The accompanying notes are an integral part
of these financial statements.
The accompanying notes are an integral part
of these financial statements.
The accompanying notes are an integral part
of these financial statements.
NOTES TO FINANCIAL STATEMENTS
December 31, 2016
Note 1—Company Overview
Interleukin Genetics, Inc. (“the Company”)
develops genetic tests for sale into the emerging personalized health market and performs testing services that can help individuals
improve and maintain their health through preventive or therapeutic measures. The Company’s principal operations and markets
are located in the United States.
Through 2016, the Company’s
focus was on commercializing its ILUSTRA™ Inflammation Management Program (the “ILUSTRA Program”) and its Inherent
Health
®
brand of genetic tests. The Company is continuing to support the ILUSTRA Program deployments with customers
and will advance new customer relationships that expand the evidence base of this program’s effectiveness. The Company will
continue to refine its strategy for the ILUSTRA Program based on the Company’s financial resources and its commercial success.
During late 2016 and early 2017, the Company redefined its strategy to add emphasis on a cardiovascular disease (CVD) program.
Note 2—Operating Matters
and Liquidity
The Company has experienced net operating
losses since its inception through December 31, 2016. The Company had net losses of $7.4 million and $7.9 million for the years
ended December 31, 2016 and 2015, respectively, contributing to an accumulated deficit of $136.4 million as of December 31, 2016.
In addition, the Company’s current liabilities exceed its current assets as of December 31, 2016 and the Company has primarily
relied on external financing to fund its operations.
As of March 31, 2017, the Company has cash
of approximately $791,000, and has no access to credit. The Company has accounts payable and accrued expenses of $1.1 million,
and owes $3.6 million in principal payments to Horizon. The Company estimates that $5.5 million in additional capital would be
required to maintain the Company’s operations for one year from March 31, 2017.
As further discussed
in Note 15 “Subsequent Events”, the Company issued and sold $1,000,000 in aggregate principal Subordinated Convertible
Promissory Notes, amended the Venture Loan and Security Agreement to defer principal amounts due in 2017, and implemented a work
force reduction. The Company expects that, taking into account these transactions, current financial resources will be adequate
to maintain the current and planned operations through the second quarter of 2017. The Company believes its success depends on
its ability to consummate a material collaboration related to its CVD test and to generate significant revenues for the ILUSTRA
Program through potential partners. The timing of any revenues that the Company may receive from either the CVD asset or the ILUSTRA
Program is uncertain at this time, and is contingent upon a number of factors, including the Company’s ability to consummate
arrangements with other partners for the CVD asset or to promote the ILUSTRA Program, the Company’s partners’ ability
to develop reimbursed insurance plans and to develop a viable market for such plans, and the timing of utilization of the ILUSTRA
Program pursuant to insured plans, or other possible arrangements. The Company does not expect to receive any material revenues
from either the CVD asset or the ILUSTRA Program until mid to late 2017, at the earliest, and the timing of any such revenues may
be substantially later. The Company may never receive significant revenues.
These conditions, among
others, considered in the aggregate raise substantial doubt about the Company’s ability to continue as a going concern within
one year after the date that the financial statements are issued.
The
Company’s financial statements have been prepared assuming that it will continue as a going concern which contemplates the
realization of assets and satisfaction of liabilities in the normal course of business.
The financial statements do
not include any adjustments that might result from the outcome of this uncertain realization. The amount of cash the Company
generates from operations is currently not sufficient to continue to fund operations and grow the business.
Until such time, if
ever, that the Company generates revenues sufficient to fund operations, the Company may fund its operations by issuing common
stock, debt or other securities in one or more public or private offerings, as market conditions permit, or through the incurrence
of debt from commercial lenders. Debt financing, if available, may involve agreements that include covenants limiting or restricting
the Company’s ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends.
There can be no assurance that additional funds will be available when the Company needs them on terms that are acceptable to the
Company, or at all. If adequate funds are not available to the Company on a timely basis, the Company may be required to delay,
limit, reduce or cease activities or operations or enter into licenses or other arrangements with third parties on terms that may
be unfavorable to the Company or sell, license or relinquish rights to develop or commercialize its products, technologies or intellectual
property.
However, no assurance can be given at this time as to whether the Company will be able to
achieve these objectives.
The ability of the
Company to realize the carrying value of its fixed assets and intangible assets is especially dependent on management’s ability
to successfully execute on its plan. The Company needs to generate additional funds in order to meet its financial obligations.
If it is unsuccessful in doing so, the Company may not be able to realize the carrying value of its fixed assets and intangible
assets.
The Company continues
to take steps to reduce genetic test processing costs. Cost savings are primarily achieved through test process improvements. Management
believes that the current laboratory space is adequate to process high volumes of genetic tests.
On December 23, 2014,
the Company entered into a Securities Purchase Agreement (the “2014 Purchase Agreement”) with various accredited investors
(the “2014 Investors”), pursuant to which the Company sold to the 2014 Investors in a private placement transaction
(the “December 2014 Private Placement”) an aggregate of 50,099,700 shares of common stock at a price of $0.1003 per
share for gross proceeds of approximately $5.025 million. The 2014 Investors also received warrants (the “2014 Warrants”)
to purchase up to an aggregate of 50,099,700 shares of common stock at an exercise price of $0.1003 per share. The 2014 Warrants
vested immediately, are all currently exercisable and have a term of seven years.
