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EXCEL - IDEA: XBRL DOCUMENT - Protea Biosciences Group, Inc.Financial_Report.xls
EX-31.1 - EXHIBIT 31.1 - Protea Biosciences Group, Inc.v311156_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - Protea Biosciences Group, Inc.v311156_ex32-1.htm
EX-32.2 - EXHIBIT 32.2 - Protea Biosciences Group, Inc.v311156_ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - Protea Biosciences Group, Inc.v311156_ex31-2.htm

 

FORM 10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012

 

OR

 

¨ 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)   Number)

 

955 Hartman Run Road, Morgantown, West Virginia 26507

(Address of principal executive offices)

 

(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 £ Accelerated filer £
  Non-accelerated filer £ 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: 28,854,130 shares of common stock, par value $.0001 per share, outstanding as of May 14, 2012.

 

 
 

 

PROTEA BIOSCIENCES GROUP, INC.

 

- INDEX -

 

  Page
PART I – FINANCIAL INFORMATION:  
     
Item 1. Financial Statements: 1
     
  Consolidated Balance Sheets 2
     
  Consolidated Statements of Operations and Total Comprehensive Loss 3
     
  Consolidated Statements of Stockholder’s Equity (Deficit) 4
     
  Condensed Consolidated Statements of Cash Flows 5
     
  Notes to Financial Statements 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
     
Item 4. Controls and Procedures 27
     
PART II – OTHER INFORMATION:  
     
Item 1. Legal Proceedings 28
     
Item 1A. Risk Factors 28
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
     
Item 3. Defaults Upon Senior Securities 29
     
Item 4. Mine Safety Disclosures 29
     
Item 5. Other Information 29
     
Item 6. Exhibits 29
     
Signatures   31

 

 
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

The accompanying financial statements have been prepared in accordance with generally accepted accounting principles 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 the Company for the interim periods presented.

 

The results for the period ended March 31, 2012 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 filed with the Securities and Exchange Commission on March 29, 2012.

 

1
 

 

PROTEA BIOSCIENCES GROUP, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

Consolidated Balance Sheets

See Accompanying Notes to Financial Statements

 

   March 31, 2012
(Unaudited)
  

 

December 31, 2011

 
ASSETS          
Current Assets:          
Cash and cash equivalents  $201,154   $505,277 
Restricted cash   50,010    49,979 
Trade accounts receivable   89,692    76,650 
Other receivables   444,595    435,062 
Inventory   350,896    223,336 
Prepaid expenses   134,560    141,425 
Total current assets   1,270,907    1,431,729 
Property and equipment, net   3,249,804    3,319,219 
           
Other noncurrent assets   14,461    17,632 
           
Total Assets  $4,535,172   $4,768,580 
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current Liabilities:          
Current maturities on long term debt  $439,543   $398,383 
Accounts payable   2,484,164    2,623,601 
Bank line of credit   3,000,000    3,000,000 
Loans payable to shareholders   850,000    750,000 
Other payables and accrued expenses   725,128    310,924 
Total current liabilities   7,498,835    7,082,908 
           
           
Long term debt - net of current portion   2,334,521    2,189,454 
           
Commitments and contingencies (see Notes)          
           
Stockholders' Equity:          
Preferred stock ($.0001 par value; 10,000,000 shares authorized; none issued or outstanding)   -    - 
Common stock ($.0001 par value; 100,000,000 shares authorized; 28,181,498 and 27,061,498 shares issued and outstanding at March 31, 2012 and December 31, 2011)   2,819    2,706 
Additional paid in capital   35,093,197    32,922,112 
Deficit accumulated during development stage   (40,374,673)   (37,443,419)
Accumulated other comprehensive income (loss)   (19,527)   14,819 
Total Stockholders' Equity (deficit)   (5,298,184)   (4,503,782)
Total Liabilities and Stockholders' Equity  $4,535,172   $4,768,580 

 

2
 

 

PROTEA BIOSCIENCES GROUP, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

 

Consolidated Statements of Operations and Total Comprehensive Loss (Unaudited)

See Accompanying Notes to Financial Statements

 

   For the Three Months Ended
March 31,
   Period from July 13, 2001
(date of inception) to
 
   2012   2011   March 31, 2012 
             
Revenue  $179,494   $147,386   $2,838,099 
Selling, general, administrative expenses   (1,325,415)   (1,119,398)   (21,978,775)
Research and development expense   (1,702,269)   (1,487,278)   (19,704,079)
Loss from operations   (2,848,190)   (2,459,290)   (38,844,755)
Other income (expense):               
Interest and exchange income (expense)   2,480    (1,682)   54,055 
Interest expense   (85,544)   (112,513)   (1,574,154)
Gain on debt settlement   -    -    13,834 
Loss on asset disposal   -    -    (23,653)
Total other income (expense)   (83,064)   (114,195)   (1,529,918)
                
Loss before income taxes   (2,931,254)   (2,573,485)   (40,374,673)
Income taxes   -    -    - 
                
Net loss   (2,931,254)   (2,573,485)   (40,374,673)
Foreign currency translation adjustment   (34,346)   (19,080)   (19,527)
Total comprehensive loss  $(2,965,600)  $(2,592,565)  $(40,394,200)
                
Net loss per share - basic and diluted  $(0.11)  $(0.14)  $(4.35)
                
Weighted average number of shares outstanding - basic and diluted   27,356,251    18,375,636    9,293,605 

 

3
 

 

PROTEA BIOSCIENCES GROUP, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

Consolidated Statements of Stockholders' Equity (Deficit) (Unaudited)

See Accompanying Notes to Financial Statements

 

                   Deficit   Accumulated   Total 
   Common Stock   Additional   Stock   Accumulated   Other   Stockholders' 
   Par Value $.0001   Paid in Capital   Subscription   During   Comprehensive   Equity 
   Shares   Amount   Common Stock   Receivable   Development Stage   Income   (Deficit) 
December 31, 2011   27,061,498   $2,706   $32,922,112   $-   $(37,443,419)  $14,819   $(4,503,782)
                                    
Issuance of stock for cash at $2.00 per share (net of issuance costs of $178,137)   1,090,000    109    2,001,754    -    -    -    2,001,863 
Stock-based compensation expense   -    -    90,055    -    -    -    90,055 
Stock warrants issued as part of convertible debentures   -    -    31,780    -    -    -    31,780 
Stock options exercised at $1.50 per share   25,000    3    37,497    -     -    -    37,500 
Stock warrants exercised at $2.00 per share   5,000    1    9,999    -     -    -    10,000 
Net loss   -    -    -    -    (2,931,254)   -    (2,931,254)
Foreign currency translation adjustment   -    -    -    -    -    (34,346)   (34,346)
March 31, 2012   28,181,498   $2,819  $35,093,197   $      -   $(40,374,673)  $(19,527)  $(5,298,184)

 

4
 

 

PROTEA BIOSCIENCES GROUP, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

Consolidated Statements of Cash Flows (Unaudited)

See Accompanying Notes to Financial Statements

 

   For the Three Months Ended
March 31,
   Period from July 13, 2001
(date of inception) to
 
