Notes to Consolidated Financial Statements (Unaudited)
|
1.
|
Description of Business
and Basis of Presentation
|
The Company
Protea Biosciences Group, Inc.
(referred to herein as “Protea,” “the Company,” “we,” “us” and “our”)
is an emerging growth, molecular information company that has developed a revolutionary platform technology that enables the direct
analysis, mapping and display of biologically active molecules in living cells and tissue samples. The technology platform offers
new, unprecedented capabilities useful to the pharmaceutical, diagnostic, clinical research, agricultural and life science industries.
“Molecular information” refers to the generation and bioinformatic processing of very large data sets, known as “big
data,” obtained by applying the Company’s technology to identify and characterize the proteins, metabolites, lipids
and other molecules which are the biologically active molecular products of all living cells and life forms.
Our technology is used to improve
pharmaceutical development and life science research productivity and outcomes, and to extend and add value to other technologies
that are used in research and development, such as three-dimensional tissue models, biomarker discovery, synthetic biologicals
and mass spectrometry. In particular, the Company believes that its ability to rapidly provide comprehensive molecular image-based
datasets addresses a universal need of the pharmaceutical, diagnostic and clinical research and life science industries.
The Company’s
commercial development is centered on three lines of business:
|
·
|
Molecular information
services – We believe that we are the commercial leader in providing multi-modal Mass Spectrometry Imaging (“MSI”),
combining Laser Ablation Electrospray Ionization (“LAESI®”), Matrix Assisted Laser Desorption Ionization (“MALDI”)
and optical microscopy. Our proprietary services enable the identification and quantitation of both small molecules (e.g., lipids
and metabolites) and large molecules (e.g., proteins) and our services portfolio, inclusive of MSI, proteomics, metabolomics,
lipidomics and bioinformatics is unique in the industry. Our clients include major pharmaceutical, chemical and biotechnology
companies;
|
|
·
|
LAESI® instrument platform – We offer our proprietary LAESI® DP-1000 instrument, software and bioanalytical consumables to corporate and academic research laboratories, and;
|
|
·
|
Molecular diagnostics and clinical research – We apply our multi-modal MSI technologies and workflows in partnership with top-tier medical research institutions to co-develop new molecular diagnostic tests that the company believes can be used to improve the diagnosis and prognosis of cancer and provide requisite information useful in predicting the outcome of cancer treatment. Our current test development programs target the differential diagnosis and prognosis of malignant melanoma and the molecular profiling of subpopulations of cells in lung adenocarcinoma.
|
Basis of Presentation
The unaudited Consolidated Financial
Statements include the accounts of Protea Biosciences Group, Inc. and its wholly-owned subsidiary, Protea Biosciences, Inc. In
the opinion of management, these statements have been prepared on a basis consistent with the December 31, 2016 audited Consolidated
Financial Statements and include all material adjustments, consisting of normal recurring adjustments and the elimination of material
intercompany transactions and balances, necessary for a fair presentation of the Company’s consolidated financial position
and results of operations for the interim periods presented. These unaudited, interim, Consolidated Financial Statements have been
prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly,
they do not include certain information and footnotes normally required by accounting principles generally accepted in the United
States of America (“GAAP”) for complete consolidated financial statements.
The consolidated results of
operations for the three months ended March 31, 2017 are not necessarily indicative of the results of operations for the full
fiscal year. These Consolidated Financial Statements and related footnotes should be read in conjunction with the financial statements
and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed
with the SEC on April 14, 2017 (“2016 Form 10-K”).
Emerging Growth Company
The Company is an “emerging
growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) and may take advantage
of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth
companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b)
of the Sarbanes-Oxley Act, and exemptions from the requirements of Sections 14A(a) and (b) of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), to hold a nonbinding advisory vote of shareholders on executive compensation and any
golden parachute payments not previously approved.
The Company has elected to use
the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act.
This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public
and private companies until those standards apply to private companies. As a result of this election, our consolidated financial
statements may not be comparable to companies that comply with public company effective dates.
We will remain an “emerging
growth company” for up to five years following our initial public offering, that is, until February 2019, although we will
lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three-year
period, or if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30.
To the extent that we continue
to qualify as a “smaller reporting company,” as such term is defined in Rule 12b-2 under the Exchange Act, after we
cease to qualify as an emerging growth company, certain of the exemptions available to us as an emerging growth company may continue
to be available to us as a smaller reporting company, including: (1) not being required to comply with the auditor attestation
requirements of Section 404(b) of the Sarbanes Oxley Act; (2) scaled executive compensation disclosures, and; (3) the requirement
to provide only two years of audited financial statements instead of three years.
Critical Accounting Policies
Information with respect to
the Company’s critical accounting policies which management believes are the most important to the portrayal of the Company’s
reported results of operations and financial condition and that require management’s most difficult, subjective or complex
judgements, often as the result of the need to make estimates about the effects of matters that are inherently uncertain, is contained
in Part II, Item 7 of our 2016 Form 10-K.
Recently Issued Accounting
Pronouncements
There were no changes to the
recently issued accounting pronouncements as described in the consolidated financial statements included in our 2016 Form 10-K.
As mentioned above, as permitted
under the JOBS Act, the Company has elected to delay the adoption of new or revised accounting standards that have different effective
dates for public and private companies until those standards apply to private companies.
Going Concern
The Company’s Consolidated
Financial Statements included in this report have been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has funded its activities
to date almost exclusively from debt and equity financings as well as sales of certain assets. Substantially all of the Company’s
property and equipment are security for outstanding indebtedness. We will continue to require substantial funds to support our
molecular information services business and advance global commercialization of our LAESI® instrument platform and service
outstanding debt obligations, including scheduled interest and principal payments, and fulfilling payment obligations related to
debt that has reached maturity.
The Company has experienced
negative cash flows from operations since inception. Since inception, our operations have been funded primarily through proceeds
received from the issuance of debt and sale of equity securities in private placement offerings and, from time-to-time, sales of
certain assets. Management intends to continue to meet the Company’s operating cash flow requirements by raising additional
funds from the sale of equity or debt securities, the sale of certain assets, and possibly developing corporate development partnerships
to advance our molecular information technology development activities by sharing the costs of development and commercialization.
For example, we could also enter into a transaction such as a merger with a business that is complimentary to ours.
