|
184,813
|
|
2021 & Thereafter
|
|
|
369,626
|
|
Rent expense totals $167,633 for the year ended
December 2016 and $274,580 for 2015. As of September 30, 2015, the Company consolidated into one facility. As a result of the consolidation,
rent expense declined from 2015 to 2016. The Company has notified the facility Leasing Company of the Company is exercising the
renewal option within the leasing agreement.
On December 1, 2016, the Company executed
the facility lease Renewal Option, Article IV-Possession, Renewal and Early Termination, 4.0.2 Renewal Option, for another five-year
term starting April 1, 2017. On April 1, 2017, rent will increase $1,432 per a month, thus increasing annual rent to from $13,969
to $15,401 per a month.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
13. Retirement Plan
The Company provides a 401(k) Profit Sharing
Plan for elective deferrals whereby participants can defer up to 100% of their wages not to exceed a maximum dollar amount determined
by the Federal Government each year. The Company, at its discretion, can make matching contributions to the Plan. The Company may
also make qualified non-elective contributions to participants who are not highly compensated employees. All employees meeting
age and hours of service requirements are eligible to participate in the Plan after completing one year of service. Participants
become vested in employer contributions on a graduated scale with full vesting after five years. No Company contributions have
yet been made.
14. 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 managements’ 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.
In 2016, 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. In December 2016, the Company entered
into a confessed judgement with one of the vendor agreeing to make payment of $161,889.16 in full by January 31, 2017. Two payments
of $25,000 each were made in December 2016 leaving a balance of $111,889.16 to pay by January 31, 2017.
Subsequent to December 31, 2016, the Company made full and final payment of $111,889.16 on the confessed
judgement on January 31, 2017. As of the date of this report total claims are $37,000.00.
Indemnity of Directors and Officers
As permitted under Delaware law and required
by corporate by-laws, the Company indemnifies and holds harmless its directors and officers for certain events or occurrences while
the director or officer is or was serving in such capacity. The maximum potential amount of future payments that could be required
under these indemnification obligations is unlimited; however, the Company maintains a Directors and Officers liability insurance
policy that enables it to recover a portion of any future amounts paid with a limit of liability of $5,000,000. The Company
may incur an additional liability if indemnity for more than the limit of liability occurred, and such liability may have
a material adverse effect on our financial position, cash flows and results of operations. As there were no known or pending claims,
the Company has not accrued a liability for such claims as of December 31, 2016.
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 all installments, as scheduled.
Warranty Reserve
The Company provides for a one-year warranty
with the sale of its LAESI instrument. Additionally, the Company sells extended warranties for an additional cost. During 2016,
the Company sold no extended LAESI warranties. All other product warranties are 90 days from the date of delivery of the goods.
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 product. During the year ended December
31, 2016 and 2015, the Company recorded accrued warranty expense of $45,000 and $50,000, respectively.
University License Agreements
The Company has agreements with universities
related to in-licensed technologies as follows:
AGREEMENT WITH WEST VIRGINIA UNIVERSITY (WVU)
The Company has entered into a License and
Exclusive Option to License Agreement with the West Virginia University Research Corporation, a nonprofit West Virginia corporation
(“WVURC”) 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.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
14. Commitments and Contingencies
(continued)
AGREEMENT WITH GEORGE WASHINGTON UNIVERSITY
(GWU)
In December 2008, the Company entered into
an Exclusive License Agreement with George Washington University (Washington D.C.) 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 LAESI - laser ablation electrospray ionization, a new method of bioanalytical analysis that enables high
throughput biomolecule characterization.
Under the terms of the license agreement, the
Company has the exclusive, worldwide rights to commercialize the technology. The Company is obligated to pay expenses for the preparation,
filing and prosecution of related patent applications, and the Company will pay royalties on the net revenues resulting from the
sale of products and services that utilize the GWU subject technology. During the year ended December 31, 2016, the Company recorded
royalty expenses of approximately $24,319 compared to $41,500 as of December 31, 2015. As of December 31, 2016, the Company’s
accounts payable balance includes approximately $85,883 to GWU, of which approximately $76,858 was in arrears, for royalties on
LAESI sales compared to $54,693 as of December 31, 2015.
