Attached files
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EX-31.1 - EXHIBIT 31.1 - Protea Biosciences Group, Inc. | v416244_ex31-1.htm |
EX-10.1 - EXHIBIT 10.1 - Protea Biosciences Group, Inc. | v416244_ex10-1.htm |
EX-32.1 - EXHIBIT 32.1 - Protea Biosciences Group, Inc. | v416244_ex32-1.htm |
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 000-51474
PROTEA BIOSCIENCES GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware | 20-2903252 | |
(State or other jurisdiction | (I.R.S. Employer Identification | |
of incorporation or organization) | No.) |
1311 Pineview Drive, Suite 501, Morgantown, West Virginia 26505
(Address of principal executive offices) (Zip Code)
(304) 292-2226
(Registrant’s telephone number, including area code)
N/A |
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated file. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | o | Accelerated filer | o | |
Non-accelerated filer | o | Smaller reporting company | x | |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 114,991,718 shares of common stock, par value $0.0001 per share, outstanding as of August 11, 2015.
PROTEA BIOSCIENCES GROUP, INC.
- INDEX -
PART I – FINANCIAL INFORMATION
The accompanying financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, the financial statements contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial condition, results of operations, and cash flows of Protea Biosciences Group, Inc. (the “Company”) for the interim periods presented.
The results for the period ended June 30, 2015 are not necessarily indicative of the results of operations for the full year. These financial statements and related footnotes should be read in conjunction with the financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission (the “SEC”) on February 13, 2015.
1
PROTEA BIOSCIENCES GROUP, INC.
See Accompanying Notes to Financial Statements
(Unaudited) | ||||||||
June 30, 2015 | December 31, 2014 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 121,366 | $ | 322,877 | ||||
Trade accounts receivable, net | 297,938 | 273,914 | ||||||
Other receivables | - | 119,230 | ||||||
Inventory | 56,495 | 161,301 | ||||||
Prepaid expenses | 205,745 | 54,022 | ||||||
Total current assets | 681,544 | 931,344 | ||||||
Property and equipment, net | 3,042,488 | 2,960,090 | ||||||
Other noncurrent assets | 105,248 | 136,693 | ||||||
Total Assets | $ | 3,829,280 | $ | 4,028,127 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current Liabilities: | ||||||||
Current maturities on short and long-term debt, net of discount | $ | 2,716,926 | $ | 1,457,800 | ||||
Accounts payable | 1,272,780 | 1,253,385 | ||||||
Bank line of credit | 3,000,000 | 3,000,000 | ||||||
Loans payable to stockholders, net of discount | 2,135,000 | 1,381,498 | ||||||
Derivative liabilities | 75,794 | 154,058 | ||||||
Other payables and accrued expenses | 498,801 | 518,821 | ||||||
Total current liabilities | 9,699,301 | 7,765,562 | ||||||
Long-term debt - net of current portion | 2,125,261 | 1,817,237 | ||||||
Stockholders' Equity: | ||||||||
Preferred stock ($.0001 par value; 10,000,000 shares | ||||||||
authorized; none and 3,337,725 issued or outstanding at | ||||||||
June 30 , 2015 and December 31, 2014) | - | 334 | ||||||
Common stock ($.0001 par value; 250,000,000 shares | ||||||||
authorized; 114,900,808 and 66,588,600 shares issued | ||||||||
and outstanding at June 30, 2015 and December 31, 2014) | 11,490 | 6,659 | ||||||
Additional paid in capital | 67,288,833 | 64,305,743 | ||||||
Accumulated deficit | (75,295,580 | ) | (69,867,118 | ) | ||||
Accumulated other comprehensive (loss) income | (25 | ) | (290 | ) | ||||
Total Stockholders' Equity (Deficit) | (7,995,282 | ) | (5,554,672 | ) | ||||
Total Liabilities and Stockholders' Equity | $ | 3,829,280 | $ | 4,028,127 |
2
PROTEA BIOSCIENCES GROUP, INC.
Consolidated Statements of Operations and Total Comprehensive Loss
See Accompanying Notes to Financial Statements
For the Three Months Ended June 30, | For the Three Months Ended June 30, | For the Six Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Gross revenue | $ | 511,783 | $ | 346,561 | $ | 920,656 | $ | 814,661 | ||||||||
Cost of revenue | $ | (166,403 | ) | $ | (180,234 | ) | (306,191 | ) | (410,970 | ) | ||||||
Gross profit | 345,380 | 166,327 | 614,465 | 403,691 | ||||||||||||
Selling, general, administrative expenses | (1,778,048 | ) | (2,565,856 | ) | (3,790,569 | ) | (4,688,561 | ) | ||||||||
Research and development expense | (369,901 | ) | (804,030 | ) | (770,994 | ) | (1,525,983 | ) | ||||||||
Loss from operations | (1,802,569 | ) | (3,203,559 | ) | (3,947,098 | ) | (5,810,853 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest and exchange income (expense) | 4,462 | (133 | ) | 6,003 | 32 | |||||||||||
Interest expense | (326,891 | ) | (206,317 | ) | (490,941 | ) | (372,480 | ) | ||||||||
Debt conversion inducement cost | - | - | (60,419 | ) | - | |||||||||||
Gain (loss) on asset disposal | 57,104 | 6,000 | 56,231 | (18,768 | ) | |||||||||||
Change in fair value of derivative | (237,014 | ) | (42,329 | ) | (836,182 | ) | 23,593 | |||||||||
Total other income (expense) | (502,339 | ) | (242,779 | ) | (1,325,308 | ) | (367,623 | ) | ||||||||
Loss before income taxes | (2,304,908 | ) | (3,446,338 | ) | (5,272,406 | ) | (6,178,476 | ) | ||||||||
Income taxes | - | - | - | - | ||||||||||||
Net loss | (2,304,908 | ) | (3,446,338 | ) | (5,272,406 | ) | (6,178,476 | ) | ||||||||
Foreign currency translation adjustment | 657 | (14,304 | ) | 265 | (13,535 | ) | ||||||||||
Total comprehensive loss | $ | (2,304,251 | ) | $ | (3,460,642 | ) | $ | (5,272,141 | ) | $ | (6,192,011 | ) | ||||
Net loss per share - basic and diluted | $ | (0.02 | ) | $ | (0.05 | ) | $ | (0.05 | ) | $ | (0.09 | ) | ||||
Weighted average number of shares | ||||||||||||||||
outstanding - basic and diluted | 106,157,191 | 65,655,378 | 100,243,815 | 65,556,136 |
3
PROTEA BIOSCIENCES GROUP, INC.
Consolidated Statements of Stockholders' Equity (Deficit) (Unaudited)
See Accompanying Notes to Financial Statements
Additional | ||||||||||||||||||||||||||||||||
Paid in | Accumulated | Total | ||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Capital | Other | Stockholders' | ||||||||||||||||||||||||||||
Par Value $.0001 | Par Value $.0001 | Common | Accumulated | Comprehensive | Equity | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Stock | Deficit | Income (Loss) | (Deficit) | |||||||||||||||||||||||||
December 31, 2014 | 3,337,725 | $ | 334 | 66,588,600 | $ | 6,659 | $ | 64,305,743 | $ | (69,867,118 | ) | $ | (290 | ) | $ | (5,554,672 | ) | |||||||||||||||
Issuance of preferred stock, net issuance costs of $378,138 | 370,050 | 37 | - | - | 361,925 | - | - | 361,962 | ||||||||||||||||||||||||
Stock dividend declared on preferred stock | 78,040 | 8 | - | - | 156,048 | (156,056 | ) | - | ||||||||||||||||||||||||
Issuance of stock upon conversion of convertible debentures | - | - | 2,201,046 | 220 | 550,041 | - | - | 550,261 | ||||||||||||||||||||||||
Issuance of stock for services | 300,000 | 30 | 92,970 | 93,000 | ||||||||||||||||||||||||||||
Issuance of stock under anti-dilution provision | - | - | 15,524,642 | 1,552 | 943,899 | - | - | 945,451 | ||||||||||||||||||||||||
Conversion of preferred stock to common stock | (3,785,815 | ) | (379 | ) | 30,286,520 | 3,029 | (2,650 | ) | - | - | - | |||||||||||||||||||||
Stock-based compensation expense | - | - | - | - | 159,154 | - | - | 159,154 | ||||||||||||||||||||||||
Stock warrants issued for services and debt | - | - | - | - | 515,923 | - | - | 515,923 | ||||||||||||||||||||||||
Stock warrants issued as part of debt conversion inducement cost | 60,419 | 60,419 | ||||||||||||||||||||||||||||||
Stock warrants issued to placement agent | - | - | - | - | 170,418 | - | - | 170,418 | ||||||||||||||||||||||||
Recognition of derivative liability | - | - | - | - | (25,057 | ) | - | - | (25,057 | ) | ||||||||||||||||||||||
Net loss | - | - | - | - | - | (5,272,406 | ) | - | (5,272,406 | ) | ||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | - | 265 | 265 | ||||||||||||||||||||||||
June 30, 2015 | - | $ | - | 114,900,808 | $ | 11,490 | $ | 67,288,833 | $ | (75,295,580 | ) | $ | (25 | ) | $ | (7,995,282 | ) |
4
PROTEA BIOSCIENCES GROUP, INC.