   2012   2011   March 31, 2012 
Cash flows from operating activities:               
Net loss  $(2,931,254)  $(2,573,485)  $(40,374,673)
Adjustments to reconcile net loss to net cash from operating activities:               
Depreciation and amortization   231,480    293,293    3,620,834 
Non-cash compensation   90,055    84,793    1,354,603 
Issuance of common stock and warrants for services   -    -    529,138 
Issuance of common stock for accrued interest   -    -    461,200 
Accretion of convertible debenture discount   -    19,194    139,834 
Loss on disposal of fixed assets   -    -    23,653 
Net change in assets and liabilities:               
Decrease (increase)               
Trade accounts receivable   (13,042)   (20,779)   (89,692)
Prepaid expenses   6,865    15,264    (134,660)
Other receivables   (6,362)   534,829    62,844 
Inventory   (127,560)   (19,458)   (350,896)
Increase (decrease)               
Trade accounts payable   (139,437)   (193,296)   2,484,165 
Other payables and accrued expenses   414,206    225,202    725,129 
                
Net cash used in operating activities   (2,475,049)   (1,634,443)   (31,548,521)
                
Cash flows from investing activities:               
Movement in restricted cash   (31)   (13)   (50,010)
Purchase of and deposits on equipment   (162,065)   (168,807)   (4,245,370)
Proceeds from sale of equipment   -    -    47,450 
Net cash used in investing activities   (162,096)   (168,820)   (4,247,930)
                
Cash flows from financing activities:               
Net advances on bank line of credit   -    -    3,000,000 
Proceeds from sale of common stock   2,049,363    30,000    22,078,852 
Proceeds from long-term debt   390,000    1,631,873    12,180,000 
Repayment of long-term debt   (71,995)   (87,237)   (1,237,333)
Financing costs   -    -    (4,387)
Net cash provided by financing activities   2,367,368    1,574,636    36,017,132 
                
Effect of exchange rate changes on cash   (34,346)   (19,080)   (19,527)
                
Net increase (decrease) in cash   (304,123)   (247,707)   201,154 
                
Cash, beginning of period   505,277    410,696    - 
                
Cash, end of period  $201,154   $162,989   $201,154 
                
Supplemental disclosure of cash flow information:               
Cash paid during the period for interest  $43,251   $93,319   $913,610 
                
Supplemental disclosure of non-cash investing and financing activities:               
Equipment financed through finance company debt  $-   $-   $2,718,272 
Debt converted to company stock  $-   $-   $9,628,710 
Stock subscription  $-   $-   $1,035,000 

 

5
 

 

PROTEA BIOSCIENCES GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE)

 

Notes to Consolidated Financial Statements – (Unaudited)

  

1.Description of Company and Nature of Business

 

Protea Biosciences Group, Inc. (“Protea” or the “Company”) was incorporated in the state of Delaware on May 24, 2005.  Pursuant to an Agreement and Plan of Merger, dated September 2, 2011 (the “Merger Agreement”), by and among the Company, Protea Biosciences, Inc., and SRKP 5 Acquisition Corp., a wholly-owned subsidiary of the Company (“MergerCo”), Protea Biosciences, Inc. merged with and into MergerCo, with Protea Biosciences, Inc. (“PBI”) continuing as the surviving entity (the “Merger”).  Upon the closing of the Merger, the Company changed its name from “SRKP 5, Inc.” to “Protea Biosciences Group, Inc.” and became the parent company of Protea Biosciences, Inc.

 

Protea Biosciences, Inc. (“Protea” or the “Company”) is an emerging biotechnology company incorporated in Delaware in July 2001, and based in Morgantown, West Virginia. The Company is engaged in developing and commercializing proprietary life science technologies, products and services that are used to recover and identify proteins in biological samples. Through its wholly-owned French subsidiary, it has a joint development arrangement with Laboratoires Mayoly Spindler SAS to develop and market a recombinant biopharmaceutical product.

 

The interim consolidated financial statements presented herein have been prepared by the Company, are unaudited and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the financial position at March 31, 2012, the results of operations for the three-month periods ended March 31, 2012, and March 31, 2011, and the cash flows for the three-month periods ended March 31, 2012, and March 31, 2011. Interim results are not necessarily indicative of results for a full year.

 

The consolidated balance sheet presented as of December 31, 2011, has been derived from the audited consolidated financial statements as of that date. The consolidated financial statements and notes included in this report should be read in conjunction with the financial statements and notes included in the company’s 2011 year-end audit.

 

The accompanying 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 experienced negative cash flows from operations since inception and had an accumulated deficit at March 31, 2012 of approximately $40 million and at December 31, 2011 of approximately $37 million. 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, to continue to develop new products and services based upon its proprietary protein recovery and identification technologies, and to continue clinical trials of its recombinant pharmaceutical compound.

 

Management’s plans to meet its operating cash flow requirements include raising additional funds from equity or debt. The Company intends to seek additional capital through sales of equity securities or convertible debt and, if appropriate, to develop corporate development partnerships to advance its drug and technology development activities for sharing the costs of development and commercialization. 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.

 

6
 

 

PROTEA BIOSCIENCES GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE)

 

Notes to Consolidated Financial Statements (unaudited)

 

1.Description of Company and Nature of Business (continued)

 

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.

 

2.Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of Protea Biosciences Group, Inc. and all of its wholly-owned subsidiaries. All material accounts and transactions have been eliminated in consolidation.

 

Development Stage Enterprise

 

The Company is a development-stage enterprise devoting substantial efforts to establishing a new business, financial planning, raising capital, research and development activities and developing markets. All losses accumulated since inception have been considered as part of the Company’s development stage activities.

 

Estimates and Assumptions

 

The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Other Receivables

 

Other receivables, which reflect amounts due from non-trade activity, consist of the following at March 31, 2012 and December 31, 2011:

 

   March 2012   Dec. 2011 
French government R&D credit  $290,467   $281,996 
French VAT receivable   122,296    119,507 
Employee loan – current   14,539    - 
Deposits and Other   17,293    33,559 
Other receivables – current  $444,595   $435,062 
           
Employee loan – noncurrent  $14,461   $17,632 
Other receivables – noncurrent  $14,461   $17,632 

 

7
 

 

PROTEA BIOSCIENCES GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE)

 

Notes to Consolidated Financial Statements (unaudited)

 

2.Summary of Significant Accounting Policies (continued)

 

Comprehensive Loss

 

For the period from inception through March 31, 2012, the Company has a translation loss which represents other comprehensive loss and is included in the Statement of Operations and Comprehensive Loss in the financial statements.

 

Net Loss per Share

 

Basic and diluted loss per common share are 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 16,116,000 and 15,133,000 at March 31, 2012 and December 31, 2011, respectively.

 

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS:

 

FASB ASU 2011-05 – Presentation of Comprehensive Income

 

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, updating ASC Topic 220, Comprehensive Income. Under the amended ASC Topic 220 , an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance eliminates the current option to present other comprehensive income and its components in the Statement of Stockholders’ Equity. This guidance does not change the components that are recognized in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for the Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, updating ASC Topic 220, Comprehensive Income. This guidance defers changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. The guidance in ASU 2011-05 and ASU 2011-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and is to be applied retrospectively. Adoption of this guidance in the first quarter of 2012 did not have an impact on the Company’s consolidated financial statements or on future operating results.

 

8
 

 

PROTEA BIOSCIENCES GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE)

 

Notes to Consolidated Financial Statements (unaudited)

 

3.Bank Line of Credit

 

In August of 2009, the Company took out 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 March 31, 2012 and December 31, 2011, 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.