We have also worked closely
with various parties that financed our short- and long-term debt to obtain extensions and modifications that deferred or reduced
amounts due under these obligations. Such extensions and modifications have included, in certain cases, the issuance of warrants.
In addition, three members of the Company’s Board of Directors and the estate of a former board member guarantee payment
of the Company’s outstanding bank line of credit. Such extensions, modifications and guarantees have been an important part
of the Company’s ability to manage its liquidity and short-term capital resources. In addition, as part of these efforts,
the Company has delayed payments to certain vendors and suppliers. As of March 31, 2017, the Company’s accounts payable balance
of $1,712,272 included $1,558,698 that was overdue by terms, $1,290,244 of which that was more than 90 days past due. Included
in the $1,290,244 balance are amounts the Company owes for lab supplies, temporary employees, legal fees, interest and consulting.
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 that is payable in monthly installments over a period of 36 months, see Note 18 Evaluation
of Subsequent Events for more information. The Company is in arrears on scheduled interest and principal payments on certain other
debt obligations, as discussed in more detail Note 12 Debt. There can be no assurances that the Company will be able to continue
to obtain such extensions and modifications to outstanding debt, delay certain payments or use other methods such as guarantees
by or advances from stockholders, when and if necessary, to ensure the Company has the liquidity and capital resources necessary
to fund future operations and to continue as a going concern.
The bank line of credit has
been presented as a currently liability as the Company was in arrears with its interest at March 31, 2017. The line of credit of
$3,000,000 has a due date of July 2018. See Note 9 Bank Line of Credit for more details.
As of the date of this report,
the Company is in default with all but one short-term convertible notes with the principal amount totaling $2,384,222. The Company
is working on an agreement with the holders of certain short-term convertible notes exchanged in September through November 2016
(the “Exchange Notes”) to extend the maturity date to September 30, 2017. The Exchange Notes shall have a principal
amount totaling $2,384,222 which represents the Original Principal Amount plus accrued interest of 10% per annum for each of the
Exchange Notes. In addition, the notes shall extend the maturity dates under the Exchange Notes to September 30, 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 March 2017, the Company’s
debt obligation to stockholders decreased $2,516,719 and issued 34,787,162 shares of its Common Stock and warrants to purchase
an aggregate of 69,574,324 shares of Common Stock as part of the Company’s “Insider Debt Conversion Agreement”.
See Note 10 Obligations to Shareholders and Note 13 Common Stock for additional information about these transactions.
In the first quarter of 2017,
the Company issued 9,173,332 shares of its Common Stock and warrants to purchase an aggregate of 18,346,662 shares of Common Stock
resulting in gross proceeds of $688,000 associated with the 2016/17 Offering. See Note 13 Common Stock and Note 15 Warrants for
additional information about these transactions.
We have sold most our investment
in AzurRx BioPharma, Inc. (“AzurRx”) as a means of obtaining additional cash in prior periods. As of March 31, 2017,
our ownership interest in AzurRx was 1.7% on a fully-diluted basis. 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. Subsequent to March 31, 2017 the Company sold 25,000 shares of Common Stock on the open
market. See Note 18 Subsequent Events for more information.
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 2016/17 Offering 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 4 Fair Value of Financial Assets and Liabilities – Derivative Financial Instruments
for additional information. See also Note 3 Derivative Liabilities for additional information related to the estimated fair value
of the anti-dilution provisions included in the Company’s financial instruments that were outstanding as of March 31, 2017.
Aside from further issuances
of its Common Stock, the Company is exploring other options for obtaining additional financial resources such as the issuances
of short-term debentures and Preferred Stock.
There can be no assurance that
we will be successful in raising enough funds to sustain operations.
Since inception, we have been
successful in raising funds and selling certain assets to fund our operations and believe that we will be successful in obtaining
the necessary capital resources to fund our operations going forward; however, there can be no assurances that we will be able
to secure any additional funding or capital resources or the terms and conditions of any such arrangements. These factors raise
substantial doubt about our ability to continue as a going-concern.
The accompanying Consolidated
Financial Statements do not include any adjustment that might be necessary if the Company is unable to continue as a going concern.
The Company recognizes revenue
from three major components: molecular information services, LAESI® instrument platform and research products.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Molecular information services
|
|
$
|
257,753
|
|
|
$
|
217,052
|
|
LAESI® instrument platform
|
|
|
6,883
|
|
|
|
179,795
|
|
Research products
|
|
|
90,200
|
|
|
|
78,791
|
|
Gross revenue
|
|
$
|
354,836
|
|
|
$
|
475,338
|
|
|
3.
|
Derivative Liabilities
|
The Company does not use
derivative instruments to hedge exposures to cash flow, market or foreign currency risks. However, the Company has certain
financial instruments that are embedded derivatives associated with certain capital raises and common stock purchase
warrants. The Company evaluates all of its financial instruments to determine if those contracts or any potential embedded
components of those contracts qualify as derivatives to be separately accounted for in accordance with FASB Accounting
Standards Codification 815-10-05-4 and 815-40. This accounting treatment requires that the carrying amount of any embedded
derivatives be recorded at fair value at issuance and marked-to-market at each balance sheet date. If the fair value is
recorded as a liability, as is the case with the Company, the change in the fair value during the period is recorded as
either income or expense. Upon conversion or exercise, the derivative liability is marked to fair value at the conversion
date and then the related fair value is reclassified to equity. See also Note 4 Fair Value of Financial Assets and
Liabilities – Derivative Financial Instruments.
|
4.
|
Fair Value of Financial Assets and Liabilities –
Derivative Financial Instruments
|
We measure the fair value of
financial assets and liabilities in accordance with GAAP, which defines fair value, establishes a framework for measuring fair
value and requires certain disclosures about fair value measurements.
GAAP defines fair value as the
exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes
the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value.