Consolidated Statements of Cash Flows (Unaudited)
See Accompanying Notes to Financial Statements
For the Six Months Ended June 30, | For the Six Months Ended June 30, | |||||||
2015 | 2014 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (5,272,406 | ) | $ | (6,178,476 | ) | ||
Adjustments to reconcile net loss to net | ||||||||
cash used in operating activities: | ||||||||
Depreciation and amortization | 356,055 | 430,771 | ||||||
Non-cash compensation | 159,154 | 179,049 | ||||||
Issuance of common stock and warrants for services | 191,683 | 515,463 | ||||||
Issuance of preferred and common stock for accrued interest | 192,785 | - | ||||||
Accretion of discount on short-term convertible debenture | 107,527 | - | ||||||
Accretion of convertible debenture discount | 117,041 | 125,645 | ||||||
Debt conversion inducement cost | 60,419 | - | ||||||
Capitalized interest on debt modification | 34,596 | - | ||||||
(Gain) Loss on disposal of fixed assets | (56,231 | ) | 18,768 | |||||
Bad debt expense | 119,230 | 1,200 | ||||||
Loss (gain) from change in fair value of derivative | 836,182 | (23,593 | ) | |||||
Net change in assets: Decrease (increase) | ||||||||
Trade accounts receivable | (24,024 | ) | 132,359 | |||||
Prepaid expenses | (151,723 | ) | 226,049 | |||||
Other receivables | - | 7,452 | ||||||
Inventory | 149,379 | (40,215 | ) | |||||
Other noncurrent assets | (93,014 | ) | 152 | |||||
Net change in liabilities: Increase (decrease) | ||||||||
Trade accounts payable | 35,787 | 1,596,754 | ||||||
Other payables and accrued expenses | (20,020 | ) | (279,128 | ) | ||||
Net cash used in operating activities | (3,257,580 | ) | (3,287,750 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of and deposits on equipment | (44,132 | ) | (119,983 | ) | ||||
Proceeds from sale of equipment | 134,169 | 6,000 | ||||||
Proceeds from subsidiary sale - Option Fee | - | 600,000 | ||||||
Net cash provided by investing activities | 90,037 | 486,017 | ||||||
Cash flows from financing activities: | ||||||||
Net advances on bank line of credit | - | 275,000 | ||||||
Proceeds from sale of preferred stock, net | 538,327 | - | ||||||
Proceeds from sale of common stock, net | - | (12,500 | ) | |||||
Proceeds from short and long-term debt, net | 1,690,656 | 283,500 | ||||||
Proceeds from shareholder debt | 1,048,000 | 2,025,000 | ||||||
Repayment of shareholder, short and long-term debt | (311,216 | ) | (325,890 | ) | ||||
Repayment of Obligation related to the Letter of Credit | - | (238,695 | ) | |||||
Net cash provided by financing activities | 2,965,767 | 2,006,415 | ||||||
Effect of exchange rate changes on cash | 265 | (13,535 | ) | |||||
Net (decrease) in cash | (201,511 | ) | (808,853 | ) | ||||
Cash, beginning of period | 322,877 | 1,086,330 | ||||||
Cash, end of period | $ | 121,366 | $ | 277,477 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for interest | $ | 124,294 | $ | 136,101 | ||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Financed equipment | $ | 516,832 | $ | 629,476 | ||||
Debt converted to common stock | $ | 550,260 | $ | - | ||||
Dividends paid in preferred stock | $ | 156,056 | $ | - | ||||
Stock warrants issued to placement agent | $ | 170,418 | $ | - |
5
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements (unaudited)
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 providing innovative bioanalytical technologies and capabilities to the pharmaceutical, diagnostic and life science industries. “Molecular information” refers to the generation and bioinformatic processing of very large data sets, obtained by applying the Company’s technology to identify and characterize the proteins, metabolites, lipids and other biomolecules which are the products of all living cells and life forms.
The Company is applying its technology to the development of next generation “direct molecular imaging” technology and service capabilities that support pharmaceutical and life science research, and enable more rapid and comprehensive molecular profiling of human disease.
2. | Summary of Significant Accounting Policies |
The accounting policies underlying the accompanying unaudited consolidated financial statements are those set forth in Note 2 to the consolidated financial statements included in the Company’s 10-K for the year ended December 31, 2014.
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. The Company will continue to require substantial funds to advance the research and development of its core technologies and to develop new products and services based upon its proprietary protein recovery and identification technologies.
Management intends to meet its operating cash flow requirements primarily from the sale of equity and debt securities. The Company seeks additional capital through sales of equity securities or convertible debt and, if appropriate, to pursue partnerships to advance various research and development activities. The Company may also consider the sale of certain assets, or entering into a transaction such as a merger with a business complimentary to theirs.
While the Company believes that it will be successful in obtaining the necessary financing to fund its operations, they have no committed sources of funding and are not assured that additional funding will be available to them. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying statements do not include any adjustment that might be necessary if the Company is unable to continue as a going concern.
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 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.
The Company accounts for shipping and handling 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/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.
6
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements (unaudited)
2. | Summary of Significant Accounting Policies (continued) |
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 (ii) 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 four major components: molecular information services, LAESI instrument platform, research products, and grants and other collaboration revenues. Revenue by component was as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, 2015 | June 30, 2014 | June 30, 2015 | June 30, 2014 | |||||||||||||
Molecular Information Services | $ | 219,064 | $ | 59,375 | $ | 389,708 | $ | 229,945 | ||||||||
LAESI Instrument Platform | 152,625 | 140,500 | 305,987 | 318,500 | ||||||||||||
Research Products | 86,387 | 120,361 | 152,910 | 215,703 | ||||||||||||
Grants and Other Collaborations | 53,707 | 26,325 | 72,051 | 50,513 | ||||||||||||
Gross Revenue | $ | 511,783 | $ | 346,561 | $ | 920,656 | $ | 814,661 |
Equity Method Investments
The Company’s 33% interest in AzurRx BioPharma, Inc. (“AzurRx”) is 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 their European subsidiary. Companies in which the Company has made an investment (the “Investee(s)”), that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an Investee depends on an evaluation of several factors including, among others, representation on the Investee’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the Investee. Under the equity method of accounting, an Investee’s accounts are not reflected within the Company’s Consolidated Balance Sheets and Consolidated Statements of Income; however, the Company’s share of the earnings or losses of the Investee is reflected in the caption “Income from equity method investments” in the Consolidated Statements of Income. The Company’s carrying value in an equity method Investee would be reflected in the caption “Equity method investments” in the Company’s Consolidated Balance Sheets.
The Company determined the fair market value of the investment as having no value as AzurRx is still in early stages of organizing, has not reached commercialization, and will continue realizing substantial research and development expenses. In addition, the Company has suspended the equity method of accounting, as the losses have reduced the Company’s basis in AzurRx below zero. The value of this investment as presented on our consolidated balance sheet was $0 at June 30, 2015 and December 31, 2014.
Other Receivables and Other Noncurrent Assets
Other assets, which reflect amounts due from non-trade activity, consist of the following at:
June 30, 2015 | December 31, 2014 | |||||||
Other receivables | $ | - | $ | 119,230 | ||||
Other receivables – current | $ | - | $ | 119,230 | ||||
Deposits | $ | 105,248 | $ | 136,693 | ||||
Other assets – noncurrent | $ | 105,248 | $ | 136,693 |
7
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements (unaudited)
2. | Summary of Significant Accounting Policies (continued) |
Other Payables and Accrued Expenses
Other payables and accrued expenses, which reflect amounts due from non-trade activity, consist of the following at:
June 30, 2015 | December 31, 2014 | |||||||
Accrued expenses | $ | 56,564 | $ | 31,104 | ||||
Accrued interest | 98,424 | 201,844 | ||||||
Accrued warranties | 50,000 | 50,000 | ||||||
Accrued payroll and benefits | 233,055 | 219,973 | ||||||
Unearned revenue | 60,758 | 15,900 | ||||||
Other payables and accrued expenses | $ | 498,801 | $ | 518,821 |
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 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 ASC 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. 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 “Down Round Protection” 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 Comprehensive Loss.
8
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements (unaudited)
2. | Summary of Significant Accounting Policies (continued) |
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 that include “Down Round Protection” are as follows:
June 30, 2015 | ||||
Expected Life (Years) | Risk Free Rate |
Volatility |
Probability of a Capital Raise | |
Derivative liabilities | 2.37-3.83 | 1.01% | 74.57% | 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 June 30, 2015 | ||||||||||||||||
Carrying Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Derivative liabilities – common stock | - | - | - | - | ||||||||||||
Derivative liabilities – warrants | 75,794 | - | - | 75,794 | ||||||||||||
Total | $ | 75,794 | - | - | $ | 75,794 |
For the quarter ended June 30, 2015, the Company modified its assessment of the probability of future down-rounds, due to a high probability of closing on a subsequent capital raises at levels that would not result in anti-dilution triggers, currently at $0.25 per share. This modification effectively eliminates the derivative liability associated with Common Stock at June 30, 2015. Previously, the Company’s assessment of possible future down-rounds were calculated using assumptions that could have resulted in ant-dilution triggers. 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.