 

4.Loan Payable

 

In December of 2011, the Company borrowed $750,000 in an aggregate principal amount from two board members. The notes accrue simple interest at a rate of 10% per annum and are due and payable 180 days from the date of issue. At the option of the holders, the notes, including the principal and accrued interest, are convertible into common stock of the Company at $2.00 per share. In March of 2012, one board member loaned the Company an additional $100,000, which closed on a note in April. (Refer to footnote 14.)

 

5.Long-term Debt

 

1)Note Payable to the West Virginia Development Office

In March 2007, the Company obtained an 8-year loan in the amount of $685,000 from the West Virginia Development Office. 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 is due and payable. The note is secured by equipment.

 

2)Note Payable to Finance Company

In July 2007, the Company obtained a 5-year loan in the amount of $28,726 from a finance company. The note bears interest at 6.99% with monthly principal and interest payments of $569 through July 2012. The note is secured by a vehicle.

 

3)Note Payable to the West Virginia Economic Development Authority

In August 2009, the Company obtained a 10-year loan in the amount of $242,631 from the West Virginia Economic Development Authority. 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 is due and payable. The note is secured by equipment costing $569,812.

 

4)Note Payable to the West Virginia Infrastructure and Jobs Development Council

In August 2009, the Company obtained a 10-year loan in the amount of $242,630 from the West Virginia Infrastructure and Jobs Development Council. 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 is due and payable. The note is secured by equipment costing $569,812.

 

9
 

 

PROTEA BIOSCIENCES GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE)

 

Notes to Consolidated Financial Statements (unaudited)

 

5.Long-term Debt (continued)

 

5)Note Payable to the West Virginia Economic Development Authority

In October 2010, the Company obtained a 10-year note in the amount of $900,000 from the West Virginia Economic Development Authority. 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 is due and payable. The note is secured by equipment costing $997,248.

 

6)Note Payable to the West Virginia Infrastructure and Jobs Development Council

In December 2010, the Company obtained a 10-year note in the amount of $900,000 from the West Virginia Infrastructure & Jobs Development Council. 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 is due and payable. The note is secured by equipment costing $1,098,249.

 

7)Convertible Promissory Note Payable to the West Virginia Jobs Investment Trust Board

In March 2012, the Company obtained an 18-month note in the amount of $290,000 from the West Virginia Job Investment Trust Board. 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 includes a stock warrant for 72,500 shares (see Note 9, Stock Warrants).

 

8)Capital Leases

In March 2010, the Company acquired a 3D printer from Stratasys under a 36-month capital lease at an imputed interest rate of 2.9%. The monthly payments, including principal and interest, continue through March 2013. The note is secured by equipment costing $122,440. In May 2011, the Company acquired a new VOIP phone system under a 36-month capital lease with Cisco at an imputed interest rate of 7.2%. The monthly payments, including principal and interest, continue through April 2014. The note is secured by the equipment costing $90,120. In May of 2011, the Company acquired a new LTQ Velos Mass Spec under a 36-month capital lease with Thermo Fisher at an imputed interest rate of 8.0%. The monthly payments, including principal and interest, continue through May 2014. The note is secured by the equipment costing $275,000.

 

10
 

 

PROTEA BIOSCIENCES GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE)

 

Notes to Consolidated Financial Statements (unaudited)

 

5.Long-term Debt (continued)

 

   March 2012   Dec. 2011 
1)    Note Payable to the WV Development Office  $297,054   $312,343 
2)    Note Payable to Finance Company   2,242    3,343 
3)    Note Payable to the WVEDA   188,906    192,559 
4)    Note Payable to the WVIJDC   187,262    190,974 
5)    Note Payable to WVEDA   789,604    802,916 
6)    Note Payable to WVIJDC   801,425    814,652 
7)    Note Payable to WVJITB   258,220    - 
8)    Capital leases   249,351    271,050 
Total   2,774,064    2,587,837 
Less: current portion   (439,543)   (398,383)
           
Long-term portion  $2,334,521   $2,189,454 

 

Future required minimum principal repayments over the next five years are as follows:

 

Year ending
December 31:
    Future required minimum
principal repayments
 
2012 (Apr to Dec)     $ 359,334  
2013     $ 662,563  
2014     $ 358,240  
2015     $ 260,542  
2016     $ 234,776  
2017 & Thereafter     $ 898,609  

 

6.Common Stock

 

The Company is authorized to issue a total of 110,000,000 shares of stock, of which 100,000,000 shares are designated Common Stock and 10,000,000 shares designated Preferred Stock.

 

Common Stock – par value of $.0001 per share with one vote in respect of each share held. Holders of Common Stock do not have cumulative voting rights. The members of the Board are elected by the affirmative vote of the holders of a majority of the Company’s outstanding Common Stock.

 

11
 

 

PROTEA BIOSCIENCES GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE)

 

Notes to Consolidated Financial Statements (unaudited)

 

6.Common Stock (continued)

 

Common Stock issues are as follows:

 

  

 

 

# Shares

Issued

  

 

 

Par

Value

  

 

 

Price

Per

Share

  

 

 

Gross

Proceeds

  

 

 

Value of

Services

Obtained

  

 

 

Par

Value

  

Add’l Paid in

Capital (not incl.

Def  fin, warrants

portion of CDs &

Stock  Options)

 
Dec. 2011 Balance   27,061,498   $.0001    Various   $31,226,645   $529,138   $2,706   $31,753,077 
Jan-March 2012 (stock options exercised)   25,000    .0001    1.50    37,500    -    3    37,497 
Jan-March 2012 (includes stock warrants)   1,095,000    .0001    2.00    2,190,000    -    110    2,189,890 
                                    
Total   28,181,498             $33,454,145   $529,138   $2,819   $33,980,464 

 

7.Preferred Stock

 

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 have been issued.

 

8.Stock Options and Stock-based Compensation

 

The Company has an Equity Incentive Plan that governs equity awards to employees, directors and consultants of the company. The Plan has been amended several times since adoption, and under the Plan, 4,150,000 shares of Common Stock are reserved for issuance.

 

The types of awards permitted under the Plan include qualified incentive stock options (ISO) and non-qualified stock options, and restricted stock. Each option shall be exercisable at such times and subject to such terms and conditions as the Board may specify. Stock options generally vest over four years and expire no later than ten years from the date of grant.

 

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, 2011   4,046,750   $1.40    4.21 
Granted   30,750   $2.00      
Exercised   25,000   $1.50      
Cancelled or expired   42,500   $1.50      
Outstanding at March 31, 2012   4,010,000   $1.41      
Exercisable at December 31, 2011   2,518,854   $1.33    3.79 
Exercisable at March 31, 2012   2,687,980   $1.35    3.56 

 

12
 

 

PROTEA BIOSCIENCES GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE)

 

Notes to Consolidated Financial Statements (unaudited)

 

8.Stock Options and Stock-based Compensation (continued)

 

The following table summarizes information about stock options at March 31, 2012:

 

    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    80,000              80,000      
$0.80    320,000              320,000      
$1.25    510,000              510,000      
$1.50    3,038,500              1,716,480      
$2.00    61,500              61,500      
$0.50 - $2.00    4,010,000    3.93   $1.41    2,687,980   $1.35 

 

At March 31, 2012, the total aggregate intrinsic value for both options currently exercisable and options outstanding was $2,414,500. These values represent the total pre-tax intrinsic value based on the estimated fair value of the Company’s stock price of $2.00 as of March 31, 2012. This intrinsic value represents the value that would have been received by the option holders had option holders exercised all of their options as of that date. Intrinsic value for stock options is defined as the difference between the current market value and the exercise price. During the three months ended March 31, 2012, 25,000 shares were exercised, whereas during the three months ended March 31, 2011, no options were exercised.