The three levels of inputs used
to measure fair value:
Level
1 – quoted prices in active markets for identical assets or liabilities
Level
2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level
3 – inputs that are unobservable (for example, the probability of a capital raise in a
“binomial” methodology for valuation of a derivative liability directly related to the issuance of common stock
warrants)
The Company has entered into
certain financial instruments, such as convertible debentures and equity financing arrangements, which include variable conversion
rates, include anti-dilution provisions (“down-round protection”) and detachable warrants that are: (i) not afforded
equity classification; (ii) embody risks not clearly and closely related to host contracts, or; (iii) may be net-cash settled by
the counterparty. Such derivative liabilities are recorded at fair value at the issuance date. Subsequent changes in fair value
are recorded through the consolidated statement of comprehensive loss. For the Company, the Level 3 financial liability is the
derivative liabilities related to certain Common Stock and warrants that include “down-round protection” that are valued
using the “Monte Carlo Simulation” technique. While the majority of inputs are Level 2, this technique necessarily
incorporates a capital raise assumption which is unobservable and, therefore, a Level 3 input.
As of March 31, 2017, a range
of key quantitative assumptions related to the Common Stock and warrants that include “down round protection” are as
follows:
|
|
Expected life (years)
|
|
Risk-free rate
|
|
Volatility
|
|
|
Probability of a capital raise
|
|
Derivative liabilities
|
|
0.50 – 5.00
|
|
0.91% and 1.27%
|
|
|
81.05
|
%
|
|
|
100
|
%
|
Financial Assets
and Liabilities Measured at Fair Value on a Recurring Basis
The Company’s derivative
liabilities are related to certain Common Stock issuances that included “down-round protection”, warrants issued in
conjunction with certain Common Stock and debt issuances, including warrants granted to the Placement Agent related to such issuances,
that included “down-round protection”, and the variable conversion rate feature of certain short-term convertible debentures.
See also Note 12 Debt, Note 13 Common Stock, and Note 15 Warrants.
The derivative liabilities measured
at fair value on a recurring basis are summarized below:
|
|
Fair value measurements as of March 31, 2017
|
|
|
|
Carrying value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liabilities – Common Stock
|
|
$
|
2,581,090
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
2,581,090
|
|
Derivative liabilities – Warrants
|
|
|
3,710,217
|
|
|
|
–
|
|
|
|
–
|
|
|
|
3,710,217
|
|
Derivative liabilities – Convertible debentures
|
|
|
632,817
|
|
|
|
–
|
|
|
|
–
|
|
|
|
632,817
|
|
Total
|
|
$
|
6,924,124
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
6,924,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements as of 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 2016/17 Offering
unit sales of Common Shares—especially considering the current market price for the Company’s Common Stock (which
is currently less than $0.09 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 2016/17 Offering
unit 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 March 31, 2017.
The table below provides a summary
of the changes in fair value of the derivative liabilities measured at fair value on a recurring basis:
|
|
Three Months Ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
|
|
Derivative liabilities
|
|
|
measurements
|
|
|
|
Common
|
|
|
|
|
|
Convertible
|
|
|
using Level 3
|
|
|
|
stock
|
|
|
Warrants
|
|
|
debt
|
|
|
inputs
|
|
Balance as of December 31, 2016
|
|
$
|
2,016,370
|
|
|
$
|
854,553
|
|
|
$
|
226,998
|
|
|
$
|
3,097,921
|
|
Unrealized loss on derivative liabilities outstanding as of December 31, 2016
|
|
|
564,720
|
|
|
|
1,725,474
|
|
|
|
–
|
|
|
|
2,290,194
|
|
Fair value of variable conversion rate for convertible debentures issued in 2017
|
|
|
–
|
|
|
|
–
|
|
|
|
405,819
|
|
|
|
405,819
|
|
Fair value of derivative liabilities associated with other financial instruments issued in 2017
|
|
|
–
|
|
|
|
1,130,190
|
|
|
|
–
|
|
|
|
1,130,190
|
|
Balance as of March 31, 2017
|
|
$
|
2,581,090
|
|
|
$
|
3,710,217
|
|
|
$
|
632,817
|
|
|
$
|
6,924,124
|
|
Basic and diluted loss per common
share is computed based on the weighted average number of shares of Common Stock outstanding, or 168,999,709 for the three months
ended March 31, 2017; for the comparative periods in 2016, weighted average number of shares of Common Stock outstanding was 133,299,471.
Common share equivalents (which may consist of stock options, warrants and convertible debt) are excluded from the computation
of diluted loss per share for all periods presented because including them would be anti-dilutive. Common share equivalents that
could potentially dilute basic earnings per share in the future, and which were excluded from the computation of diluted loss per
share, were 278,374,047 and 80,102,519 shares as of March 31, 2017 and March 31, 2016, respectively.
Inventory represents finished
goods and work in progress. Finished goods and work in progress consist primarily of specifically identifiable items that are valued
at the lower of cost or fair market value using the first-in, first-out (FIFO) method. Inventory consists of the following at:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Finished goods
|
|
$
|
10,307
|
|
|
$
|
8,725
|
|
Work-in progress
|
|
|
30,311
|
|
|
|
83,519
|
|
Total inventory
|
|
$
|
40,618
|
|
|
$
|
92,244
|
|
|
7.
|
Property and Equipment
|
Property and equipment and leasehold
improvements are capitalized at cost and depreciated using the straight-line method (the Company used the double-declining balance
method for property and equipment placed in service prior to January 2011) over estimated lives as follows:
Equipment
|
5 – 10 years
|
Vehicles
|
5 years
|
Leasehold improvements
|
Life of lease
|
Software
|
3 years
|
Property and equipment consists
of the following:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Lab equipment
|
|
$
|
5,701,039
|
|
|
$
|
5,698,009
|
|
Computer equipment
|
|
|
552,423
|
|
|
|
552,423
|
|
Office equipment
|
|
|
191,248
|
|
|
|
191,248
|
|
Leasehold improvements
|
|
|
212,730
|
|
|
|
212,730
|
|
|
|
|
6,657,440
|
|
|
|
6,654,410
|
|
Accumulated depreciation
|
|
|
(4,318,639
|
)
|
|
|
(4,188,285
|
)
|
Property and equipment, net
|
|
$
|
2,338,801
|
|
|
$
|
2,466,125
|
|
For the three months ended March
31, 2017, depreciation expense was $157,345. For the three months ended March 31, 2016, depreciation expense was $158,993.
|
8.
|
Trade Accounts Receivable and Other Noncurrent Assets
|
Trade accounts receivable, net
includes a bad debt allowance of $1,200 and $7,000 for March 31, 2017 and December 31, 2016, respectively.