Fair Value Measurements at December 31, 2014 | ||||||||||||||||
Carrying Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Derivative liabilities – common stock | $ | 88,871 | - | - | $ | 88,871 | ||||||||||
Derivative liabilities – warrants | 65,187 | - | - | 65,187 | ||||||||||||
Total | $ | 154,058 | - | - | $ | 154,058 |
As a result of the 2014 winter offering, the Company issued 15,524,642 shares of Common Stock related to anti-dilution protection rights to various stockholders during the three months ended June 30, 2015. As of December 31, 2014, the Company believed that only 10,122,067 shares of Common Stock were required under these rights. Additionally, the Company had not issued these shares at December 31, 2014, the fair value of which was $1,771,362, was reduced from the derivative liability, and recorded as Common Stock to be issued in additional paid in capital as of December 31, 2014. These shares were issued in April 2015. In May 2015, the Company determined that an additional 5,402,575 were required under these same anti-dilution rights. The Company issued the remaining shares in June 2015. The fair value of the additional 5,402,575 shares was $945,451 upon issuing the anti-dilution shares, and the related loss was recognized in the change in fair market value of the derivative liability and recorded as additional paid in capital.
6
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements (unaudited)
2. | Summary of Significant Accounting Policies (continued) |
The table below provides a summary of the changes in fair value of the derivative liabilities measured at fair value on a recurring basis:
Six Months Ended June 30, 2015 | ||||||||||||
Derivative Liabilities - Common Stock | Derivative Liabilities - Warrants | Total Fair Value Measurements Using Level 3 Inputs | ||||||||||
Balance at January 1, 2015 | $ | 88,871 | $ | 65,187 | $ | 154,058 | ||||||
Issuance of warrants | - | 5,948 | 5,948 | |||||||||
Anti-dilution shares issued | (945,451 | ) | (945,451 | ) | ||||||||
Unrealized loss on derivative liabilities | 856,580 | (20,398 | ) | 836,182 | ||||||||
Recognition of derivative liabilities | - | 25,057 | 25,057 | |||||||||
Balance at June 30, 2015 | $ | - | $ | 75,794 | $ | 75,794 |
Year Ended December 31, 2014 | ||||||||||||
Derivative Liabilities - Common Stock | Derivative Liabilities - Warrants | Total Fair Value Measurements Using Level 3 Inputs | ||||||||||
Beginning balance at January 1, 2014 | $ | 558,799 | $ | 64,788 | $ | 623,587 | ||||||
Issuance of warrants | - | 2,550 | 2,550 | |||||||||
Anti-dilution shares to be issued | (1,771,362 | ) | - | (1,771,362 | ) | |||||||
Unrealized (gain) loss on derivative liabilities | 1,301,434 | (11,449 | ) | 1,289,985 | ||||||||
Recognition of derivative liabilities | - | 9,298 | 9,298 | |||||||||
Balance at December 31, 2014 | $ | 88,871 | $ | 65,187 | $ | 154,058 |
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 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 79,823,000 and 84,834,000 at June 30, 2015 and December 31, 2014, respectively.
7
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements (unaudited)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In May 2014, the FASB issued 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. The Company is evaluating the impact that this standard will have on its consolidated financial statements.
In June 2014, the FASB issued authoritative guidance on stock compensation, which requires performance targets that affect vesting and can be achieved after the requisite service period, to be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If achievement of the performance target becomes probable before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The amendments are effective for fiscal years beginning after December 15, 2015. The Company is evaluating the impact that this standard will have on its consolidated financial statements.
In August 2014, the FASB issued authoritative guidance on going concern disclosures and financial statement presentation, which is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). This standard provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations in the financial statement footnotes. This standard is effective for annual reporting periods ending after December 15, 2016, and to annual and interim periods thereafter. Early adoption is permitted. 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 November, 2014, the FASB issued ASU 2014-16, "Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force)." The ASU clarifies how current guidance should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of a host contract. The ASU is effective for fiscal years and interim periods beginning after December 15, 2015. The Company is currently in the process of evaluating the impact of adoption of this standard on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. This standard update requires an entity to present debt issuance costs on the balance sheet as a direct deduction from the related debt liability as opposed to an asset. Amortization of the costs will continue to be reported as interest expense. The update is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued, and the new guidance would be applied retrospectively to all prior periods presented. 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 14, 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.
8
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements (unaudited)
3. | 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:
Inventory: | June 30, 2015 | December 31, 2014 | ||||||
Finished goods | $ | 14,992 | $ | 18,739 | ||||
Work in progress | 41,503 | 142,562 | ||||||
Total Inventory | $ | 56,495 | $ | 161,301 |
4. | 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 |
Vehicle | 5 years |
Leasehold improvements | Life of lease |
Software | 3 years |
Property and equipment consists of the following at:
June 30, 2015 | December 31, 2014 | |||||||
Lab equipment | $ | 7,011,067 | $ | 7,313,979 | ||||
Computer equipment | 540,212 | 540,814 | ||||||
Office equipment | 191,248 | 229,785 | ||||||
Leasehold improvements | 443,639 | 434,304 | ||||||
8,186,166 | 8,518,882 | |||||||
Accumulated depreciation | (5,143,678 | ) | (5,558,792 | ) | ||||
Property and equipment, net | $ | 3,042,488 | $ | 2,960,090 |
For the three months and six months ended June 30, 2015, depreciation expense was $181,084 and $356,055 compared to $224,455 and $430,528 for the three and six months ended June 30, 2014.
5. | Bank Line of Credit |
A subsidiary of the Company has a line of credit that is authorized to $3,000,000 and payable on demand. The interest rate is variable and is .75% plus prime with a minimum rate of 5.87%. The line of credit is subject to an annual review and certain covenants. At June 30, 2015 and December 31, 2014, the balance was $3,000,000 with interest payable at 5.87% and all covenants had been met. Borrowings under the line are secured by the personal guarantee of three board members and the estate of a former board member.
9
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements (unaudited)
6. | Loans Payable to Stockholders |
On August 6, 2013, the Company entered into a Note and Warrant Purchase Agreement (the “Summit Agreement”) with Summit Resources, Inc. (“Summit”), an affiliate of Steve Antoline, a director of the Company, pursuant to which Summit acquired (a) a promissory note (the “Summit Note”) bearing simple interest at a rate of 10% per annum, in an aggregate principal amount of $600,000 and (b) a five year warrant to purchase 1,000,000 shares of common stock at an exercise price of $1.10 per share. The fair value of these warrants was estimated to be $134,117, which was recorded as a discount to the Summit Note, and will be accreted based on the repayment of the obligation. In accordance with the terms of the Summit Agreement, up to $150,000 of the gross proceeds received by the Company from the sale of each LAESI instrument shall be used to repay the principal amounts due under the Summit Note. The Company repaid $423,915 as of December 31, 2014 and recognized accretion expense of $94,757 in 2014. On March 20, 2015, the Company converted the remaining principal balance of $176,085 and unpaid accrued interest of $87,707, and issued Summit 1,055,165 shares of Common Stock at a conversion price of $0.25 per share and as an inducement to convert, warrants in aggregate of 527,583 to purchase shares of Common Stock at an exercise price of $0.50 per share. The Company recognized accretion expense of $39,360 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 $28,964 during the three months ended March 31, 2015. As of March 31, 2015, the Note was considered fully satisfied.
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 June 30, 2015, the outstanding balance was $1,000,000 or $917,000, net of discount.
During 2014, the Company received advances equal to an aggregate of $540,000 from various directors and current stockholders of the Company. The Company repaid $370,000 to these related parties in 2014. No terms of repayment have been specified on the remaining $170,000 aforementioned advances as of the filing date.
During 2015, the Company received advances equal to an aggregate of $1,048,000 from various directors and current stockholders of the Company. No terms of repayment have been specified on the remaining aforementioned advances as of the filing date.
7. | Short and 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 December 31, 2015 with the final payment due January 2017.
10
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements (unaudited)
7. | Short and Long-term Debt (continued) |
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. As of March 31, 2015, the Company was in arrears on the note. 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. If the Company fails to make any of the five 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.
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 final payment due April 2021.
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. As of March 31, 2015, the Company was in arrears on the note. 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. 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.
5) | Note Payable to the West Virginia Infrastructure and 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 final payment due August 2022.
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 (see Note 9, Stock Warrants). 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. The maturity date of the loan was also modified and extended to December 31, 2015.
11
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements (unaudited)
7. | Short and Long-term Debt (continued) |
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 (see Note 9, Stock Warrants). 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.
8) | Convertible Promissory Note Payable to the West Virginia High Technology Consortium Foundation (“WVHTCF”) |
In May 2012, the Company issued a 30-month note in the amount of $200,000 from the WVHTCF. The note bears interest at 8% providing for 25 monthly principal and interest payments of $9,001 starting December 2012 through November 2014, then final interest and principal payments due December 2014. The note was secured by 50% of equipment costing $447,320. On April 1, 2015, the Company and WVHTCF entered into the First Amendment to Promissory Note whereby the original note was modified so that principal balance of $74,726.08 is payable in nine monthly installments; the next payment of $8,789.37 will be due on April 15, 2015 with final payment due December 15, 2015. As of June 30, 2015, the Company is current on the note.
9) | 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. As of March 31, 2015, the Company was in arrears on the note. 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. 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.