 

The following table summarizes the activity of the Company’s stock options that have not vested for the three months ended March 31, 2012:

 

     

 

 

Shares

    Weighted 
Average Grant-
date Fair Value
 
Nonvested at December 31, 2011       1,527,896     $ 0.437  
Granted       -     $ -  
Forfeited       42,500     $ 0.646  
Vested       163,376     $ 0.464  
Nonvested at March 31, 2012       1,322,020     $ 0.423  

 

The fair value of non-vested options to be recognized in future periods is $558,943, which is expected to be recognized over a weighted average period of 2 years. The total fair value of options vested during the three months ended March 31, 2011 was $90,055 and vested during the year ended December 31, 2011 was $351,990.

 

Stock-based compensation expense is as follows:

 

   March 2012   Dec. 2011 
Selling, general, and administrative expense  $70,794   $282,836 
Research and development expense   19,261    69,154 
Total stock-based compensation expense  $90,055   $351,990 

 

13
 

 

PROTEA BIOSCIENCES GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE)

 

Notes to Consolidated Financial Statements (unaudited)

 

8.Stock Options and Stock-based Compensation (continued)

 

The weighted average grant-date fair value of options granted during the three-month period ended March 31, 2012 was $0.573 and for the year ended December 31, 2011 was $0.426 per option. The fair value of the option grants was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

   Period ended, 
   March 2012   Dec. 2011 
Risk-free interest rate   1.56%   1.35%
Volatility factor   24.01%   23.00%
Weighted average expected life (in years)   7    7 
Dividend rate   0.0%   0.0%

 

The Company based its estimate of expected stock price volatility on monthly price observations of the AMEX Biotech Index. Given the Company’s limited history with stock options, the Company’s expected term is based on average of the contractual term and the vesting period of the options (the SAB 110 “Simplified” method).

 

In January 2012, the Company issued 499,482 shares of common stock to the placement agent in connection with a private placement offering of units consisting of common and warrants. The shares are subject to forfeiture under certain conditions. As the shares represent an incremental direct cost incurred to issue equity, and the ultimate disposition of the shares is uncertain as of the date of this filing, the financial statements do not include any recognition of these shares as of March 31, 2012.

 

9.Stock Warrants

 

In 2008, the Company issued stock warrants related to common stock issuances. The warrant is exercisable for five years from date of issuance. The warrant allows the holder the ability to purchase an additional share of common stock for every share purchased in connection with the warrant. The exercise price is $2.00 per share.

 

In November 2009, the Company issued stock warrants to four board members in exchange for personal guarantees on a bank line of credit (See Note 3, Bank Line of Credit). The warrant is exercisable for five years from date of issuance. The warrant allows the four holders the ability to purchase an additional 375,000 shares of common stock. The exercise price is $2.00 per share.

 

In 2009, the Company issued stock warrants related to common stock issuances. The warrant is exercisable for five years from date of issuance. The warrant allows the holder the ability to purchase an additional share of common stock for every two shares purchased in connection with the warrant. The exercise price is $2.00 per share.

 

In 2010, the Company issued stock warrants related to common stock issuances. The warrant is exercisable for five years from date of issuance. The warrant allows the holder the ability to purchase an additional share of common stock for every two shares purchased in connection with the warrant. The exercise price is $2.00 per share.

 

14
 

 

PROTEA BIOSCIENCES GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE)

 

Notes to Consolidated Financial Statements (unaudited)

  

9.Stock Warrants (continued)

  

In 2012, the Company issued stock warrants in connection with the issuance of a Convertible Debenture to the West Virginia Jobs Investment Trust Board (see Note 5, Long-term Debt). The warrant is exercisable for five years from date of issuance. The warrant allows the holder the ability to purchase 72,500 shares of common stock. The exercise price is $2.25 per share.

 

As of March 31, 2012, warrants to purchase 12,332,305 shares of common stock were outstanding and exercisable.

 

10.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 adopted ASC 740-10 effective January 1, 2007. The adoption of ASC 740-10 did not require an adjustment to the opening balance of retained earnings as of January 1, 2007. There were no changes to unrecognized tax benefits during 2011 or the first three months of 2012. The tax years 2007 through 2011 remain open to review by various taxing authorities.

 

Deferred income taxes are provided for the temporary differences between the carrying values of the Company’s assets and liabilities for financial reporting purposes and their corresponding income tax basis. These temporary differences are primarily attributable to a net operating loss, which, due to income tax laws and regulations, become taxable or deductible in different years than their corresponding treatment for financial reporting purposes. The temporary differences give rise to either a deferred tax asset or liability in the financial statements, which is computed by applying statutory tax rates to taxable or deductible temporary differences based upon the classification (i.e., current or noncurrent) of the asset or liability in the financial statements which relate to the particular temporary difference. Deferred taxes related to differences that are not attributable to a specific asset or liability are classified in accordance with the future period in which they are expected to reverse and be recognized for income tax purposes.

 

During the development stage of the Company when future benefit of the deferred tax asset is uncertain, the Company provides for a full valuation allowance against the deferred tax asset. Net operating loss carry forwards start to expire beginning 2021 for both federal and state purposes. The net operating tax loss carry forward totals approximately $35,100,000 and $32,700,000 at March 31, 2012 and December 31, 2011, respectively.

 

15
 

 

PROTEA BIOSCIENCES GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE)

 

Notes to Consolidated Financial Statements (unaudited)

 

11.Lease Commitments

 

The Company leases its USA facilities under operating leases beginning a) February 2005 and extended through December 2012 and b) April 2012 through March 2017. Additionally, the Company leases its Europe facility on a two-year lease beginning January 2008 and extended through January 2012, followed by a three-year lease beginning January 2012 through January 2015. The Company also has three equipment operating leases with terms of 3 to 5 years.

 

Future required minimum principal repayments over the next five years are as follows:

 

Year ending
December 31:
    Future required minimum
lease payments
 
2012 (Apr to Dec)     $ 352,125  
2013     $ 267,816  
2014     $ 261,434  
2015     $ 173,569  
2016     $ 167,628  
2017     $ 41,907  

 

Rent expense totals $75,400 for the three months ended March 2012 and $54,048 for the three months ended March 2011.

 

12.Retirement Plan

 

The Company provides a 401(k) Profit Sharing Plan for elective deferrals whereby participants can defer up to 100% of their wages not to exceed a maximum dollar amount determined by the Federal Government each year. The Company, at its discretion, can make matching contributions to the plan. The Company may also make qualified non-elective contributions to participants who are not highly compensated employees. All employees meeting age and hours of service requirements are eligible to participate in the Plan beginning their first full month of service. Participants become vested in employer contributions on a graduated scale with full vesting after five years. No company contributions have yet been made.