Other noncurrent assets consisted
of deposits totaling $19,041 of March 31, 2017 and December 31, 2016.
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 March 31, 2017 and December 31, 2016.
The Company’s line of
credit with the bank requires the Company to adhere to certain customary covenants. For example, the bank can issue a default notice
to the Company and accelerate payment of the outstanding balance if the Company fails to make a scheduled interest payment to the
bank, is in default under any agreement with a third party which materially and adversely affects the Company’s property,
operations or financial condition, or the Company does not make timely payments on property that is useful its business, including
maintenance and repairs of such property.
As of the date of this report,
the Company is one month in arrears with scheduled payments to the bank. The bank has not issued any notice to the Company regarding
any default or possible default under the line of credit; however, this has caused the Company to classify the line of credit as
a current liability.
|
10.
|
Obligations to Stockholders
|
During the three months ended
March 31, 2017, the Company received advances equal to an aggregate of $537,148 from various directors and current stockholders
of the Company increasing the advance obligation to $3,625,104 including promissory notes. The advances have no terms of repayment
and do not bear interest. Certain Stockholders have converted some of their 2017 advances into Common Stock and warrants. See below.
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. 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. On March 14, 2017, Summit agreed to convert the balance
of this note and accrued interest into securities, see below. Accretion expense of $83,000 was recognized in March 2017 due to
the note being converted.
In March 2017, certain related
parties agreed to convert $2,320,400 of such Stockholder advances received on or before December 31, 2016 and $196,319 of such
Stockholder advanced received in 2017 along with accrued interest of $92,319 into units of our securities consisting of (a) 34,787,162
shares of our Common Stock (a conversion price of $0.075 per share) plus (b) an eighteen-month warrant to purchase an additional
34,787,162 share of Common Stock at an exercise price of $0.09 per share and (c) a five-year warrant to purchase an additional
34,787,162 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.
The $200,000 interest-bearing
promissory note with a stockholder has reached maturity. This obligation has a current principal amount of $194,556. In February
2017, the Company and the stockholder discussed the possibility of converting the unpaid principal balance into units of our securities
containing identical terms of the units of equity securities which we sold in our private placement to unaffiliated accredited
investors between November 2016 and March 31, 2017 only when the accrued and unpaid interest of $15,047, as of March 31, 2017,
is paid in cash. As of the date of this report, the Company is still in discussions with the related party regarding timing of
the conversion.
On March 14, 2017, the Company
received an extension of maturity on the $255,000 related party note. This note was obtained from a bank and the Company is responsible
for repaying the related party note directly to the bank by August 28, 2017.
See Note 13 Common Stock related
to the conversion of advances and interest into shares of Common Stock.
See also Note 18 Evaluation
of Subsequent Events for activity related to advances and other loans payable to stockholders after March 31, 2017.
|
11.
|
Other Current Liabilities
|
Other current liabilities consist
of the following at:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Accrued expenses
|
|
$
|
33,358
|
|
|
$
|
68,411
|
|
Accrued interest
|
|
|
304,266
|
|
|
|
264,507
|
|
Accrued warranty expense
|
|
|
35,000
|
|
|
|
45,000
|
|
Accrued payroll and benefits
|
|
|
189,322
|
|
|
|
119,619
|
|
Accrued sales tax
|
|
|
–
|
|
|
|
103
|
|
Unearned revenue
|
|
|
55,572
|
|
|
|
58,407
|
|
Other payables and accrued expenses
|
|
$
|
617,518
|
|
|
$
|
556,047
|
|
Convertible Promissory
Notes with WVJITB
The Company has outstanding
two convertible promissory notes with the West Virginia Jobs Investment Trust Board (“WVJITB”). One is an 18-month
note issued in March 2012 with a principal amount of $290,000 (“March 2012 Promissory Note”) and the second a 3-month
note issued in April 2012 with principal amount of $400,000 (“April 2012 Promissory Note”). As of March 31, 2017, the
principal balance of the March 2012 Promissory Note was $290,000 with the principal balance of the April 2012 Promissory Note having
been reduced to $300,000 as the result of a payment made by the Company in 2013. Since the issuance of these notes, the Company
and WVJITB have enacted several addendums to both notes, including extending the maturity dates and reducing the rate at which
the notes are convertible into shares of Common Stock.
On January 17, 2017, the Company
and WVJITB entered into another addendum, loan modification, whereby the maturity date of the promissory note was extended until
December 31, 2017. The loan modification requires the Company to pay all accrued unpaid interest is due in full on March 1, 2017.
Starting in April 2017 principal payments of $50,000 to be split evenly between the two notes and interest is due monthly until
maturity is reached. In return of the extension, the Company paid a $5,000 loan modification fee and granted WVJITB another
five-year warrant to purchase 750,000 shares of the Company’s Common Stock at an exercise price of $0.10.
As of March 31, 2017, the principal
balance of each note has been offset with the fair value of the warrant. The relative fair value of the warrant at the issuance
date was estimated at $30,825 and $7,322 has been accreted for the three months ending March 31, 2017.
Promissory Note with WVDO
As of January 31, 2017, the
Company was eleven 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 $92,873. The promissory note matured on January 31, 2017.
In February 2017, the Company and WVDO reached an agreement whereby the Company would defer payment for another year.
Convertible Debentures
and September 2016 OID Note
As of March 31, 2017, the Company
is in default under approximately $2,250,544 of outstanding debt securities owed to various investors and may not be able to obtain
extension of the maturity. The Company is offering to the holder(s) of all $2,384,222 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.
September 2016 10% OID
Secured Promissory Note
As of March 31, 2017, the Company
is in negotiations with the holder of the note to extend the maturity date. The current balance of the note is $280,000. See Note
18 Evaluation of Subsequent Events for information relating to the extension of this note.
Capital Leases
From time to time, in the normal
course of business, the Company enters into capital leases to finance equipment. As of March 31, 2017, the Company had six capital
lease obligations outstanding with imputed interest rates ranging from 5.04% to 9.45%. The capital leases require 24 – 60
monthly payments and expire in June 2017 – June 2020. These leases are secured by equipment with an aggregate cost of $1,783,676.
As of March 31, 2017, the Company was two months in arears on two capital lease payments.
See Note 18 Evaluation of Subsequent
Events for additional activity and information regarding debt.