In November 2012, the Company entered into
a Patent License Agreement with George Washington University (Washington D.C) 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
(Matrix) and Nanophotonic Production, Modulation and Switching of Ions by Silicon Microcolumn Arrays.
Under the terms of the license 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 third quarter of 2015,
the Company reached the $30,000 milestone payment under this agreement.
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 30 days of exposure.
During the year ended December 31, 2016, the Company recorded REDIchip royalty expense of $8,000 and $3,000 for December 31, 2015.
As of December 31, 2016, the Company’s accounts payable balance includes approximately $41,000 to GWU, which includes the
milestone commitment, of which $38,500 is in arears compared to $30,000 as of December 31, 2015. Subsequent to December 31, 2016, GWU has requested all past due payments be made. See Note 15 Evaluation
of Subsequent Events for further information.
COAST Project
In 2014, the Company entered into an agreement
with Omics2Image related to the “Next Generation Ambient Imaging Mass Spectrometry for (Bio)polymers and Smart Materials”
(“COAST Project”). The Company has committed to fund €60,000 or $76,000 related to the COAST Project over the
next twelve month period. Omics2Image agrees to evenly share the value gained from the efforts outlined within the scope of the
COAST Project, which may include new intellectual property and the development of a commercial, integrated instrument system. As
of December 31, 2015, the Company had made two payments of €40,000 or $46,600 to Omics2Image. On November 25, 2016, the Company
paid the balance in full plus accrued interest of totaling $24,296. As of December 31, 2016, this commitment has been fully satisfied.
Engineering and Design Services
The Company has engaged Dynamic Manufacturing
LLC, to produce ten LAESI units and of December 31, 2016, the Company has received ten LAESI units. As of December 31, 2016, the
Company has payables of $53,063 of which $53,063 is in arears. In February 2017, this commitment has been paid in full and fully
exhausted.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
15. Evaluation of Subsequent Events
Sale of Common Stock
In January through March 2017 (the “Closing”),
the Company received an aggregate of $688,000 in gross cash proceeds from 21 accredited investors (the “Purchasers”)
in connection with the sale of approximately 68.80 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 terminated on March 31, 2017.
In connection with the Closings, the Company paid to the placement agent an aggregate of $71,960 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 2,328,001 shares of Common Stock, with an exercise price of $0.075 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.
Stock Warrants
Subsequent to December 31, 2016, the
Company issued warrants to purchase 750,000 shares of Common Stock to West Virginia Jobs Investment Trust Board as
consideration for modifying the terms of the loan agreement. The warrants are exercisable at an exercise price of $0.10 per
share for a five-year term. In connection with this loan modification, a price of $0.10 was set to the September 30, 2016
warrant to purchase 590,000 shares of Common Stock.
Consultant Agreements
Subsequent to December 31, 2016, the Board
of Directors approved payment of $50,000 to a certain Consultant for Consulting Services of which is to be paid as units of our
securities consisting of (a) 666,667 shares of our Common Stock (a conversion price of $0.075 per share) plus (b) an eighteen-month
warrant to purchase an additional 666,667 share of Common Stock at an exercise price of $0.09 per share and (c) a five-year warrant
to purchase an additional 666,667 shares of Common Stock at an exercise price of $0.1125 per share containing identical terms
to the units of equity securities which we sold in our private placement to unaffiliated accredited investors between November
2016 and March 31, 2017.
Subsequent to December 31, 2016, the Company
issued warrants to purchase 1,720,000 shares of Common Stock to Consultants pursuant to their Consulting Agreements.