 

16
 

 

PROTEA BIOSCIENCES GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE)

 

Notes to Consolidated Financial Statements (unaudited)

 

13.Commitments and Contingencies

 

Legal Proceedings

 

The Company currently is not a party to any material legal proceeding and has no knowledge of any material legal proceeding contemplated by any governmental authority or third party. The Company may be subject to a number of claims and legal proceedings which, in the opinion of our management, are incidental to normal business operations. In managements’ opinion, although final settlement of these claims and suits may impact the financial statements in a particular period, they will not, in the aggregate, have a material adverse effect on the Company’s financial position, cash flows or results of operations.

 

Indemnity of Directors and Officers

 

As permitted under Delaware law and required by corporate by-laws, the Company indemnifies and holds harmless its directors and officers for certain events or occurrences while the director or officer is or was serving in such capacity. The maximum potential amount of future payments that could be required under these indemnification obligations is unlimited; however, the Company maintains a Directors and Officers liability insurance policy that enables it to recover a portion of any future amounts paid with a limit of liability of $5,000,000.  The Company may incur an additional liability if indemnity for more than the limit of liability occurred, and such liability may have a material adverse effect on our financial position, cash flows and results of operations. As there were no known or pending claims, the Company has not accrued a liability for such claims as of March 31, 2012.

 

Warranty

 

In the ordinary course of business, the Company warrants to customers that its products will conform to published or agreed specifications. Generally, the applicable product warranty period is 90 days from the date of delivery of the goods.  The Company provides for estimated warranty costs at the time of the product sale. As of March 31, 2012, management believes that no warranty allowance is necessary due to a limited sales history and that no goods have historically been returned.

 

Stock Options

 

The Company has agreements with one board member and an equity financing consultant for payment of services by stock options. The board member is to receive a stock option for 4,000 shares per month (awarded annually) with an exercise price equal to the current market price. The equity financing consultant currently receives $12,500 in value of shares per month with an exercise price equal to the current market price. (The equity financing consultant also receives $5,000 in cash per month and $2,500 in stock grants per month related to this agreement.) The board member agreement is cancellable with 90 days notice, and the agreement with the equity financing consultant terminated on April 30, 2012.

 

17
 

 

PROTEA BIOSCIENCES GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE)

 

Notes to Consolidated Financial Statements (unaudited)

 

13.Commitments and Contingencies (continued)

 

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 JOHNS HOPKINS UNIVERSITY (JHU)

In June 2009, the Company entered into an Exclusive License Agreement with Johns Hopkins University for technology developed in the laboratory of Jennifer Van Eyk, Ph.D., Professor of Medicine, Division of Cardiology, Biological Chemistry and Biomedical Engineering. The technology field is albumin-bound protein complexes and their use in the diagnosis of cardiovascular disease. 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 JHU 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.

 

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.

 

18
 

 

PROTEA BIOSCIENCES GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE)

 

Notes to Consolidated Financial Statements (unaudited)

 

13.Commitments and Contingencies (continued)

 

AGREEMENT WITH VIRGINIA TECH

In 2010, the Company entered into an agreement with Virginia Tech (VT) for the exclusive option to license technology in development in the laboratory of Rafael Davalos, PhD, which is intended to enable the separation of specific cell populations, such as cancer cells, in blood and other fluids. It also has a co-exclusive license to the IRAK-1 compound as a regulator of diseases and disorders in the lab of Liwu Li, PhD. Per the licensing agreements, the Company may be required to pay milestone payments of $12,500 during 2012.

 

Joint Pharmaceutical Development Agreement

 

AGREEMENT WITH LABORATOIRE MAYOLY SPINDLER

In May 2009, the Company, and its wholly-owned subsidiary, Proteabio Europe SAS, entered into a Joint Research and Development Agreement with Laboratories Mayoly Spindler SAS (Mayoly), a European Pharmaceutical company with headquarters in France, for the joint development of a recombinant lipase biopharmaceutical. Under terms of the agreement, Protea receives the exclusive marketing rights for the therapeutic in the territory of North America; will be responsible for paying 40% of the development expenses (with Mayoly funding the remaining 60%); will pay royalties on net sales of the biopharmaceutical, and a milestone payment of 1 million Euros at the time the Company obtains the first FDA approval for the recombinant Lipase biotherapeutic. The Company also receives a sublicense to certain patents owned by Mayoly and licensed from the government of France. As of March 31, 2012 and December 31, 2011, based on estimated expenditures by both companies and the anticipated sharing of expenditures, the Company estimates that it owed approximately $984,000 and $974,000 to Mayoly, which is reflected in Trade Accounts Payable on the Consolidated Balance Sheet.

 

Engineering and Design Services

 

The Company has about $971,000 in outstanding commitments with MPR Associates, Inc. for engineering and design services related to their LAESI (Laser Ablation Electrospray Ionization) technology. These amounts relate to ongoing software development, completion of development and design, retrofit of beta units to production standards and production of three additional instruments. At March 31, 2012, the Company recorded approximately $278,000 in accrued expenses owed to MPR.

 

14.Evaluation of Subsequent Events

 

Common Stock.

 

Subsequent to the balance sheet date, the Company sold 152,500 shares of Common Stock at a price of $2.00 per share (in units of $100,000). The stock sales also included a stock warrant. The warrant is exercisable for five years from date of issuance. The warrant allows the holder the ability to purchase an additional share of common stock for every two shares purchased in connection with the warrant. The exercise price is $2.25 per share.

 

19
 

 

PROTEA BIOSCIENCES GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE)

 

Notes to Consolidated Financial Statements (unaudited)

 

14.Evaluation of Subsequent Events (continued)

 

Warrants.

 

Subsequent to the balance sheet date, holders of warrants exercised their rights to purchase 20,625 shares of Common Stock. The exercise price was $2.00 per share.

 

Related Party Notes.

 

On April 16, 2012, the Company issued convertible promissory notes in an aggregate principal amount equal to $640,000 to Stanley Hostler, Scott Segal and Leonard Harris, each a director of the Company, Summit Resources, Inc., an affiliate of Steve Antoline, a director of the Company, Nancy Turner, the spouse of Stephen Turner, Chief Executive Officer and a director of the Company and Virginia Child, the wife of Stanley Hostler. The Notes accrue simple interest at a rate of 10% per annum and are due and payable on the earlier to occur of (i) the date that is 90 days from the Issue Date, or (ii) when declared due and payable by the holder upon the occurrence of an event of default.

 

At the option of the holder, each $2.00 of outstanding Principal Amount and accrued unpaid interest is convertible into one share of common stock of the Company at any time after the Issue Date.

 

West Virginia Jobs Investment Trust Board

 

On April 18, 2012, the Company issued a convertible debenture for an aggregate principal amount of $400,000 to the West Virginia Jobs Investment Trust Board (the “WVJITB”). The Debenture accrues interest at a rate of 10% per annum. The entire Debenture Principal Amount is due on July 17, 2012 and all accrued and unpaid interest is due and payable in cash monthly, beginning on May 17, 2012 through and including the Maturity Date. Upon the issuance of the Debenture, the Company also issued a warrant to the WVJITB to purchase 88,889 shares of common stock of the Company at an exercise price of $2.25 per share (the “Warrant”).

 

20
 

 

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.