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 9 Bank Line of Credit; table also excludes obligations to stockholders, which
are detailed in Note 10 Obligations to Stockholders and presented as a separate line item on the Company’s Consolidated Balance
Sheets):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
1)
Note Payable to the WVDO
|
|
$
|
92,873
|
|
|
$
|
92,873
|
|
2)
Note Payable to the WVEDA (a)
|
|
|
143,312
|
|
|
|
143,312
|
|
3)
Note Payable to the WVIJDC (b)
|
|
|
139,229
|
|
|
|
139,229
|
|
4)
Note Payable to the WVEDA (a)
|
|
|
572,148
|
|
|
|
572,148
|
|
5)
Note Payable to the WVIJDC (b)
|
|
|
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 (a)
|
|
|
168,362
|
|
|
|
168,362
|
|
9)
Convertible Debenture 2
nd
& 3
rd
Quarters 2016
|
|
|
2,114,438
|
|
|
|
2,114,438
|
|
10)
September 2016 10% OID Secured Promissory Note
|
|
|
280,000
|
|
|
|
480,000
|
|
11)
September 2016 20% OID Note
|
|
|
156,250
|
|
|
|
156,250
|
|
12)
Short-term Convertible Note in March 2016
|
|
|
–
|
|
|
|
-
|
|
13)
Capital leases
|
|
|
818,979
|
|
|
|
928,530
|
|
Total
|
|
|
5,657,578
|
|
|
|
5,967,129
|
|
Less: current portion
|
|
|
(3,798,276
|
)
|
|
|
(4,012,149
|
)
|
Less: unamortized original issue discount
|
|
|
–
|
|
|
|
(22,001
|
)
|
Less: unamortized debt issuance costs
|
|
|
(25,051
|
)
|
|
|
(163,624
|
)
|
Long-term portion
|
|
$
|
1,834,251
|
|
|
$
|
1,769,355
|
|
(a) West Virginia Economic
Development Authority
(b) West Virginia Infrastructure
and Jobs Development Council
Future required minimum principal
repayments over the next five years are as follows (same exclusions as noted for the table above):
|
|
Future required minimum
|
|
Year Ended December 31:
|
|
principal payments
|
|
2017
|
|
$
|
3,733,206
|
|
2018
|
|
|
534,352
|
|
2019
|
|
|
500,357
|
|
2020
|
|
|
495,353
|
|
2021 and thereafter
|
|
|
394,310
|
|
Total
|
|
$
|
5,657,578
|
|
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, 2016 and no such shares were issued during
the three months ended March 31, 2017. In January 2017, the Board of Directors agreed to increase the Company’s authorized
shares to 750,000,000.
The Company filed the Restated
Charter with the Secretary of State of the State of Delaware on April 25, 2017 to increase the Company’s authorized shares
to 760,000,000, of which 750,000,000 shares were designated Common Stock, par value of $0.0001 per share and 10,000,000 designated
preferred stock, par value of $0.0001 per share.
Proxy
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”).
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.
As of April 24, 2017, the Company
has received the written consent of more than a majority of the voting power of its Common Stock outstanding as of the Record Date
in favor of the Proposals and terminated the Consent Solicitation period.
See Note 18 Evaluations of Subsequent
Events for additional information related to the proxy.
Conversion of
Obligations to Stockholder
In March 2017, related parties
converted $2,516,719 of such Stockholder Notes and accrued interest of $92,319 into units of our securities consisting of (a) 34,787,162
shares of our Common Stock (a conversion price of $0.075 per share) plus (b) an eighteen-month warrant to purchase an additional
34,787,162 share of Common Stock at an exercise price of $0.09 per share and (c) a five-year warrant to purchase an additional
34,787,162 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.
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 Closing,
the Company issued an aggregate of 9,173,331 shares of Common Stock at $0.075, Class A Warrants to purchase 9,173,331 shares of
Common Stock at an exercise price of $0.09 per share and Class B Warrants to purchase 9,173,331 shares of Common Stock at an exercise
price of $0.1125 per share. See Note 15 Warrants for additional information.
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 Closing,
the Company paid to the placement agent an aggregate of $88,040 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 2,222,000 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.
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 from
November through March 2017 (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 25,244,336 Warrants to purchase shares of Common Stock,
reduce the conversion rate for the Exchange Notes to $0.075 per share (See Note 12 Debt) and reduce the exercise price of 49,459,532
warrants.
Consultant Agreements
On January 31, 2017, 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.
On January 31, 2017, the Board
of Directors approved payment of 2,000,000 shares of Common Stock to a certain Consultant for Consulting Services which were issued
in February 2017.
In February 2017, 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.
In March 2017, the Company 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. As of the date of this report, the shares associated with this agreement haven’t
been issued.
Anti-Dilution Triggering
Event
The sale of Common Stock in
the 2016/17 Offering 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 and reduce the exercise price of 49,459,532 warrants.
Common Stock issued
and outstanding is as follows:
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
issued and
|
|
|
per
|
|
|
Gross
|
|
|
fair value at
|
|
|
Par
|
|
|
Additional
|
|
|
|
outstanding
|
|
|
share
|
|
|
proceeds
|
|
|
issuance
|
|
|
value
|
|
|
paid-in capital
|
|
Balance as of December 31, 2016
|
|
|
162,471,373
|
|
|
|
Various
|
|
|
$
|
59,801,216
|
|
|
$
|
2,951,293
|
|
|
$
|
16,247
|
|
|
$
|
62,440,674
|
|
Issuance (a)
|
|
|
9,173,330
|
|
|
$
|
0.075
|
|
|
|
688,000
|
|
|
|
–
|
|
|
|
917
|
|
|
|
563,508
|
|
Issuance (b)
|
|
|
3,416,667
|
|
|
$
|
various
|
|
|
|
–
|
|
|
|
230,000
|
|
|
|
342
|
|
|
|
229,658
|
|
Issuance (c)
|
|
|
34,787,162
|
|
|
$
|
0.075
|
|
|
|
–
|
|
|
|
2,609,037
|
|
|
|
3,479
|
|
|
|
2,605,558
|
|
Balance as of March 31, 2017
|
|
|
209,848,532
|
(d)
|
|
|
|
|
|
$
|
60,489,216
|
|
|
$
|
5,790,330
|
|
|
$
|
20,985
|
|
|
$
|
65,839,398
|
|
|
(a)
|
Shares issued in conjunction with the 2016/17 Offering and contains no anti-dilution provisions
|
|
(b)
|
Shares issued in conjunction with certain
Consultant Agreements
|
|
(c)
|
Shares issued for conversion of debt and interests. Shares do not contain anti-dilution provisions
|
|
(d)
|
Includes 21,214,642 shares that contain an anti-dilution provision
|
|
14.