10) | Short-term Convertible Debenture |
In May 2015, the Company received an aggregate of $2,000,000 in gross cash proceeds, less transaction costs such as commission and legal fees of $309,344, from one accredited investor in connection with the sale of a 20% original issue discount unsecured convertible debenture (the “Debenture”) due November 22, 2015, pursuant to the terms and condition of a Subscription Agreement. The Company issued (a) the Debenture with a principal amount of $2,500,000 that bears interest at a rate of 10% per annum, and (b) a three-year warrant to purchase up to 7,500,000 shares of common stock of the Company par value $0.001 per share at an exercise price of $0.325 per share. The Debenture may be converted in whole or in part, into shares of Common Stock at a conversion price of $0.25 per share. The relative fair value of these warrants was estimated to be $411,750, which was recorded as a discount to the promissory note, and will be accreted over the life of the loan. The Company recognized accretion expense of $68,625 related to the fair value of the warrants and interest expense of $107,527 related to the original issue discount during the six months ended June 30, 2015. As of June 30, 2015, the outstanding balance was $2,500,000 or $1,455,058, net of discount.
11) | Capital Leases |
From time to time, in the normal course of business, the Company enters into capital leases to finance equipment. As of June 30, 2015, the Company had five capital lease obligations outstanding with imputed interest rates ranging from 5.86% to 6.00%. The leases require 24-60 monthly payments and begin to expire in December 2016 through October 2019. These leases are secured by equipment with an aggregate cost of $1,580,257. As of June 30, 2015, the Company was current on all lease payments.
12
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements (unaudited)
7. | Short and Long-term Debt (continued) |
Total debts outstanding are as follows:
June 30, 2015 | December 31, 2014 | |||||||
1) Note Payable to the WVDO | $ | 100,656 | $ | 99,365 | ||||
2) Note Payable to the WVEDA | 143,312 | 141,369 | ||||||
3) Note Payable to the WVIJDC | 139,229 | 139,128 | ||||||
4) Note Payable to the WVEDA | 572,148 | 617,767 | ||||||
5) Note Payable to the WVIJDC | 581,987 | 630,738 | ||||||
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 WVHTCF | 47,863 | 69,888 | ||||||
9) Note Payable to the WVEDA | 168,362 | 166,258 | ||||||
10) Convertible Debentures | 2,500,000 | - | ||||||
11) Capital leases | 1,043,572 | 820,524 | ||||||
Total | 5,887,129 | 3,275,037 | ||||||
Less: current portion | (2,716,926 | ) | (1,457,800 | ) | ||||
Less: unamortized discount | (735,598 | ) | - | |||||
Less: transaction costs | (309,344 | ) | - | |||||
Long-term portion | $ | 2,125,261 | $ | 1,817,237 |
Future required minimum principal repayments over the next five years are as follows:
Year Ending December 31: | Future
Required Minimum Principal Repayments | |||
2015 | $ | 3,444,045 | ||
2016 | 739,424 | |||
2017 | 556,334 | |||
2018 | 371,822 | |||
2019 & Thereafter | 775,504 | |||
Total | $ | 5,887,129 |
8. | Common Stock |
The Company is authorized to issue a total of 260,000,000 shares of stock, of which 250,000,000 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 of Directors are elected by the affirmative vote of the holders of a majority of the Company’s outstanding Common Stock. Common Stock issued are as follows:
#
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) | 2,201,046 | .0001 | $ | 0.25 | 550,261 | - | 220 | 550,041 | ||||||||||||||||||||
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) | 300,000 | .0001 | $ | 0.31 | - | $ | 93,000 | 30 | 92,970 | |||||||||||||||||||
Balance at June 30, 2015 | 114,900,808 | $ | 54,258,782 | $ | 1,907,673 | $ | 11,490 | $ | 56,155,344 |
(1) | Activity does not include issuance costs, deferred financing, warrants portion of convertible debentures and stock options. |
(2) | Shares issued for conversion of an aggregate of $341,085 principal amount and $192,785 of accrued interest on promissory notes and $16,391 of accounts payable. Shares do not contain an anti-dilution provision. |
(3) | Shares issued upon conversion of preferred stock and accrued dividends thereon and contained an anti-dilution provision. |
(4) | Shares issued under certain anti-dilution privileges. |
(5) | Shares issued to a consultant for services rendered. Shares do not contain anti-dilution provision. |
The Company issued 15,524,642 shares of Common Stock to investors in the Company’s winter 2013 private placement of Common Stock and Common Stock warrants pursuant to anti-dilution rights.
13
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements (unaudited)
9. | 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 prior to 2014.
# 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 | ) | |||||||||||||
Balance at June 30, 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. |
During 2014 and 2015, the Company sold units of preferred stock each consisting of 50,000 shares of Series A convertible Preferred Stock and a 3-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.
10. | 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 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 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.
The types of awards permitted under the Plans include qualified incentive stock options (ISO), 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 | 882,500 | $ | 0.53 | |||||||||
Exercised | - | $ | 0.00 | |||||||||
Cancelled or expired | (294,687 | ) | $ | 0.55 | ||||||||
Outstanding at June 30, 2015 | 7,607,563 | $ | 0.89 | 6.44 | ||||||||
Exercisable at December 31, 2014 | 4,596,467 | $ | 1.11 | 5.95 | ||||||||
Exercisable at June 30, 2015 | 4,983,854 | $ | 1.08 | 6.40 |
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PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements (unaudited)
10. | Stock Options and Stock-based Compensation (Continued) |
The following table summarizes information about stock options at June 30, 2015:
Options Outstanding | Options Exercisable | |||||||||||||||||||||
Exercise Price | Outstanding | Weighted
Average Remaining Contractual Life (in years) | Weighted Average Exercise Price | Exercisable | Weighted Average Exercise Price | |||||||||||||||||
$ | 0.50 | 159,000 | 146,000 | |||||||||||||||||||
$ | 0.53 | 635,000 | - | |||||||||||||||||||
$ | 0.55 | 3,844,063 | 1,868,354 | |||||||||||||||||||
$ | 0.80 | 320,000 | 320,000 | |||||||||||||||||||
$ | 1.25 | 310,000 | 310,000 | |||||||||||||||||||
$ | 1.50 | 2,124,750 | 2,124,750 | |||||||||||||||||||
$ | 2.00 | 214,750 | 214,750 | |||||||||||||||||||
$0.50 - $2.00 | 7,607,563 | 6.44 | $ | 0.89 | 4,983,854 | $ | 1.08 |
At June 30, 2015, 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 $0.40 as of June 30, 2015. In 2015, no options were exercised whereas 25,000 options were exercised in 2014.
The following table summarizes the activity of the Company’s stock options that have not vested:
Shares | Weighted Average Grant-date Fair Value | |||||||
Nonvested at December 31, 2014 | 2,423,283 | $ | 0.258 | |||||
Granted | 635,000 | $ | 0.313 | |||||
Forfeited | (294,687 | ) | $ | 0.251 | ||||
Vested | (139,887 | ) | $ | 0.386 | ||||
Nonvested at June 30, 2015 | 2,623,709 | $ | 0.237 |
The fair value of non-vested options to be recognized in future periods is $533,923, which is expected to be recognized over a weighted average period of 2.4 years. The total fair value of options vested during the six months ended June 30, 2015 was $159,154 compared to $179,049 for the six months ended June 30, 2014.
Stock-based compensation expense is as follows:
Six Months Ended | ||||||||
June 30, 2015 | June 30, 2014 | |||||||
Selling, general, and administrative expense | $ | 137,092 | $ | 163,541 | ||||
Research and development expense | 22,062 | 15,508 | ||||||
Total stock-based compensation expense | $ | 159,154 | $ | 179,049 |
The weighted average grant-date fair value of options granted during the six months ended June 30, 2015 was $0.313 and for the six months ended June 30, 2014 was $0.206 per option.
15
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements (unaudited)
10. | 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:
Six Months Ended | ||||||||
June 30, 2015 | June 30, 2014 | |||||||
Weighted average risk-free interest rate | 1.67 | % | 1.91 | % | ||||
Volatility factor | 66.26 | % | 69.96 | % | ||||
Weighted average expected life (in years) | 8 | 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).
11. | Stock Warrants |
From 2008 through 2015, the Company issued warrants to purchase shares of common stock. The warrants are exercisable for five years from date of issuance and are exercisable at exercise prices that range from $0.325 to $2.25 per share.
As of June 30, 2015, warrants to purchase 64,338,749 shares of common stock were outstanding and exercisable. During the six months ended June 30, 2015, the Company recognized a total of $117,041 in interest expense, $60,419 in debt conversion costs related to warrants issued as part of debt conversion consideration, $98,683 in consulting services, and $170,418 in placement agent services as a result of an aggregate of 4,654,145 warrants earned. During the six months ended June 30, 2014, the Company recognized a total of $125,645 in interest expense and $49,921 in consulting services.