 

Overview

 

We were originally incorporated in the State of Delaware on May 24, 2005 under the name "SRKP 5, Inc." as a “blank check” shell company to investigate and acquire a target company or business seeking the perceived advantages of being a publicly held corporation. On September 2, 2011, we completed a merger in accordance with the terms and conditions of an Agreement and Plan of Merger by and among the Company, Protea Biosciences, Inc., a Delaware corporation ("PBI") and SRKP 5 Acquisition Corp., a Delaware corporation and our wholly-owned subsidiary ("SRKP 5"), pursuant to which SRKP 5 merged with and into PBI (the "Merger"). As a result of the Merger, we (i) became the 100% parent of PBI, (ii) assumed the operations of PBI and (iii) changed our name to "Protea Biosciences Group, Inc."

 

Protea operates in the field of bioanalytics. Bioanalytics is the identification and characterization of proteins and other biomolecules, which are the products of all living cells and life forms. The Company is applying its technology to the development of a new generation of products and services that enable comprehensive, real-time analysis of living cells, thereby providing data that helps to define normal and disease processes. We believe this will, in turn, support the next generation of medical research and pharmaceutical development. Protea’s technologies seek to enable the discovery and analysis of the proteins and other biomolecules that regulate the biological functions of the human body and all other forms of life. This is a critical area of research, because most biological functions are carried out by proteins, and the discovery of proteins that are associated with specific diseases can lead to the development of new pharmaceuticals, designed to block the proteins’ aberrant biological activities.

 

Our Business Strategy and Products

 

The Company applies its core technologies and expertise to the development of products, instruments and services that seek to provide improved capability to the discovery of new proteins and other biomolecules. The Company also seeks to improve the analysis of known biomolecules. To accomplish its commercial objectives, the Company’s operations are organized into two units as follows:

 

Bioanalytical Product Systems - This unit is responsible for research and development, product manufacturing and quality assurance, including the LAESI technology platform described below.

 

21
 

 

Bioanalytical Services - This unit is organized as a bioanalytics services business, and offers mass spectrometry-based bioanalytical services for the identification of proteins, metabolites, and other biomolecules, to pharmaceutical, industrial and academic research laboratories.

 

Bioanalytical Product Systems

 

The Company’s products are purchased and used primarily by pharmaceutical and academic research laboratories. Our product groups are divided as follows:

 

Protein Sample Preparation

 

This product group encompasses consumable products for the recovery and preparation of protein samples for analysis by mass spectrometry. The product group includes the following:

 

· A family of proprietary reagents, known as surfactants, that can rapidly remove proteins out of biological samples and into liquid phase, preparing them for analysis by mass spectrometry. Our surfactants do not interfere with mass spectrometry analysis, as is the case with currently-available surfactants. Marketed as Progenta™ surfactants, they allow recovery of proteins from cells and other sample types, eliminating sample handling and purification steps that lead to reduced protein yield and poorer quality results by mass spectrometry. Our surfactants are available in a variety of forms, to accommodate most classes of proteins.

 

· Single use products for capturing albumin protein in serum. More than 80% of all protein circulating in our bloodstream is human serum albumin (HSA). Our products allow the capture of intact HSA with >99% recovery, in a simple 20 minute disposable spin tip. The analysis of human serum albumin has been found to be a new source of new biomarkers for disease diagnosis (see discussion below). These products have been tested at Johns Hopkins University School of Medicine, and found to be effective for the recovery of serum albumin.

 

· Single use products, including pipette tips and 96 well plates, which employ a novel chemistry technique, known as monolith chemistry, which enables recovery of proteins from solutions, as well as removal of salts, thereby improving the quality of analysis of the proteins by mass spectrometry. Monolith chemistry improves the quantity of protein recovered, as well as the reproducibility of its subsequent analysis.

 

Gel Protein Separation and Recovery

 

The Company developed and markets the GPR-800, a benchtop instrument system that employs proprietary, single-use plastic microfluidic chips and reagent kits to simultaneously recover eight protein samples in 20 minutes, compared to 3-6 hours per sample required by current methods. The GPR-800 improves the quality, reproducibility and throughput of intact protein analysis, while minimizing the possibility of sample loss or contamination.

 

Mass Spectrometry Standards

 

The Company has developed and markets an extensive line of protein mass spectrometry standards, which provide defined and characterized proteins representing different protein structures and classes. As the field of proteomics has progressed, there is increased interest in knowing the precise status of a protein, particularly in the identification of “post translational modifications” (chemical modifications of the protein that occurs after its production via RNA translation), such as phosphorylation, a change that relates to the protein’s biological status. The Company’s mass spectrometry standards are intended to improve the reproducibility of a researcher’s mass spectrometry results.

 

22
 

 

LAESI Technology

 

In 2011, we 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 tissue, cells and biofluids, such as serum and urine, without any 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. LAESI’s rapid time to results enables analysis of cell samples in real time. As an example, a researcher testing a new drug’s effects on living cells can analyze changes in the cells’ metabolism in real time and across a specific time course, thereby almost immediately obtaining precise data as to the effects of the new drug. The Company believes that LAESI has the potential to revolutionize bioanalytics in pharmaceutical research, as well as many other fields, including agriculture, pathology, biomarker discovery, biodefense and forensics.

 

We presently have three fully functional LAESI production units in-house with software packages developed by the Company (LAESI desktop software and ProteaPlot™). Instrument productions have started and the first LAESI unit was shipped to Oak Ridge National Laboratory in February 2012.

 

Bioanalytical Services

 

Protea offers bioanalytical services for the analysis and identification of both small molecules (e.g. lipids and metabolites) and large molecules (e.g. proteins). The services unit is operated under GLP (Good Laboratory Practices, which are necessary for regulatory submissions and to meet the internal research and development standards of pharmaceutical research clients). The Company believes that it is the first laboratory to offer quantitative protein mass spectrometry services in a GLP regulatory environment.

 

The Company offers advanced techniques for the analysis of therapeutic proteins (known as biopharmaceuticals) by mass spectrometry, in particular the analysis of modifications to therapeutic proteins that occur in the course of their production by living cells. These modifications include phosphorylation (can activate or deactivate a protein), glycosylation (needed for proper protein folding), and many others. Knowledge of these subtleties of a protein’s structure improves the understanding of the relationship between a protein’s structure and its biological activity. This improved insight can lead to improvements in production methods for therapeutic proteins and improved safety and efficacy for the therapeutic protein.

 

Antibody-based detection techniques have traditionally been the means to identify proteins. However, antibody methods present challenges of non-specificity, poor reproducibility and in particular the inability to identify subtle changes in protein structure such as phosphorylation status. Protein analysis by mass spectrometry offers improved specificity, sensitivity, and reproducibility.

 

The Company plans to commence offering advanced bioanalytical services employing its proprietary LAESI technology platform in the near future.

 

The Company believes that its advanced protein mass spectrometric methods are an important strategic asset, and will be a key component of its future corporate growth.

 

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Since inception, we have relied primarily on sales of our securities to fund our operations. We have never been profitable and we cannot assure you that we will be profitable in the future. From inception through March 31, 2012, our loss from operations totaled $38,844,755 and our net loss for the three month period ending March 31, 2012 totaled $2,848,190. We expect to continue to require substantial funds to advance the research and development of our core technologies, to continue to develop new products and services based on our proprietary protein recovery and identification technologies, and to continue clinical trials of our recombinant pharmaceutical compound. We plan to meet our operating cash flow requirements by raising additional funds from the sale of our securities and, whenever possible, by entering into additional development partnerships, like our partnership with Laboratoires Mayoly Spindler SAS, to assist us with our drug and technology development activities. We have no committed sources of funding and we cannot assure you that additional funding will be available to us.