|
Stock Options and Stock-Based Compensation
|
In 2002, the Board adopted the
2002 Equity Incentive Plan (the “2002 Plan”) that governed equity awards to employees, members of the Board of Directors,
and consultants of the Company. Under the 2002 Plan, 450,000 shares of Common Stock were reserved for issuance. From 2006 through
2012, the 2002 Plan was amended several times to increase the total number of shares authorized under this plan to 4,150,000 shares.
In 2013, the Board of Directors adopted the 2013 Equity Incentive Plan (the “2013 Plan”) and, together with the 2002
Plan (the “Plans”), governs the equity awards to employees, members of the Board of Directors, and consultants of the
Company. Under the 2013 Plan, an additional 12,500,000 shares of Common Stock were reserved for issuance.
The types of awards permitted
under the Plans include qualified incentive stock options (“ISO”), non-qualified stock options (“NQO”),
and restricted stock. Each stock option shall be exercisable at such times and subject to such terms and conditions as the Board
of Directors may specify. Stock options generally vest over four (4) years and expire no later than ten (10) years from the date
of grant. A summary of stock option activity is as follows:
|
|
|
|
|
Weighted average
|
|
|
Weighted ave. remaining
|
|
|
|
Stock options
|
|
|
exercise price
|
|
|
contractual life (years)
|
|
Outstanding as of December 31, 2016
|
|
|
10,780,086
|
|
|
$
|
0.57
|
|
|
|
7.30
|
|
Granted
|
|
|
560,000
|
|
|
$
|
0.15
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
Cancelled or expired
|
|
|
(430,000
|
)
|
|
$
|
0.48
|
|
|
|
|
|
Outstanding as of March 31, 2017
|
|
|
10,910,086
|
|
|
$
|
0.55
|
|
|
|
7.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2016
|
|
|
5,680,899
|
|
|
$
|
0.84
|
|
|
|
5.70
|
|
Exercisable as of March 31, 2017
|
|
|
5,871,656
|
|
|
$
|
0.81
|
|
|
|
5.72
|
|
The following table summarizes
information about stock options at March 31, 2017:
Stock options outstanding
|
|
|
Stock options exercisable
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted average
|
|
|
average
|
|
|
|
|
|
average
|
|
|
|
|
|
|
|
remaining contractual
|
|
|
exercise
|
|
|
|
|
|
exercise
|
|
Exercise price
|
|
|
Outstanding
|
|
|
life (in years)
|
|
|
price
|
|
|
Exercisable
|
|
|
price
|
|
$
|
0.15
|
|
|
|
3,560,000
|
|
|
|
|
|
|
|
|
|
|
|
375,000
|
|
|
|
|
|
$
|
0.25
|
|
|
|
1,573,336
|
|
|
|
|
|
|
|
|
|
|
|
839,592
|
|
|
|
|
|
$
|
0.48
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
56,250
|
|
|
|
|
|
$
|
0.50
|
|
|
|
79,000
|
|
|
|
|
|
|
|
|
|
|
|
79,000
|
|
|
|
|
|
$
|
0.53
|
|
|
|
325,000
|
|
|
|
|
|
|
|
|
|
|
|
142,188
|
|
|
|
|
|
$
|
0.55
|
|
|
|
3,312,000
|
|
|
|
|
|
|
|
|
|
|
|
2,468,876
|
|
|
|
|
|
$
|
1.25
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
$
|
1.50
|
|
|
|
1,646,000
|
|
|
|
|
|
|
|
|
|
|
|
1,646,000
|
|
|
|
|
|
$
|
2.00
|
|
|
|
214,750
|
|
|
|
|
|
|
|
|
|
|
|
214,750
|
|
|
|
|
|
|
$0.15 – $2.00
|
|
|
|
10,910,086
|
|
|
|
7.20
|
|
|
$
|
0.55
|
|
|
|
5,871,656
|
|
|
$
|
0.81
|
|
As of March 31, 2017, the total
aggregate intrinsic value for stock options currently exercisable and stock options outstanding was estimated to be $0. This
value represents the total pre-tax, intrinsic value based on the estimated fair value of the Company’s Common Stock price
of $0.08 per share as of March 31, 2017.
The following table summarizes
the activity of the Company’s stock options that have not yet vested:
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
grant-date fair
|
|
|
|
Stock options
|
|
|
value (per option)
|
|
Non-vested as of December 31, 2016
|
|
|
5,340,687
|
|
|
$
|
0.12
|
|
Granted
|
|
|
560,000
|
|
|
$
|
0.15
|
|
Forfeited
|
|
|
(279,375
|
)
|
|
$
|
0.21
|
|
Vested
|
|
|
(582,882
|
)
|
|
$
|
0.07
|
|
Non-vested as of March 31, 2017
|
|
|
5,038,430
|
|
|
$
|
0.24
|
|
The fair value of non-vested
stock options to be recognized in future periods is $588,548, which is expected to be recognized over a weighted average period
of 2.57 years. The total fair value of stock options vested during the three months ended March 31, 2017 was $41,208 compared to
$63,800 for the three months ended March 31, 2016.
Stock-based compensation expense
is as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Selling, general, and administrative expense
|
|
$
|
37,822
|
|
|
$
|
58,018
|
|
Research and development expense
|
|
|
3,386
|
|
|
|
5,782
|
|
Total stock-based compensation
|
|
$
|
41,208
|
|
|
$
|
63,800
|
|
The weighted average grant-date
fair value of stock options granted during the three months ended March 31, 2017 was $0.097 per stock option and for the three
months ended March 31, 2016 it was $0 per stock option.