Shares | Weighted
Average Exercise Price | Weighted
Average Remaining Contractual Life (in years) | ||||||||||
Outstanding at December 31, 2014 | 53,112,193 | $ | 0.98 | 3.27 | ||||||||
Granted | 11,978,223 | $ | 0.38 | 3.34 | ||||||||
Exercised | - | - | ||||||||||
Cancelled or expired | (751,667 | ) | $ | 2.00 | ||||||||
Outstanding at June 30, 2015 | 64,338,749 | $ | 0.86 | 2.92 |
As a result of the 2014 Winter Offering, the exercise price of the 2013 Winter Offering warrants was adjusted from $0.75 to $0.64 under certain anti-dilution rights. The following table summarizes information about stock warrants at June 30, 2015:
Warrants Outstanding | ||||||||
Exercise Price | Outstanding | Weighted Average Remaining Contractual Life (in years) | Weighted Average Exercise Price | |||||
$0.33 | 7,500,000 | |||||||
$0.38 | 14,831,098 | |||||||
$0.45 | 1,730,000 | |||||||
$0.50 | 1,100,523 | |||||||
$0.64 | 11,065,144 | |||||||
$0.80 | 1,415,000 | |||||||
$1.10 | 19,054,350 | |||||||
$1.12 | 263,750 | |||||||
$2.00 | 5,984,175 | |||||||
$2.20 | 98,320 | |||||||
$2.25 | 1,296,389 | |||||||
$0.33 - $2.25 | 64,338,749 | 2.92 | $0.86 |
16
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements (unaudited)
12. | 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.
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 carryforwards total approximately $63,500,000 and $59,800,000 at June 30, 2015 and December 31, 2014, respectively.
13. | Lease Commitments |
The Company leases its facilities under operating leases beginning a) February 2005 and extended through September 2015 and b) April 2012 through March 2017. The Company also has various equipment operating leases with a term of five years.
Future required minimum principal repayments over the next five years are as follows:
Year ending December 31: | Future required minimum lease payments | |||
2015 (payment in arrears) | $ | 27,939 | ||
2015 (July – December) | $ | 128,260 | ||
2016 | $ | 172,428 | ||
2017 | $ | 46,707 | ||
2018 | $ | 4,800 | ||
2019 | $ | 4,000 |
Rent expense totals $65,636 and $142,993 for the three and six months ended June 30, 2015 compared to $94,220 and $189,048 for the three and six months ended June 30, 2014.
14. | Retirement Plan |
The Company provides a 401(k) Profit Sharing Plan (“401(k) Plan”) for elective deferrals whereby participants can defer up to 85% 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 401(k) 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 401(k) Plan immediately upon hire. Participants become vested in employer contributions on a graduated scale with full vesting after five years. No company contributions have yet been made.
17
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements (unaudited)
15. | Commitments and Contingencies |
Legal Proceedings
The Company currently is not a party to any material legal proceeding and has no knowledge of any material legal proceeding contemplated by any governmental authority or third party. The Company may be subject to a number of claims and legal proceedings which, in the opinion of our management, are incidental to normal business operations. In management’s opinion, although final settlement of these claims and suits may impact the financial statements in a particular period, they will not, in the aggregate, have a material adverse effect on the Company’s financial position, cash flows or results of operations.
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 its 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 June 30, 2015.
Warranty Costs
The Company provides for a one year warranty with the sale of its LAESI instrument. 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. As of June 30, 2015 and December 31,2014, the Company has accrued warranty expense of $50,000.
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.
AGREEMENT WITH GEORGE WASHINGTON UNIVERSITY (GWU)
In March 2009, 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.
18
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements (unaudited)
15. | Commitments and Contingencies (Continued) |
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 three and six months ended June 30, 2015, the Company recorded royalty expenses of approximately $9,445 and $20,211, respectively. As of June 30, 2015, the Company’s accounts payable balance includes approximately $33,433 to GWU, of which approximately $24,000 was in arrears, for royalties compared to $29,300 as of December 31, 2014.
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. As of June 30, 2015, the Company had not reached milestones under this agreement.
In January 2014, the Company became a subcontractor to George Washington University 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.
AGREEMENT WITH OMICS2IMAGE
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 Euros 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 June 30, 2015, the Company had made two payment of 40,000 Euros or $46,600 to Omics2Image.
Engineering and Design Services
The Company has engaged Dynamic Manufacturing LLC, a contract manufacturer to produce ten LAESI units. As of June 30, 2015, the Company had received five LAESI units from Dynamic. During the second quarter, the Company repaid Dynamic $53,063 for one LAESI unit which was received early July. As of June 30, 2015, the Company had $320,238 in outstanding commitments with Dynamic as well as approximately $0 in payables due to Dynamic.
During the second quarter, the Company received one laser from Bridger Photonics and ordered another laser related to the LAESI technology. The order fully satisfied the Company’s contract with Bridger. The Company prepaid for both lasers. At June 30, 2015, the Company had no remaining commitments with Bridger. At June 30, 2015, the Company owed approximately $0 in payables due to Bridger.
19
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements (unaudited)
16. | Contingent Acquisition |
On March 31, 2015, the Company entered into a share purchase agreement, as amended on June 4, 2015 (the “Purchase Agreement”) with the shareholders of vivoPharm Pty. Ltd., a corporation organized under the laws of Australia (“vivoPharm”) to acquire 100% of the capital stock of vivoPharm and its subsidiaries (the “Acquisition”). The purchase price for the vivoPharm shares is $12,063,084 (the “Purchase Price”), of which (i) $100,000.00 was payable by way of deposit prior to the closing of the Acquisition (the “Deposit”), to be credited as partial payment towards the Purchase Price, (ii) $5,690,280 is payable in cash at the closing of the Acquisition (the “Closing Cash Consideration”, together with the Deposit, the “Cash Consideration”) and (iii) the balance of $6,272,804 is payable in the form of 627,280.4 shares of the new Company’s 4% Series A Convertible Preferred Stock, with a liquidation value of $10.00 per share, to be issued to vivoPharm on the closing date of the Acquisition (“Series A Convertible Preferred Stock”).
If and when issued, the Company’s Series A Convertible Preferred Stock is convertible by the holder at any time into Company common stock at a conversion price equal to the greater of (a) the same price per share at which the Company sells shares of its Common Stock, or the highest conversion price or exercise price per share of any convertible securities, in either case, as issued in connection with the “Required Financing” contemplated by the Purchase Agreement, or (b) forty ($0.40) cents. Such conversion price is subject to appropriate and proportionate adjustment for forward stock splits, reverse stock splits or other subdivisions, recapitalizations or combinations. As contemplated by the Purchase Agreement, the Company intends, prior to closing of the Acquisition, to obtain stockholder approval for a reverse split of its issued and outstanding shares of Common Stock.
In addition, the Series A Convertible Preferred Stock is subject to automatic conversion in the event that (a) the volume weighted average price of the Company’s common stock for any 20 consecutive trading days shall equal or exceed 150% of the conversion price then in effect; or (b) the Company shall consummate an underwritten public offering of not less than $15,000,000 of its shares of common stock (either a “Conversion Event”); provided, that a Conversion Event shall only be deemed to have occur if all of the shares then issuable upon conversion of the Series A Convertible Preferred Stock (the “Conversion Shares”) have been registered for resale under the Securities Act of 1933 (the “Securities Act”) and a registration statement on Form S-1 is then effective and has not been withdrawn, unless all of such Conversion Shares can be immediately resold by the holders without registration pursuant to an applicable exemption from the registration requirements of the Securities Act.
Consummation of the vivoPharm acquisition is subject to a number of conditions, including the Company raising not less than $10 million of additional debt or equity financing (the “Required Financing”). There can be no assurance that the Company will be successful in completing the necessary additional Required Financing or if completed, that the terms will be favorable to the Company and its stockholders. In addition, there can be no assurance that the vivoPharm acquisition, if consummated will ultimately prove to be beneficial to the Company and its stockholders. On June 4, 2015, the Company and vivoPharm agreed to extend the closing date to September 7, 2015.
As of the date of this filing, the Company has not raised any funds for the vivoPharm acquisition.
20
PROTEA BIOSCIENCES GROUP, INC.
Notes to Consolidated Financial Statements (unaudited)
17. | Evaluation of Subsequent Events |
Advances from Stockholders
Subsequent to June 30, 2015, the Company received advances equal to an aggregate of $135,000 from certain current directors and related parties, which brought the outstanding balance to $1,353,000. No terms of repayment have been specified on the aforementioned advances as of the filing date.
Convertible Promissory Note and Commitment Fee
Subsequent to June 30, 2015, the Company received an aggregate gross proceeds of $200,000 from one director and issued a 10% Convertible Promissory Note due on December 31, 2015. 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 with a price per share of $0.33
Stock Warrants
Subsequent to June 30, 2015, the Company issued warrants to purchase 100,000 shares of Common Stock to GWU as consideration for their continued support of the Company's business development. The warrants are exercisable at an exercise price of $0.50 per share for a five year term.
Stock Options
Subsequent to June 30, 2015, the Company granted options to purchase an aggregate of 150,000 shares of Common Stock to one employee in connection with the Company’s 2013 Equity Incentive Plan at an exercise price of $0.48 per share.
21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statement Notice
Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements” regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of Protea Biosciences Group, Inc. (“we”, “us”, “our”, “Protea” or the “Company”) to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. The Company's plans and objectives are based, in part, on assumptions involving the continued expansion of business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes its assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and therefore, there can be no assurance the forward-looking statements included in this Quarterly Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved.
Protea is an emerging growth, molecular information company that has developed what we believe is a revolutionary 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.
“Molecular information” refers to the generation and bioinformatic processing of very large data sets obtained by applying the Company’s technology to identify and characterize the proteins, metabolites, lipids and other molecules which are the 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 3D 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 life science industries.