Subsequent to December 31, 2016, the Company
has issued an aggregate of 750,000 in Common Stock for consulting services. The consulting agreement required 500,000 shares of
Common Stock to be issued upon execution of the Consulting Agreement. The aggregate of 250,000 shares of Commons Stock were issued
as upon execution of the Consulting Agreement, in 2016, leaving an aggregate of 250,000 shares of Common Stock to be issued for
execution of the agreement. In addition to the 500,000 shares of Common Stock to be issued upon execution of the Consulting Agreement,
and for each quarter thereafter for the remainder of the Consulting Period, Common Stock and warrants to purchase Common Stock
will be issued 250,000 shares of Common Stock and a warrant to purchase 250,000 shares of Common Stock to the Consultant on the
first day of each quarter. The issuance of 750,000 comprised of 250,000 shares of Common Stock due upon execution of the Consulting
Agreement, 250,000 shares of Common Stock for the first quarter in 2017 and 250,000 shares of Common Stock for the second quarter
of 2017. On January 31, 2017 the Board of Directors approved the request to accelerate the issuance of 250,000 shares of Common
Stock for the second quarter of 2017.
Subsequent to December 31, 2016, the Company
has entered into a consulting agreement with a firm for professional financial advisory and introductory services for a period
is from March 8, 2017 through December 31, 2017. Besides a one-time $10,000 retainer payment the consulting agreement requires
payment of 1,200,000 shares of the Company’s Common Stock.
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
15. Evaluation of Subsequent Events
(continued)
Advances from Stockholders
Subsequent to December 31, 2016, the Company received advances equal to an aggregate of $522,148 from
certain current directors and related parties. A total of 131,319 was converted into current units of security (see subsequent
event below) and no terms of repayment have been specified on the balance of aforementioned advances as of the filing date.
Conversion of Advances from Stockholders
Subsequent to December 31, 2016, Related
Parties agreed to convert $2,521,719 of such Stockholder Notes and accrued interest of $92,319 into units of our securities consisting
of (a) 34,853,829 shares of our Common Stock (a conversion price of $0.075 per share) plus (b) an eighteen-month warrant to purchase
an additional 34,853,829 share of Common Stock at an exercise price of $0.09 per share and (c) a five-year warrant to purchase
an additional 34,853,829 shares of Common Stock at an exercise price of $0.1125 per share containing identical terms to the units
of equity securities which we sold in our private placement to unaffiliated accredited investors between November 2016 and March
29, 2017.
Payment on Debt
Subsequent to December 31, 2016, the Company
made a $200,000 payment on the September 2016 10% OID Secured Promissory Note. As of the date of this report the balance of the
note is $280,000.
Stock Options Granted
Subsequent to December 31, 2016, the Board
of Directors approved 560,000 Stock Option awards to certain key personnel with an $0.11 exercise price. Stock Options vest over
four years and expire no later than ten years from the date of grant.
Appointment of Principal Officer
Subsequent to December 31, 2016, the Board
of Directors approved the appointment of Haddon Goodman to the Chief Business Officer, which was previously held by the Company’s
President David Halverson.
Obligations to Vendors
Subsequent to December 31, 2016, the Company had fulfilled their
obligation to MPR of $111,889 and such judgement has been cancelled.
License Agreements with The George
Washington University (“GWU”)
Subsequent to December 31, 2016, the
Company had received two Payment on Demand letters from George Washington University regarding the patent license agreement
for “LISMA/NAPA License” and exclusive license agreement for the “LAESI License” along with the
patent license agreement for the “Protein Microscope License.” As these letters relate to such agreements and
past due payments they allow the Company to make payment or release their rights of the each of such license agreements by
specified amount of days for each agreement or provide requested plans.
The Protein Microscope License request is to deliver the University
an updated Development Plan per article 2.1, achieving first commercial sale of the Licensed Product per article 2.3, and either
demonstrating expenditures of agreed diligence minimums or paying any shortfall per article 2.4 within forty-five (45) days of
the letter. The due date of this request is March 13, 2017. As of the date of this report the Company has complied with the request and is currently working with GWU.