 

Results of Operations

 

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

 

We earned revenue of $179,494 and $147,386 for the three months period ended March 31, 2012 and March 31, 2011, respectively, an increase of $32,108, or approximately 22%. The increase reflects additional revenue from the Company’s bioanalytical services group.

 

Selling, general and administrative expenses totaled $1,325,415 for the three months ended March 31, 2012 compared to $1,119,398 for the three months ended March 31, 2011, an increase of $206,017 or approximately 18%. The increase in selling, general and administrative expenses related largely to increased sales and marketing effort, and an increase in legal, accounting and consulting fees.

 

Research and development expense totaled $1,702,269 for the three months ended March 31, 2012, compared to research and development expense of $1,487,278 for the three months ended March 31, 2011, an increase of $214,991 or approximately 14%. The increase in research and development expenses was due primarily to costs associated with the development of the LAESI technology.

 

As a result of the increase in both our selling, general and administrative expenses and our research and development expense, our loss from operations for the three months ended March 31, 2012 was $2,848,190, compared to a loss from operations of $2,459,290 for the three months ended March 31, 2011.

 

During the three months ended March 31, 2012, we had other expense of $83,064 as compared to other expense for the three months ended March 31, 2011 of $114,195. The decrease was due largely to interest expense related to convertible debentures, which were all converted into equity in September of 2011.

 

After foreign currency translation adjustments of ($34,346) and ($19,080), respectively, we had a total comprehensive loss of $2,965,600, or ($0.11) per share, for the three months ended March 31, 2012 as compared to a total comprehensive loss of $2,592,565, or ($0.14) per share, for the three months ended March 31, 2011.

 

Liquidity and Capital Resources

 

We have experienced negative cash flows from operations since inception. To date, our operations since inception have been funded primarily through proceeds received from the sale of debt and equity securities in private placement offerings. Prior to the Merger, we had $8,455,000 in principal amount of 6% Series A Convertible Debentures outstanding. Immediately prior to the closing of the Merger, the debentures were automatically converted into shares of common stock of the Company pursuant to their terms. We have a credit facility of $3 million with Centra Bank, Inc. with a balance of $3 million outstanding as of March 31, 2012. Interest is payable monthly and the loan is due on demand. In 2009 and 2010, we also borrowed a total of $2,285,261 for the purchase of equipment from the West Virginia Economic Development Authority and the West Virginia Water Development Authority. These loans have 10 year terms and interest rates ranging from 3.25% to 4%. In the first quarter 2012, we borrowed $290,000 from the West Virginia Jobs Investment Trust for the expansion of our bioanalytical services group into the White Birch facility in Morgantown, West Virginia.

 

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We will continue to require substantial funds to advance the research and development of our core technologies, to continue to develop new products and services based upon our proprietary protein recovery and identification technologies and to continue clinical trials of our recombinant pharmaceutical compound. We intend to continue to meet our operating cash flow requirements by raising additional funds from the sale of equity or debt securities and possibly, developing corporate development partnerships to advance our drug and technology development activities for sharing the costs of development and commercialization.  We may also consider the sale of certain assets, or entering into a transaction such as a merger with a business complimentary to ours. While we have been successful in raising funds to fund our operations since inception and we believe that we will be successful in obtaining the necessary financing to fund our operations going forward, we do not have any committed sources of funding and there are no assurances that we will be able to secure additional funding.

 

As of March 31, 2012, we had total current assets equal to $1,270,907, comprised of $201,154 in cash and cash equivalents, $50,010 in restricted cash, $534,287 in trade accounts receivable and other receivables, $350,896 in inventory and $134,560 in prepaid expenses. This compares with total current assets at December 31, 2011 equal to $1,431,729 comprised of $505,277 in cash and cash equivalents, $49,979 in restricted cash, $511,712 in trade accounts receivable and other receivables, $223,336 in inventory and $141,425 in prepaid expenses.  The Company's total current liabilities as of March 31, 2012 were equal to $7,498,835, comprised of $439,543 in current maturities on long term debt, $2,484,164 in trade accounts payable, $3,000,000 in connection with the Centra Bank, Inc. line of credit, $850,000 in loans payable to shareholders and $725,128 in other payables and accrued expenses. The Company's total current liabilities as of December 31, 2011 were equal to $7,082,908, comprised of $398,383 in current maturities on long term debt, $2,623,601 in trade accounts payable, $3,000,000 in connection with the Centra Bank, Inc. line of credit, $750,000 in loans payable to shareholders and $310,924 in other payables and accrued expenses.  

 

Operating Activities

 

Net cash used in operating activities for the three months ended March 31, 2012 increased $840,606, or 51% from $1,634,443 for the three months ended March 31, 2011 to $2,475,049. Net cash used in operating activities during the three month period ended March 31, 2012 was primarily the result of a net loss of $2,931,254. Net loss was adjusted for non-cash items such as depreciation and amortization of $231,480 and non-cash compensation of $90,055. We also had an increase in trade accounts receivable of $13,042 and a net decrease in prepaids and other receivables of $503 and an increase in inventory of $127,560 and a decrease in trade accounts payable of $139,437 and an increase in other payables and accrued expenses of $414,206.

 

Our working capital deficit at March 31, 2012 was $6,227,928 as compared to a working capital deficit of $5,651,179 at December 31, 2011.  The increase in working capital deficit was $576,749 from December 31, 2011 to March 31, 2012.

 

Investing Activities

 

Net cash used in investing activities during the three months ended March 31, 2012 was $162,096, which was primarily used for deposits on equipment or equipment purchases. We expect to continue to purchase property and equipment in the normal course of our business. The amount and timing of these purchases and the related cash outflows in future periods is difficult to predict and is dependent on a number of factors including, but not limited to, any increase in the number of our employees and changes related to our development programs. Net cash used in investing activities during the three months ended March 31, 2011 was $168,820 and was also used for deposits on equipment or equipment purchases.

 

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Financing Activities

 

Cash provided by financing activities during the three months ended March 31, 2012 was $2,367,368, which was the result of the net proceeds of $2,049,363 from the sale of our common stock and proceeds of $390,000 from the issuance of long term debt. This was offset by $71,995 used in the repayment of long term debt. Cash provided by financing activities during the three months ended March 31, 2011 was $1,574,636, which was the result of the net proceeds of $30,000 from the sale of our common stock and proceeds of $1,631,873 from the issuance of long term debt. This was offset by $87,237 used in the repayment of long term debt.

 

Other than as discussed above, we know of no trends, events or uncertainties that are reasonably likely to impact our future liquidity.

 

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. The following represents a summary of our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.

 

Revenue Recognition

 

We derive our revenue from the sale of products and services. Revenue is recognized when all four of the following criteria are met: (1) we have persuasive evidence that an arrangement exists, (2) the price is fixed and determinable, (3) title has passed, and (4) collection is reasonably assured. Product revenue is recognized upon shipment of the product, which is typically when title passes. Service revenue is recognized as the service is performed, generally through short-term contracts. However, where applicable, contract service revenue is earned and recognized according to the provisions of each agreement. As of March 31, 2012 and 2011, we had no deferred revenue that related to future periods.