Known as LAESI (Laser Ablation Electrospray Ionization), our technology platform is exclusively licensed from The George Washington University (“GWU”). We have subsequently completed the development of the first fully-automated LAESI instruments and proprietary software platforms known as ProteaPlot TM, used for LAESI data analysis, and ProteaScope TM, used in Histology Guided Mass Spectrometry Imaging workflows (HG-MSI TM) that support applications for molecular imaging - the direct analysis and visualization of molecules in cells and tissue, without sample preparation or extractions.
Our Business Strategy and Products and Services
The Company intends to achieve its business objectives by leveraging its knowhow 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.
The Company employs a three part commercialization strategy consisting of the following:
· | Proprietary Molecular Information Services – the Company believes that we are a commercial leader in providing direct molecular imaging services known as “mass spectrometry imaging” services. Our clients include major pharmaceutical, chemical and biotechnology companies; | |
· | LAESI Technologies – we offer the LAESI DP-1000 instrument and software for in-house corporate and academic research; and | |
· | Tissue Analytics – we partner with top-tier medical research institutions to create comprehensive, tissue-based molecular profiles that support the discovery of novel biomarkers that can be used to improve the diagnosis of human disease. |
22
Molecular information Services
The Company believes it is a commercial leader in the offering of direct molecular imaging services. Clients can send their tissue and biofluid samples directly to the Company’s laboratory where they are analyzed by the Company’s scientific staff with the LAESI technology platform and state of the art mass spectrometer instruments. Clients include major pharmaceutical, biotechnology, chemical and medical device companies.
The Company offers proprietary molecular information services for the identification of both small molecules (e.g. lipids and metabolites) and large molecules (e.g. proteins). The services unit is operated within a Quality by Design (QBD) environment, which is necessary to meet the internal research and development standards of pharmaceutical and clinical research clients.
LAESI instruments, software and research products
LAESI technology was invented in the laboratory of Prof. Akos Vertes, Ph.D., Dept. of Chemistry, The GWU, in 2007 and was exclusively-licensed to Protea in 2008. The LAESI DP-1000 instrument, the Company’s first embodiment of its proprietary LAESI technology, integrates with laboratory instruments known as mass spectrometers. 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, improving the convenience and speed of analysis, as well as eliminating bias that can result from sample preparation and handling. LAESI instruments employ proprietary software developed by the Company that creates “molecular maps” - the ability to display the distribution of molecules throughout tissue sample in both 2 and 3 dimensional imaging. LAESI instruments, software and consumables are sold directly by the Company, and through international distributors. In addition, the Company has a nonexclusive co-marketing agreement with Waters (NYSE: WAT) and anticipates establishing similar arrangements with other companies.
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. In addition to Protea, SRI International and GE Global Research will collaborate on this project titled “New Tools for Comparative Systems Biology of Threat Agent Action Mechanisms”. 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.
LAESI DP-1000 Instrument Platform
In 2012, Protea completed the development of a novel bioanalytical instrument platform known as “LAESI” (laser ablation electrospray ionization). This technology enables the direct identification of proteins, lipids and metabolites in tissues, cells and biofluids, such as serum and urine, with minimal to no sample preparation prior to analysis. By eliminating sample preparation, the biological sample can be analyzed without the possible contamination, bias or sample loss that occurs with the current techniques, which require the introduction of chemicals, or the destruction of the sample itself, in order to enable analysis by mass spectrometry. LAESI then can display the data obtained by mass spectrometry analysis combined with actual images of the tissue and cell samples. Thus, mass spectrometry data can be evaluated in the context of the biology of the sample; this allows the integration of mass spectrometry data with current pathology and microscopic imaging techniques. 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. 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.
LAESI is intended to meet the broad need of the biologist for the direct, unbiased identification and characterization of molecules in biological samples. By virtue of LAESI’s improved speed and the comprehensive datasets it generates, the Company is pursuing its vision of what it believes will be a new era of human molecular information, where the molecular pathways of human disease will be more clearly elucidated and datasets more rapidly available, thereby accelerating pharmaceutical and life science research.
The Company currently offers the LAESI DP-1000 instrument as well as proprietary software suites developed by the Company (LAESI Desktop Software and ProteaPlot). Its software facilitates operating the instrument and the storage and display of datasets in a user friendly, intuitive software environment. The LAESI and ProteaPlot software includes tools for post-processing of LAESI-MS data, generation of molecular maps/images, and mass spectral comparison for regions of interest.
23
Tissue Analytics
The Company is applying a multi-modal mass spec imaging approach, including both its proprietary LAESI platform and MALDI methodologies to create comprehensive, tissue-based molecular profiles that provide novel, and highly-specific tissue analytics to improve the differential diagnosis of human disease and allow the integration of the Company’s mass spec imaging data files with related pathology, gene expression and demographic datasets, with the purpose of improving human disease state detection, assessment and management. To advance this objective, the Company develops collaborative research partnerships with top tier academic centers to develop and validate tissue analytics -based cancer diagnostics.
As a model of its approach to achieving this, the Company put in place a collaborative research partnership with the Memorial Sloan-Kettering Cancer Center and the Dana-Farber Cancer Institute. The Company is generating molecular profiles of early stage lung cancer tissue samples with the goal of improving the classification and differential diagnosis of cancer. The first target is 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 behave 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 tumor cell “molecular profiling”, leading to more precise treatment selection and higher survivor rates.
Recent Developments—Acquisition of vivoPharm
The Company entered into a share purchase agreement, effective as of March 31, 2015, as amended on June 4, 2015 (the “Acquisition Agreement”), with the shareholders of vivoPharm, a corporation organized under the laws of Australia, to acquire 100% of the capital stock of vivoPharm and its subsidiaries (the “Acquisition”). The purchase price for the vivoPharm shares is $12,063,084 (the “Acquisition Price”), of which (i) $100,000 was payable by way of deposit prior to the closing of the Acquisition, to be credited as partial payment towards the Acquisition Price, (ii) $5,690,280 is payable in cash at the closing of the Acquisition and (iii) the balance of $6,272,804 is payable in the form of 627,280.4 shares of a new series of convertible preferred stock of the Company, with a liquidation value of $10.00 per share, to be issued to vivoPharm on the closing date of the Acquisition (“Acquisition Preferred Stock”). If we do not consummate the Acquisition by September 7, 2015, we will (with certain limited exceptions) forfeit our deposit of $100,000.
If and when issued, each share of the Acquisition Preferred Stock would be convertible by the holder at any time into a number of shares of Company common stock obtained by dividing $10.00 plus accrued dividends by the greater of (a) the price per share at which the Company sells shares of its common stock, or the highest conversion price or exercise price per share of any convertible securities, in either case, as issued in connection with the Required Financing, hereinafter defined, contemplated by the Acquisition Agreement, or (b) $0.40. Such conversion price would be subject to appropriate and proportionate adjustment for forward stock splits, reverse stock splits or other subdivisions, recapitalizations or combinations. As contemplated by the Acquisition Agreement, the Company intends, prior to closing of the Acquisition, to obtain stockholder approval for a reverse split of its issued and outstanding shares of common stock.
In addition, the Acquisition Preferred Stock would be subject to automatic conversion in the event that (a) the volume weighted average price of the Company’s common stock for any 20 consecutive trading days shall equal or exceed 150% of the conversion price then in effect; or (b) the Company shall consummate an underwritten public offering of not less than $15,000,000 of its shares of common stock (either a “Conversion Event”); provided, that a Conversion Event shall only be deemed to have occurred if all of the shares then issuable upon conversion of the Acquisition Preferred Stock (the “Conversion Shares”) have been registered for resale under the Securities Act and a registration statement on Form S-1 is then effective and has not been withdrawn, unless all of such Conversion Shares can be immediately resold by the holders without registration pursuant to an applicable exemption from the registration requirements the Securities Act.
The following is a summary of other terms that the Acquisition Preferred Stock would have if it is issued:
Liquidation Value: The Acquisition Preferred Stock would have a stated or liquidation value per share of $10.00 per share, which would be payable upon any sale or liquidation of the Company prior to any payments in respect of our Common Stock.
Dividends: The Acquisition Preferred Stock would pay an annual dividend of 4% percent, which shall accrue annually, be payable in additional shares of Acquisition Preferred Stock, and be added to the face or stated amount of such shares of Acquisition Preferred Stock.
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Voting Rights: Except as described in the Certificate of Designation, holders of the Series A Preferred Stock would vote together with holders of the Company common stock on all matters submitted to the vote of the holders of Company Common Stock, on an as-converted to common stock basis.
Redemption: The Acquisition Preferred Stock would be subject to redemption and repurchase at the sole option of the Company, upon thirty days prior written notice to the holders, for a cash amount, payable in United States Dollars, equal to the $10.00 per share stated value of the Acquisition Preferred Stock plus accrued dividends thereon.
Consummation of the Acquisition is subject to a number of conditions, including the Company raising not less than $10 million of additional debt or equity financing (the “Required Financing”). There can be no assurance that the Company will be successful in completing the necessary additional Required Financing or if completed, that the terms will be favorable to the Company and its stockholders. In addition, there can be no assurance that the Acquisition, if consummated will ultimately prove to be beneficial to the Company and its stockholders. On June 4, 2015, the Company and vivoPharm agreed to extend the closing date to September 7, 2015. As of the date of this filing, the Company has not raised any funds for the vivoPharm acquisition.