The LAESI License request is that all past due royalties are paid within sixty (60) days of the letter.
George Washington University is preserving their rights under article 10.9 and 7.3(b) of the LAESI License agreement. The Company
has made payment in full on March 28, 2017, this request has been fulfilled.
The LISMA/NAPA License request is that all past due royalties are
paid within ten (10) days of the letter. As of the date of this report, the Company has relinquished all rights to the LISMA/NAPA
License and Patents. George Washington University has accepted this relinquishment and has started the process of removing Protea
from all rights.
Proxy
Subsequent to December 31, 2016, our definitive
proxy statement on Schedule 14A, filed as of March 2, 2017 with the SEC. We submitted a ratification of appointment of Schneider
Downs & Co., Inc. as our auditors for the 2016 fiscal year, is being submitted to our stockholders for ratification as a matter
of good corporate practice. If our stockholders fail to ratify the appointment, the Board of Directors will reconsider whether
to appoint Schneider Downs & Co., Inc. Even if the appointment is ratified, the Board of Directors in its discretion may direct
the appointment of a different independent registered public accounting firm if the Board of Directors determines that a new appointment
would be in our best interests and the best interests of our stockholders.
On January 31,
2017, at a special meeting of the Board of Directors, our Board of Directors approved by unanimous vote to seek shareholder approval
of certain proposals by written consent that, to adopt and effectuate, will require the majority consent of our stockholders. As
of the date of this filing on Form 10-K, we have submitted these proposals to our stockholders pursuant to our definitive proxy
statement on Schedule 14A, filed on March 2, 2017 with the Securities and Exchange Commission ("SEC"). Under the proposals
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements
15. Evaluation of Subsequent Events
(continued)
we are soliciting
our stockholders written consent to approve the filing of an amended and restated certificate of incorporation in Delaware (“Restated
Charter”), to increase the number of authorizes shares of our Common Stock, $0.0001 par value per share (“Common Stock”)
from 500,000,000 shares of Common Stock to 750,000,000 shares of Common Stock (the “Authorized Common Stock Increase”),
and with such Authorized Common Stock Increase to be effective at such time and date within one year after the date such action
is approved by the Majority Stockholders, if at all, as determined by the Board of Directors in its sole discretion (the “Authorized
Common Stock Increase Proposal”).
Included within
our definitive proxy statement on Schedule 14A, filed as of March 2, 2017 with the SEC, we submitted a proposal to our stockholders
for written consent to approve the filing of an amended and restated certificate of incorporation in Delaware (the “Restated
Charter”) or in a subsequent amendment to the Restated Charter, provisions to effect a reverse split of our issued and outstanding
Common Stock, within a range of not less than one-for-fifteen (1:15) and not more than one-for-fifty (1:50), with such ratio to
be determined by the Board of Directors, in its sole discretion (the “Reverse Split”), and with such Reverse Split
to be effective at such time and date within one year after the date such action is approved by the stockholders, if at all, as
determined by the Board of Directors in its sole discretion (the “Reverse Split Proposal”).
The Reverse Split proposal, including the
final reduced number of shares of Common Stock into which our currently outstanding shares will be converted (within the stockholder-approved
range referred to above), if approved by the consent of a majority of our stockholders, will be determined by our Board of Directors
in order to list our Common Stock on the Nasdaq Capital Market which, in any event, shall become effective only (a) upon the approved
filing of the Restated Charter to consummate the Reverse Split with the Secretary of State of the State of Delaware, including
the final reduced number of shares of Common Stock into which our currently outstanding shares will be converted; and (b) upon
announcement of the Reverse Split by FINRA.