 

Shipping and handling costs are included in cost of sales. Shipping and handling costs charged to customers are recorded as revenue in the period the related product sales revenue is recognized.

 

Comprehensive Loss

 

The financial statements of our international subsidiary are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities, the historical exchange rate for shareholders’ equity and an average exchange rate for each period of revenues, expenses, and gains and losses. The functional currency of our non-U.S. subsidiary is the local currency. Adjustments resulting from the translation of financial statements are reflected in accumulated other comprehensive income. Transactional gains and losses are recorded within operating results.

 

Research and Development

 

We follow the policy of charging the costs of research and development to expense as incurred. Research and development expense is $1,702,269 and $1,487,278 for the three months period ended March 31, 2012 and March 31, 2011.

 

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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 16,116,000 and 15,133,000 for the three months period ended March 31, 2012 and year ended December 31, 2011, respectively.

 

Stock Based Compensation

 

We follow the provisions of FASB ASC 718, “Stock Based Compensation”. Stock-based compensation expense is estimated as of the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting period. Fair value of stock options issued by the Company is estimated using the Black-Scholes option-pricing model. The associated compensation expense is recognized on a straight-line basis over the requisite service period, net of estimated forfeitures.

 

Estimating the fair value for stock options for each grant requires judgment, including estimating stock-price volatility, expected term, expected dividends and risk-free interest rates. The expected volatility rates are estimated based on the volatility of similar entities whose share information is publicly available. The expected term represents the average time that options are expected to be outstanding and is estimated based on the average of the contractual term and the vesting period of the options as provided in SEC Staff Accounting Bulletin 110 as the “simplified” method. The risk-free interest rate for periods approximating the expected term of the options is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividends are zero as we have no plans to issue dividends.

 

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 March 31, 2012, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and our principal financial officer of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our principal executive officer and our principal financial officer have concluded that as of March 31, 2012, our disclosure controls and procedures were effective at the reasonable assurance level.

 

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Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal controls over financial reporting during the quarter ended March 31, 2012 that have materially affected or are reasonably likely to materially affect our internal controls.

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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 and no such proceedings are known to the Company to be threatened or contemplated against it.

 

Item 1A. Risk Factors.

 

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 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

As of March 1, 2012, in connection with the terms of a private placement offering (the “Offering”) of up to 100 units (the “Units”), each Unit consisting of 50,000 shares of common stock and warrants to purchase 25,000 shares of common stock (the “Warrants”), the Company issued an aggregate of 1,370,000 shares of common stock and Warrants to purchase an aggregate of 685,000 shares of common stock at a per Unit purchase price equal to $100,000, for aggregate gross proceeds equal to $2,740,000. The Warrants are exercisable at an exercise price of $2.25 per share any time after the date of issuance (the “Issue Date”) until the earlier of (i) a Qualified Public Offering (as defined below), or (ii) 5:00 p.m. Eastern time on the fifth anniversary of the issue date of the Warrant. The term “Qualified Public Offering” means the closing of a firm commitment underwritten offering pursuant to an effective registration statement under the Securities Act covering the offer and sale of common stock for the account of the Company in which the net cash proceeds to the Company (after deduction of underwriting discounts, commissions and fees) are at least $15,000,000. The placement agent (the "Placement Agent") in the Offering received total cash commissions equal to $140,000, which amount represents 8% of the total gross proceeds received from investors that participated in the Offering and were introduced to the Company by the Placement Agent. In addition, the Placement Agent also received warrants to purchase an aggregate of 70,000 shares of common stock at an exercise price of $2.20 per share (the "Placement Agent Warrants"). The Placement Agent Warrants are exercisable any time after the issue date until the earlier of (i) a Qualified Public Offering or (ii) 5:00 p.m. Eastern time on the fifth anniversary of the issue date.  The securities underlying the Units and Placement Agent Warrants were issued to accredited investors in accordance with Rule 506 of Regulation D under the Securities Act of 1933, as amended. The Company did not engage in any general advertisement or general solicitation in connection with the offering of the Units.

 

On March 20, 2012, the Company issued a convertible debenture (the “Debenture”), dated as of March 15, 2012, for an aggregate principal amount of $290,000 (the “Principal Amount”) to the West Virginia Jobs Investment Trust Board (the “WVJITB”), evidencing a convertible loan in that amount from the WVJITB to finance the construction and leasehold improvements required in connection with the Company’s newly leased premises. The Debenture accrues interest at a rate of 6% per annum and is subordinated to outstanding senior indebtedness of the Company. The entire Principal Amount is due on September 14, 2013 (the “Maturity Date”) and all accrued and unpaid interest is due and payable in cash monthly, beginning on April 14, 2012 through and including the Maturity Date. At the option of the WVJITB, the Debenture is convertible into shares of common stock of the Company, at an initial conversion rate of $2.00 per share, subject to certain adjustments. In addition, the Company also issued a warrant to the WVJITB, dated as of March 15, 2012, to purchase 72,500 shares of common stock of the Company at an exercise price of $2.25 per share (the “Warrant”). The Debenture and the Warrant were issued to an accredited investor in accordance with Rule 506 of Regulation D under the Securities Act of 1933, as amended. The Company did not engage in any general advertisement or general solicitation in connection with issuance and sale of the securities.

 

On March 31, 2012, the Company issued 10,000 shares of common stock to Nathan Hostler and 20,000 shares of common stock to Melissa Hostler in connection with the exercise of a warrant and options issued to John A. Hostler at an aggregate purchase price equal to $47,500. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.

 

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Item 3.  Defaults Upon Senior Securities.

 

None.

 

Item 4.  Mine Safety Disclosure.

 

Not applicable.

 

Item 5.  Other Information.

 

None.

 

Item 6.  Exhibits.

 

(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 registrant’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 registrant’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 registrant's Form 8-K filed with the Securities and Exchange Commission on September 9, 2011).
4.1   Convertible Debenture, dated as of March 15, 2012, issued to the West Virginia Jobs Investment Trust Board (incorporated by reference to Exhibit 4.1 to the registration’s Form 8-K filed on March 26, 2012).
4.2   Warrant, dated as of March 15, 2012, issued to the West Virginia Jobs Investment Trust Board (incorporated by reference to Exhibit 4.2 to the registration’s Form 8-K filed on March 26, 2012).
4.3   Form of Warrant issued to investors in the Offering (incorporated by reference to Exhibit 4.1 to the registrant’s Form 8-K filed on March 6, 2012).
10.1   Lease Agreement, dated January 25, 2012, by and between Protea Biosciences, Inc. and White Birch Properties LLC (incorporated by reference from Exhibit 10.1 to the registrant’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2012).
31.1   Certification of the Company’s Principal Executive 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 March 31, 2012.
31.2   Certification of the Company’s Principal Financial 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 March 31, 2012.
32.1   Certification of the Company’s Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2   Certification of the Company’s Principal Financial 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

 

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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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SIGNATURES

 

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: May 14, 2012 By: /s/  Stephen Turner
    Stephen Turner
  President and Director
    Principal Executive Officer
     
  By: /s/  Edward Hughes
    Edward Hughes
  Chief Financial Officer
    Principal Financial Officer

 

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