The description of the Acquisition Agreement herein does not purport to be complete.
Bridge Financing - Short-term Convertible Debenture
In May 2015, the Company received an aggregate of $2,000,000 in gross cash proceeds from one accredited investor in connection with the sale of a 20% original issue discount unsecured convertible debenture (the “Debenture”) due November 22, 2015, pursuant to the terms and condition of a Subscription Agreement. The Company issued (a) the Debenture with a principal amount of $2,500,000 that bears interest at a rate of 10% per annum, and (b) a three-year warrant to purchase up to 7,500,000 shares of common stock of the Company par value $0.001 per share at an exercise price of $0.325 per share. The Debenture may be converted in whole or in part, into shares of Common Stock at a conversion price of $0.25 per share. The fair value of these warrants was estimated to be $411,750, which was recorded as a discount to the promissory note, and will be accreted over the life of the loan. The Company recognized accretion expense of $68,625 related to the fair value of the warrants and interest expense of $107,527 related to the original issue discount during the six months ended June 30, 2015. As of June 30, 2015, the outstanding balance was $2,500,000 or $1,764,402, net of discount.
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 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, 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.
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Results of Operations
Three and Six Months Ended June 30, 2015 Compared to Three and Six Months Ended June 30, 2014
For the three months ended June 30, 2015 and June 30, 2014, the Company earned revenue of $511,783 and $346,561, respectively, an increase of $165,222 or approximately 48%. The Company earned revenues of $920,656 and $814,661 for the six months ended June 30, 2015 and June 30, 2014, respectively, an increase of $105,995, or approximately 13%. For the three and six months ended June 30, 2015, the Company realized service revenues of $219,064 and $389,708, respectively compared to $59,375 and $229,945 for the three and six months ended June 30, 2014. Service clients include major pharmaceutical, biotechnology, chemical and medical device companies. Additionally, the Company realized grant revenue of $53,707 and $72,051, respectively for the three and six months ended June 30, 2015 compared to $26,325 and $50,513 for the three and six months ended June 30, 2014.
For the three months ended June 30, 2015, cost of revenue totaled $166,403 compared to $180,234 for the three months ended June 30, 2014, a decrease of $13,831 or 8%. Cost of revenue was $306,191 for the six months ended June 30, 2015 compared to $410,970 for the six months ended June 30, 2014, which is a decrease of $104,779 or 26%. The Company realized gross profits of $345,380 and $614,465 for three and six months ended June 30, 2015 compared to $166,327 and $403,691 for the three and six months ended June 30, 2014.
For the three and six months ended June 30, 2015, selling, general and administrative expenses totaled $1,778,048 and $3,790,569, respectively compared to $2,565,856 and $4,688,561, respectively, for the three and six months ended June 30, 2014. This is a decrease of $787,808 or approximately 31% for the three months ended June 30, 2015 and a decrease of $897,992 or 19% for the six months ended June 30, 2015. The decrease relates to a reduction in personnel costs, outside services, consulting expenses, and other items as the Company has focused efforts on reducing expenses.
For the three and six months ended June 30, 2015, research and development expenses totaled $369,901 and $770,994, respectively, compared to research and development expenses of $804,030 and $1,525,983 for the three and six months ended June 30, 2014. This is a decrease of $434,129 or approximately 54% for the three months ended June 30, 2015 and $754,989 or 49% for the six months ended June 30, 2015. The reduction in expenses relates largely to the disposition of the Company’s European subsidiary effective at the end of 2014. No expenses were incurred for the three months or six months ended June 30, 2015 related to the disposed subsidiary. During the three and six months ended June 30, 2015, research and development expenses primarily included costs associated with the development of the LAESI and NAPA technologies.
Loss from operations totaled $1,802,569 and $3,947,098, respectively, for the three and six months ended June 30, 2015, compared to a loss from operations of $3,203,559 and $5,810,853, respectively for the three and six months ended June 30, 2014. This is a decrease of $1,400,990 or 44% for the three months ended June 30, 2015 and a decrease of $1,863,756 or approximately 32% for the six months ended June 30, 2015.
For the three months ended June 30, 2015, we had other expenses of $502,339 as compared to other expenses for the three months ended June 30, 2014 of $242,779, a decrease of $259,560. For the six months ended June 30, 2015, other expenses were $1,325,308 compared to $367,623 for the six months ended June 30, 2014 The majority of the increase is as a result of derivative expense of $836,182 recognized during the six months ended June 30, 2015.
After foreign currency translation adjustments of $657 and $(14,304), respectively, the Company had a total comprehensive loss of $2,304,251, or ($0.02) per share, for the three months ended June 30, 2015 as compared to a total comprehensive loss of $3,460,642, or ($0.05) per share, for the three months ended June 30, 2014. For the six months ended June 30, 2015, the Company had foreign currency translation adjustments of $265 and total comprehensive loss of $5,272,141 or $(0.05) per share compared to foreign currency translation adjustments of $(13,535) and total comprehensive loss of $6,192,011 or $(0.09) per share.
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Cash Requirements
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. We will continue to require substantial funds to advance our research products and services. 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 molecular information technology development activities by 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. These factors raise substantial doubt about our ability 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 favorable modifications related to the repayment of these obligations.
With a goal of raising capital additional during the third quarter of 2015, 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 or institutional investing communities. However, there can be no assurance that we will be successful in raising additional capital on terms acceptable to us or at all.
As discussed above under “Recent Developments—Acquisition of vivoPharm,” we would have to raise not less than $10 million of additional debt or equity financing in order to complete the acquisition of vivoPharm. There can be no assurance that the Company will be successful in completing the necessary financing or if completed, that the terms will be favorable to the Company and its stockholders.
During the latter half of 2014, the Company’s molecular information services division signed new contracts with large-to-mid market pharmaceutical companies. The Company believes that these contracts have the potential to provide more routine workflow resulting in increased revenues and more consistent cash flows in 2015.
Based on our current spending levels, management estimates that the Company will need approximately $4,300,000 in additional working capital, net of cash flows from revenue, to maintain current operations through the end of 2015 or $9,000,000 for the next twelve calendar months.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The opinion of our independent registered public accountants on our audited financial statements as of and for the year ended December 31, 2014 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. The Company 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. 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.
See Note 2 to the Financial Statements contained in Item 1 of this report.
Liquidity and Capital Resources
As of June 30, 2015, the Company had total current assets of $681,544 comprised of $121,366 in cash and cash equivalents, $297,938 in trade accounts receivables, $56,495 in inventory, and $205,745 in prepaid expenses. As of December 31, 2014, we had total current assets equal to $931,344 comprised of $322,877 in cash and cash equivalents, $273,914 in trade accounts receivable, $119,230 in other receivables, $161,301 in inventory and $54,022 in prepaid expenses. As of June 30, 2015, the Company had total current liabilities of $9,699,301 comprised of $2,716,926 in current maturities on long term debt, $1,272,780 in trade accounts payable, $3,000,000 in connection with the United Bank line of credit, $2,135,000 in loans payable to shareholders, $75,794 in derivative liabilities, and $498,801 in other payables and accrued expenses. The Company's total current liabilities as of December 31, 2014 were equal to $7,765,562, comprised of $1,457,800 in current maturities on long term debt, $1,253,385 in trade accounts payable, $3,000,000 in connection with the United Bank line of credit, $1,381,498 in loans payable to shareholders, $154,058 in derivative liabilities, and $518,821 in other payables and accrued expenses.
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Our working capital deficit was $(9,017,757) at June 30, 2015 as compared to a working capital deficit of $(6,834,218) at December 31, 2014. The change in working capital was approximately $2,183,539 to June 30, 2015 from December 31, 2014 primarily resulting from the decrease in cash and cash equivalents and increase in accounts payable, loans payable to stockholders, and derivative liabilities.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.
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. For further discussion of critical accounting policies, please see Note 2 to our financial statements, which are included in this report in Item 1.
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 in Item 1.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules, regulations and related forms, and that such information is accumulated and communicated to our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As of June 30, 2015, we carried out an evaluation, under the supervision and with the participation of our principal executive officer on the effectiveness of the design and operation of our disclosure controls and procedures. 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 as a result of material weaknesses in our internal control over financial reporting, our disclosure controls and procedures were not effective as of June 30, 2015. 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: (1) lack of a sufficient complement of personnel commensurate with the Company’s reporting requirements; (2) the Company did not consistently establish appropriate authorities and responsibilities in pursuit of the Company’s financial reporting objectives; and (3) insufficient written documentation or training of internal control policies and procedures which provide staff with guidance or framework for accounting and disclosing financial transactions.
Despite the existence of the material weakness above, we believe that our consolidated financial statements contained in this Form 10-Q 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 above, there have been no changes in our internal controls over financial reporting during the quarter ended June 30, 2015 that have materially affected or are reasonably likely to materially affect our internal controls.
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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 presently no pending legal proceedings to which the Company or any of its subsidiaries is a party or to which any of their property is 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.
Except as set forth below, there are no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, as filed with the SEC.
We may not be able successfully to complete our proposed acquisition of vivoPharm.