The fair value of the stock
option grants was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted average risk-free interest rate
|
|
|
2.12
|
%
|
|
|
N/A
|
%
|
Volatility factor
|
|
|
66.32
|
%
|
|
|
N/A
|
%
|
Weighted average expected life (in years)
|
|
|
7
|
|
|
|
N/A
|
|
Dividend rate
|
|
|
0
|
%
|
|
|
N/A
|
%
|
The Company utilizes a peer
group to estimate its expected volatility assumptions used in the Black-Scholes option-pricing model. The Company completed an
analysis and identified four similar public companies considering their industry, stage of life cycle, size, and financial leverage.
Given the Company’s limited history with stock options, the Company’s expected term is based on an average of the contractual
term and the vesting period of the options (the SEC Staff Accounting Bulletin No. 110, “Simplified” method).
See Note 12 Debt and Note 13
Common Stock for information related to the issuance of warrants to related parties, WVJITB, Consultants, Investors and a placement
agent for the purchase of 69,574,324, 750,000, 1,720,000, 18,346,662 and 2,222,000 shares of Common Stock, respectively during
the three months ended March 31, 2017.
As of March 31, 2017,
warrants to purchase 214,206,968 shares of Common Stock were outstanding and exercisable. During the three months ended March
31, 2017, the Company recognized a total of 150,158 in interest expense resulting from the accretion of the fair value of
issued warrants.
The following table summarizes
the activity of the Company’s warrants:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
average
|
|
|
average remaining
|
|
|
|
|
|
|
exercise
|
|
|
contractual life
|
|
|
|
Warrants
|
|
|
price
|
|
|
(in years)
|
|
Outstanding as of December 31, 2016
|
|
|
122,475,881
|
|
|
$
|
0.43
|
|
|
|
2.13
|
|
Granted
|
|
|
92,612,986
|
|
|
$
|
0.10
|
|
|
|
3.83
|
|
Exercised
|
|
|
–
|
|
|
$
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(881,899
|
)
|
|
$
|
1.90
|
|
|
|
|
|
Outstanding as of March 31, 2017
|
|
|
214,206,968
|
(a)
|
|
$
|
0.25
|
|
|
|
2.81
|
|
(a) includes 57,488,533 warrants
that contain an anti-dilution provision
The following table summarizes
information about warrants as of March 31, 2017:
Warrants Outstanding
|
|
Exercise Price
|
|
|
Outstanding
|
|
|
Weighted Average Remaining
Contractual Life (in years)
|
|
|
Weighted Average
Exercise Price
|
|
$
|
0.075
|
|
|
|
7,463,720
|
|
|
|
|
|
|
|
|
|
$
|
0.090
|
|
|
|
63,592,889
|
|
|
|
|
|
|
|
|
|
$
|
0.100
|
|
|
|
1,810,000
|
|
|
|
|
|
|
|
|
|
$
|
0.110
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
|
|
$
|
0.1125
|
|
|
|
63,592,889
|
|
|
|
|
|
|
|
|
|
$
|
0.190
|
|
|
|
4,654,145
|
|
|
|
|
|
|
|
|
|
$
|
0.240
|
|
|
|
7,500,000
|
|
|
|
|
|
|
|
|
|
$
|
0.270
|
|
|
|
14,831,098
|
|
|
|
|
|
|
|
|
|
$
|
0.280
|
|
|
|
2,845,000
|
|
|
|
|
|
|
|
|
|
$
|
0.325
|
|
|
|
8,029,001
|
|
|
|
|
|
|
|
|
|
$
|
0.375
|
|
|
|
741,000
|
|
|
|
|
|
|
|
|
|
$
|
0.400
|
|
|
|
1,040,000
|
|
|
|
|
|
|
|
|
|
$
|
0.450
|
|
|
|
1,730,000
|
|
|
|
|
|
|
|
|
|
$
|
0.500
|
|
|
|
13,315,667
|
|
|
|
|
|
|
|
|
|
$
|
0.740
|
|
|
|
7,309,395
|
|
|
|
|
|
|
|
|
|
$
|
0.750
|
|
|
|
491,250
|
|
|
|
|
|
|
|
|
|
$
|
0.800
|
|
|
|
1,415,000
|
|
|
|
|
|
|
|
|
|
$
|
1.100
|
|
|
|
11,773,275
|
|
|
|
|
|
|
|
|
|
$
|
1.120
|
|
|
|
263,750
|
|
|
|
|
|
|
|
|
|
$
|
2.200
|
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
$
|
2.250
|
|
|
|
488,889
|
|
|
|
|
|
|
|
|
|
|
$0.075 - $2.250
|
|
|
|
214,206,968
|
|
|
|
2.81
|
|
|
$
|
0.25
|
|
|
16.
|
Commitments and Contingencies
|
Legal Proceedings
The Company currently is not
a party to any material legal proceeding and has no knowledge of any material legal proceeding contemplated by any governmental
authority or third party. The Company may be subject to a number of claims and legal proceedings which, in the opinion of our management,
are incidental to normal business operations. In 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. 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.
Warranty Reserve
The Company provides for a one-year
warranty with the sale of its LAESI® instruments. As the Company does not currently have sufficient historical data on warranty
claims, the Company’s estimates of anticipated rates of warranty claims and costs are primarily based on comparable industry
metrics. The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating
the quality of its products. As of March 31, 2017, and December 31, 2016, the Company had accrued warranty expense of $35,000
and $45,000, respectively.
University License Agreements
The Company has agreements with
West Virginia University (“WVU”) and George Washington University (GWU) related to in-licensed technologies as follows:
|
WVU
|
The Company has entered into a License and Exclusive Option to License Agreement with the West Virginia University Research
Corporation (“WVURC”), a nonprofit West Virginia corporation acting for and on behalf of WVU. Under the terms of this
agreement, the WVURC has granted the Company an exclusive option to license technology from the laboratories of certain WVU principal
investigators in the field of protein discovery, for therapeutic, diagnostic and all other commercial fields worldwide. Under the
terms of this Agreement, the Company pays expenses for the preparation, filing and prosecution of related patent applications,
and the Company will pay royalties on the net revenue resulting from the sale of products and services that utilize the WVU subject
technology.
|
|
GWU
|
I
n March 2009, the Company entered into an Exclusive License Agreement with
GWU for technology developed in the laboratory of Dr. Akos Vertes Ph.D., Professor of Chemistry, Professor of Biochemistry &
Molecular Biology, Founder and Co-Director of the W.M. Keck Institute for Proteomics Technology and Applications, the Department
of Chemistry, who is a science advisor to the Company. The technology field is laser ablation electrospray ionization, or “LAESI”,
a new method of bioanalytical analysis that enables high throughput biomolecule characterization. Under the terms of this agreement,
the Company has the exclusive, worldwide rights to commercialize the technology. The Company has obtained a registered trademark
for “LAESI®”. The Company is obligated to pay expenses for the preparation, filing and prosecution of related patent
applications, and the Company pays royalties on the net revenues resulting from the sale of products and services that utilize
the GWU subject technology. During the three months ended March 31, 2017, the Company recorded royalty expenses of $699. During
the three months ended March 31, 2016, the Company recorded royalty expenses of $1,257.
|
In January 2017, the Company had
received a Payment on Demand letters from George Washington University regarding 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.