In the event that we receive written consent
from a majority of our stockholders entitled to vote thereunder approving the Reverse Split and, subsequently, our Board of Directors
elects to consummate the Reverse Split on or prior to March 31, 2017, the Board of Directors will
not
effectuate
the filing of the Restated Charter to consummate the Authorized Common Stock Increase. However, in the event that we do not consummate
the Reverse Split on or prior to March 31, 2017, we will consummate the Authorized Common Stock Increase by filing the Restated
Charter with the Secretary of State of the State of Delaware as soon as practicable following March 31, 2017. Even if we do consummate
the Authorized Common Stock Increase on or about March 31, 2017, our Board of Directors will still reserve and maintain the right
to consummate the Reverse Split at such time and date within one year after the date such action is approved by our stockholders,
if at all, and as determined by the Board of Directors in its sole discretion (the “Reverse Split Proposal”).
If implemented, the Reverse Stock Split
will only effect our outstanding Common Stock and shares of Common Stock issuable upon conversion of convertible securities and
exercise of warrants and options. It will not effect the number of shares of Common Stock we are authorized to issue under our
Restated Charter.
The purpose of the Reverse Split is to
enable us to qualify our Common Stock for listing on a national stock exchange such as The Nasdaq Capital Market or the NYSE AMEX.
Our Common Stock is currently traded on the OTC Markets OTCQB marketplace. Such trading market is considered to be less efficient
than that provided by a stock exchange such as The Nasdaq Stock Market or NYSE AMEX. In order for us to list our Common Stock on
The Nasdaq Stock Market or NYSE MKT, we must fulfill certain listing requirements, including minimum bid price requirements for
our Common Stock.
On April 4, 2017, the Company’s board
of directors approved the Company’s decision to exercise such discretionary right by extending the deadline to receive written
consents under the Consent Solicitation from the original date of March 30, 2017 to April 28, 2017.
Convertible Note
Subsequent to December 31, 2016, we issued
our legal counsel, CKR Law LLP a $308,439 convertible note due September 30, 2017, representing accrued and unpaid legal fees
through December 31, 2016 and in connection with the preparation and filing of our recent proxy statement. Such note will, at
the option of the holder, either be paid out of the net proceeds of any public offering of our Common Stock we consummate prior
to the maturity date of such note, or be convertible into shares of our common stock at a price equal to 85% of the initial per
share offering price of our Common Stock we may offer in connection with such public offering. We have agreed to register the
shares of Common Stock issuable upon conversion of the note in the registration statement relating to such public offering.
Senior Secured Convertible Note
On April 7, 2017, we received a loan of
$1,750,000 from Summit Resources, Inc., one of our principal stockholders and an affiliate of Steve Antoline, one of our directors.
The loaned amount includes $200,000 previously advanced by Summit and an additional $1,550,000 will be advanced to us from April
2017 through July 2017. We issued to Summit our senior secured promissory note in the principal amount of up to $1,750,000 that
is payable in monthly installments over a period of 36 months.
Of the loan proceeds, $1,250,000 will be
used to purchase the new state-of-the-art mass spectrometer we recently ordered and the balance of the loan will be used for working
capital. We have agreed to apply 30% of the net proceeds (after commissions and offering expenses) we receive from any equity or
equity type financing to reduce and prepay the $500,000 working capital portion of the loan. In addition, the entire loan is subject
to mandatory prepayment in the event and to the extent that we receive gross proceeds of $5,000,000 or more from any subsequent
public offering of our securities.
Commencing
30 days after installation of the Instrument we will pay monthly installments of principal and accrued interest in the amount equal
to the greater of (a) $62,030.86 (representing 36 monthly installments of principal and accrued interest at the rate of 15% per
annum), or (b) 20% of the cash proceeds we receive from customers who request services from the Company using the new mass spectrometer
equipment. We also agreed to establish a special lock
box to deposit cash proceeds we receive from use of such equipment.
The Note is convertible into shares of
our Common Stock, at the option of the holder at a conversion price equal to
the lower
of $0.075 per share (as adjusted
by the contemplated the reverse stock split), or (b) 85% of the offering price per share of the Common Stock in any subsequent
public offering of our Common Stock.
The loan is secured by a first lien and
security interest on all of our assets and properties, including the purchased equipment and all purchase orders we receive in
connection therewith.