We entered into a share purchase agreement, effective as of March 31, 2015, as amended on June 4, 2015 (the “Acquisition Agreement”), with the shareholders of vivoPharmPty, Ltd., a corporation organized under the laws of Australia (“vivoPharm”), to acquire 100% of the capital stock of vivoPharm and its subsidiaries (the “Acquisition”). The purchase price for the vivoPharm shares is $12,063,084 (the “Acquisition Price”), of which (i) $100,000.00 was payable by way of deposit prior to the closing of the Acquisition, to be credited as partial payment towards the Acquisition Price, (ii) $5,690,280 is payable in cash at the closing of the Acquisition and (iii) the balance of $6,272,804 is payable in the form of 627,280.4 shares of a new series of convertible preferred stock of the Company, with a liquidation value of $10.00 per share, to be issued to vivoPharm on the closing date of the Acquisition (the “Acquisition Preferred Stock”).
Consummation of the Acquisition is subject to a number of conditions, including the Company raising not less than $10 million of additional debt or equity financing (the “Required Financing”). There can be no assurance that the Company will be successful in completing the necessary additional Required Financing or if completed, that the terms will be favorable to the Company and its stockholders, or that the other conditions to closing will be satisfied. If we do not consummate the Acquisition by September 7, 2015, we will (with certain limited exceptions) forfeit our deposit of $100,000. As of the date of this filing, the Company has not raised any funds for the vivoPharm acquisition.
We may have difficulty in integrating the vivoPharm acquisition with our existing business; the acquisition may not be beneficial to the Company and its stockholders.
The process of integrating any acquired business such as that of vivoPharm (assuming that the acquisition is consummated) may create unforeseen operating difficulties and expenditures and is itself risky. The acquisition, if consummated, may be subject to a number of challenges, including:
• diversion of management time and resources as well as a shift of focus from operating the businesses to issues related to integration and administration, which could result in the potential disruption of our ongoing business;
• the need to integrate each company’s accounting, management, information, human resource and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented;
• the need to implement controls, procedures and policies appropriate for a public company at an acquired company that prior to acquisition may have lacked such controls, procedures and policies;
• difficulties in maintaining uniform standards, controls, procedures and policies;
• difficulties in managing operations in widely disparate time zones;
• potential unknown liabilities associated with the acquired company, including liability for activities of the acquired company before the acquisition, including any violations of laws, rules and regulations, commercial disputes, tax liabilities and other known and unknown liabilities;
• difficulty retaining key alliances on attractive terms with partners, suppliers and customers;
• declining employee morale and retention issues resulting from changes in compensation, or changes in management, reporting relationships, future prospects or the direction or culture of the business;
• the need to integrate operations across different cultures and to address the particular economic, currency, political, and regulatory risks associated with Australia; and
• possibly, the need to transition operations, end-users, and customers onto our existing platforms.
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Failure to manage the vivoPharm acquisition, should it be consummated, effectively may affect our success in executing our business plan and may adversely affect our business, financial condition and results of operation. We may not realize the anticipated benefits of the acquisition, or may not realize them in the time frame expected.
The Acquisition Preferred Stock, if issued, will dilute current stockholders and may adversely affect the rights of holders of Common Stock.
If and when issued upon consummation of our proposed acquisition of vivoPharm, the Company’s Acquisition Preferred Stock will have the effect of diluting our existing stockholders. Each share of the Acquisition Preferred Stock would be convertible by the holder at any time into a number of shares of Company Common Stock obtained by dividing $10.00 plus accrued dividends by the greater of (a) the price per share at which the Company sells shares of its Common Stock, or the highest conversion price or exercise price per share of any convertible securities, in either case, as issued in connection with the Required Financing contemplated by the Acquisition Agreement, or (b) $0.40 (subject to adjustment for stock splits and similar events), which could result in the issuance of up to 14.25 million shares of our Common Stock (plus the number of shares of Common Stock into which accrued dividends would be convertible). In addition, the Acquisition Preferred Stock would be subject to automatic conversion in certain events.
Other terms of the Acquisition Preferred Stock, if it is issued, may adversely affect the rights of holders of Common Stock. Among other things, the Acquisition Preferred Stock would have a stated or liquidation value per share of $10.00 per share, which would be payable upon any sale or liquidation of the Company prior to any payments in respect of our Common Stock. The Acquisition Preferred Stock would pay an annual dividend of 4% accruing annually, payable in additional shares of Acquisition Preferred Stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Common Stock
On June 29, 2015, the Company issued 5,402,575 shares of Common Stock to investors in the Company’s winter 2013 private placement of Common Stock and Common Stock warrants pursuant to anti-dilution rights.
On June 11, 2015, the Company issued 300,000 shares of Common Stock with a value of $93,000 to a consultant for services rendered.
Convertible Debenture and Warrant
On May 22, 2015, the Company entered into a Subscription Agreement with one accredited investor, pursuant to which the Company received an aggregate gross proceeds of $2,000,000 for the sale of an 20% original issue discount unsecured convertible debenture (the “Debenture”) due November 22, 2015. The Company issued (a) the Debenture with a principal amount of $2,500,000 that bears interest at a rate of 10% per annum, and (b) a three-year warrant to purchase up to 7,500,000 shares of Common Stock at an exercise price of $0.325.
In connection with the Debenture, the Company paid to a FINRA registered broker dealer that acted as the placement agent an aggregate of approximately $440,000 in cash compensation, representing fees and an expense allowance. In addition, the Company agreed to issue a warrant to purchase an aggregate of 1,550,000 shares of Common Stock to the placement agent (or its designees).
Convertible Note
On July 1, 2015, the Company received an aggregate gross proceeds of $200,000 from one director and issued a 10% Convertible Promissory Note due on December 31, 2015. 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 with a price per share of $0.33.
Stock Warrant
On July 16, 2015, the Company issued a warrant to The George Washington University to purchase 100,000 shares of Common Stock. The warrants are exercisable at an exercise price of $0.50 per share for a five-year term.
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Stock Option
On July 16, 2015 (the “Issuance Date”), the Company issued an incentive stock option to Dave Halverson, Vice President of Sales, under the Company’s 2013 Equity Incentive Plan (the “Plan”), to purchase 150,000 shares of Common Stock. The option shall be exercisable at fair market value, as defined in the Plan, and shall vest as to 25% of the shares at the end of each of the first four anniversaries from the Issuance Date, becoming fully vested and exercisable four years from the Issuance Date.
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.
Item 3. Defaults Upon Senior Securities.
Not applicable
Item 4. Mine Safety Disclosure.
Not applicable.
As previously reported on the Company’s Annual Report on Form 10-K, on February 13, 2015 Edward Hughes resigned as the Company’s Chief Financial Officer (its principal financial officer) of the date of this filing, the Company has not yet appointed a new Chief Financial Officer.
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(a) | Exhibits required by Item 601 of Regulation S-K. |
Exhibit No. | Description | ||
3.1 | Certificate of Incorporation (incorporated by reference from Exhibit 3.1 to the Company’s Form 10-SB filed with the Securities and Exchange Commission on August 3, 2005). | ||
3.2 | Bylaws (incorporated by reference from Exhibit 3.2 to the Company’s Form 10-SB filed with the Securities and Exchange Commission on August 3, 2005). | ||
3.3 | Certificate of Ownership and Merger filed with the Office of Secretary of State of Delaware on September 2, 2011 (incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on September 9, 2011). | ||
3.4 | Certificate of Amendment to Certificate of Incorporation (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on September 9, 2011 and amended on November 14, 2011). | ||
3.5 | Certificate of Designations of Series A Convertible Preferred Stock (incorporated by reference from Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 5, 2014). | ||
3.6 | Certificate of Amendment to the Certificate of Designations of Protea Biosciences Group, Inc. (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on March 18, 2015). | ||
3.7 | Certificate of Amendment to the Certificate of Incorporation (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on July 8, 2015). | ||
10.1 | Amendment No. 1 to Share Purchase Agreement, dated as of June 4, 2015, among the Company, vivoPharm Pty Ltd. and the shareholders of vivoPharm Pty Ltd. | ||
10.2 | Form of Subscription Agreement among Protea Biosciences Group, Inc., and investors in the Company’s 2015 bridge debenture offering (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 29, 2015). | ||
10.3 | Form of 20% Original Issue Discount Unsecured Convertible Debenture issued to the investor in the Company’s 2015 bridge debenture offering (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 29, 2015). | ||
10.4 | Form of Warrant issued to the investors in the Company’s 2015 bridge debenture offering (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 29, 2015). | ||
31.1 | Certification of the Company’s Principal Executive Officer and Interim Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015. | ||
32.1 | Certification of the Company’s Principal Executive Officer and Interim Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
EX-101.INS | XBRL Instance Document | |||
EX-101.SCH | XBRL Taxonomy Extension Schema | |||
EX-101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |||
EX-101.DEF | XBRL Taxonomy Extension Definition Linkbase | |||
EX-101.LAB | XBRL Taxonomy Extension Label Linkbase | |||
EX-101.PRE | XBRL Taxonomy Extension Presentation Linkbase | |||
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PROTEA BIOSCIENCES GROUP, INC. | ||
Dated: August 12, 2015 | By: | /s/ Stephen Turner |
Stephen Turner | ||
Chief Executive Officer, President and Director | ||
(Principal Executive Officer, Interim Principal Financial and Accounting Officer) | ||
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