George Washington University requests
that all LAESI License past due royalties and interest of $110,374 be paid within sixty (60) days of the letter dated January 27,
2017. 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.
As of March 31, 2017, the Company’s accounts payable
balance included $47,700 payable to GWU, of which $0, for royalties on sales of the LAESI® instrument platform and $699 royalties
on Imaging Services work using the LAESI® instrument. Under the terms of the Company’s Exclusive License Agreement with
GWU, as amended, the Company is required to pay interest on amounts that are more than five (5) business days overdue. In addition,
the Company’s agreement with GWU allows GWU to terminate the agreement under certain circumstances, including related to
late payments.
In January 2014, the Company became
a subcontractor to GWU in a multi-year project with the Defense Advanced Research Projects Agency (“DARPA”) to develop
new tools and methods to elucidate the mechanism of action of a threat agent, drug, biologic or chemical on living cells within
thirty (30) days of exposure. This product is called REDIchip™ (an acronym for Resonance-Enhanced Desorption Ionization).
|
Yale
|
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.
|
|
17.
|
Supplemental Cash Flow Information
|
Cash paid for interest and
income taxes
During the three months ended
March 31, 2017, cash paid for interest totaled $104,566. Cash paid for interest for the three months ended March 31, 2016 was $47,459.
The Company did not pay any income taxes during 2016
or the three months ended March 31, 2017.
Non-cash investing and financing
activities
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Equipment acquired under capital leases
|
|
$
|
–
|
|
|
$
|
18,344
|
|
Issuance of common stock upon conversion of accrued interest
|
|
$
|
–
|
|
|
$
|
41,393
|
|
Issuance of common stock upon conversion of related party debt and interest
|
|
$
|
2,614,037
|
|
|
$
|
–
|
|
Issuance costs for short-term debt
|
|
$
|
–
|
|
|
$
|
5,000
|
|
Fair value of warrant committed to placement agent
|
|
$
|
–
|
|
|
$
|
2,456
|
|
|
18.
|
Evaluation of Subsequent Events
|
Convertible Note
Subsequent to March 31, 2017,
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 $300,000 previously advanced by Summit and an additional $1,250,000 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.
In a related development on
April 21, 2017, we entered into an agreement with Summit under which Summit:
|
•
|
Consented to the exchange agreement with GRQ and waived any defaults on our part under the Summit
loan agreement; and
|
|
•
|
agreed to waive its security interest in the GRQ Collateral until such time as we pay the $301,577.79
obligation to GRQ.
|
The Company and our subsidiary
reaffirmed Summit’s senior priority lien and security interest on all of our assets and properties, other than the specific
GRQ Collateral.
Proxy
As of April 24, 2017, the Company
has received the written consent of more than a majority of the voting power of its Common Stock outstanding as of the Record Date
in favor of the Proposals and terminated the Consent Solicitation period.
The Company filed the Restated
Charter with the Secretary of State of the State of Delaware on April 25, 2017.
September 2016 10% OID
Secured Promissory Note
On April 20, 2017, we entered
into an exchange agreement with GRQ Consulting Inc. 401k (‘GRQ”) under Section 3(a)(9) of the Securities Act of 1933,
as amended. Under the terms of the exchange agreement, GRQ exchanged the Original GRQ Note for a new Company note that requires
the Borrowers to pay in full the overdue $301,577.79 amount by not later than June 30, 2017, plus an additional unsecured amount
of $375,000 by September 30, 2017 (the “Final Maturity Date”); which latter amount is convertible by the holder at
any time at a conversion price $0.075 per share or may be paid at our option at any time prior to the Final Maturity Date by delivering
to the note holder 5,000,000 shares of our Common Stock. On April 21, 2017, GRQ exercised its conversion right and converted the
$375,000 balance of the note into 5,000,000 shares of our common stock.
The guaranty of our Protea subsidiary
and GRQ’s security interest in the GRQ collateral remain in full force and effect pending our payment of the $301,577.79
amount due on June 30, 2017.
In a related development on
April 21, 2017, we entered into an agreement with Summit under which Summit:
|
•
|
Consented to the exchange agreement with GRQ and waived any defaults on our part under the Summit
loan agreement; and
|
|
•
|
Agreed to waive its security interest in the GRQ Collateral until such time as we pay the $301,577.79
obligation to GRQ.
|
The Company and our subsidiary
reaffirmed Summit’s senior priority lien and security interest on all of our assets and properties, other than the specific
GRQ Collateral.
Obligations to Stockholders
Subsequent to March 31, 2017,
the Company received advances totaling $415,000 from certain related parties. Some of these obligations may convert into the terms
of the previous 2016-17 Offering. All advances that do not convert have no terms of repayment and do not bear interest.
Executed Consulting Agreements
Subsequent to March 31, 2017
the Company has entered into one (1) consulting agreement. This agreement was entered into for business advisory services and has
a term period from April 24, 2017 through December 31, 2017. The Company will compensate the Consultant by issuing 250,000 shares
of Common Stock no later than 30 days from the effective date. These compensation shares have not been issued to date.
Sale of Investment
Subsequent to March 31, 2017 the Company sold 25,000 shares of AzurRx common stock as means for obtaining
additional cash. The shares were sold on the open market and the Company received $85,355. As of the date of this report the Company’s
ownership interest in AzurRx is 1.36% on a fully diluted basis and holds 100,757 shares of AzurRx common stock.