On December 23, 2014,
the Company entered into a Venture Loan and Security Agreement (the “Loan Agreement”) with Horizon Technology Finance
Corporation (the “Lender”) under which the Company borrowed $5.0 million. The loan originally bore interest at a floating
rate equal to the One Month LIBOR Rate (with a floor of 0.50%) plus 8.50%. The loan was to be repaid in forty-five (45) monthly
payments consisting of fifteen (15) monthly payments of only interest followed by thirty (30) equal monthly payments of principal
and interest. In addition, at the end of the repayment term (or at early termination of the loan) a final payment equal to 4.5%
of the loan would have been due and payable. The Company’s obligations under the Loan Agreement were secured by a first priority
security interest in substantially all of its assets other than its intellectual property. The Company had also agreed not to pledge
or otherwise encumber its intellectual property assets, subject to certain exceptions. In connection with the Loan Agreement, the
Company issued to the Lender and its affiliates warrants to purchase a total of 2,492,523 shares of common stock at an exercise
price of $0.1003 per share, which the Company refers to herein as the 2014 Lender Warrants. The 2014 Lender Warrants vested immediately,
are all currently exercisable and have a term of ten (10) years.
On August 25, 2016,
the Company and the Lender entered into the First Amendment of Venture Loan and Security Agreement and an Amended and Restated
Secured Promissory Note (collectively referred to herein as the “2016 Debt Restructuring”), which was effective as
of August 1, 2016, pursuant to which the principal payments due from August 2016 through December 2016 were reduced to 33% of the
principal payments due for these periods under the Loan Agreement. Principal payments were also subject to reduction in future
periods upon the achievement of certain milestones by the Company. These milestones were not achieved. In consideration of these
changes, (i) the Company paid the Lender an amendment fee of $25,000 and reimbursed the Lender’s legal expenses in the amount
of $5,000, (ii) the Company granted the Lender a first priority security interest in substantially all of its assets, including
its intellectual property, (iii) the interest rate of the loan was increased to 11.00% plus the amount by which the one month LIBOR
Rate exceeds 0.50%, and (iv) the final payment was increased from 4.5% of the loan, or $225,000, to 6.5% of the loan, or $325,000.
At December 31, 2016, the interest rate was 11.27% per annum. In connection with the 2016 Debt Restructuring, the Company also
issued to the Lender an additional warrant to purchase up to 5,169,577 shares of the Company’s common stock at an exercise
price of $0.0994 per share (the “2016 Lender Warrant”). The 2016 Lender Warrant vested immediately, is currently exercisable
and has a term of ten (10) years. See Note 15 “Subsequent Events” for additional information with respect to an amendment
to the Venture Loan and Security Agreement entered into in April 2017.
On July 29, 2016, the
Company entered into a Securities Purchase Agreement (the “2016 Purchase Agreement”) with various accredited investors
(the “2016 Investors”), pursuant to which the Company sold to the 2016 Investors in a private placement transaction
(the “2016 Private Placement”) an aggregate of 56,262,571 shares of common stock at a price of $0.0994 per share for
gross proceeds of approximately $5.6 million. The 2016 Investors also received warrants to purchase up to an aggregate of 56,262,571
shares of common stock at an exercise price of $0.0994 per share (the “2016 Warrants”). The 2016 Warrants vested immediately,
are all currently exercisable and have a term of seven years.
Note 3—Summary of Significant Accounting Policies
Management Estimates
The preparation 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 disclosures of contingent assets
and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reported
periods. Actual results could differ from those estimates. The Company’s most critical accounting policies are more fully
discussed in these notes to the financial statements.
Revenue Recognition
Revenue from genetic
testing services is recognized when there is persuasive evidence of an arrangement, service has been rendered, the sales price
is determinable and collectability is reasonably assured. Service is deemed to be rendered when the results have been reported
to the individual who ordered the test. To the extent that tests have been prepaid but results have not yet been reported, recognition
of all related revenue is deferred.
As of December 31, 2016 and December 31, 2015, the Company had deferred
genetic test revenue of $2.5 million and $3.2 million, respectively. Included in deferred revenue at December 31, 2016 is $2.4
million for kits that are still outstanding one year or longer after initial kit sale, of which $0.15 million was sold directly
to consumers (credit card payments) and $2.3 million was sold to
distributors as a promotional bundle. In 2012 and 2013,
Access Business Group LLC (“ABG”), an affiliate of Alticor Inc., a related party (“Alticor”), placed purchase
orders totaling approximately $3.3 million consisting of Weight Management test kits. The kits were included as part of a promotional
bundle of products that ABG sold to their Individual Business Owners (“IBOs”).
The Company recognizes
breakage revenue related to genetic test kits utilizing the remote method. Under the remote method, breakage revenue should be
recognized when the likelihood of the customer exercising rights of redemption becomes remote. The term remote requires statistical
analysis of customer redemption patterns for all tests sold and returned. The Company analyzed redemption patterns from 2009 through
2015 and determined the period of time after which the likelihood of test redemption was remote was three years after the sale
of a genetic test kit. Included in genetic test revenue in the years ended December 31, 2016 and 2015 is $191,000 and $218,000,
respectively, of breakage revenue related to unredeemed genetic test kits sold in 2013 and 2012, respectively. The Company expects
to continue to recognize breakage revenue on a quarterly basis based on the historical analysis.
Sales Commission
On October 26, 2009,
the Company entered into a Merchant Network and Channel Partner Agreement with Amway Corp., d/b/a/ Amway Global (“Amway Global”),
a subsidiary of Alticor Inc. (“Alticor”). Pursuant to this Agreement, Amway Global sells the Company’s Inherent
Health
®
brand of genetic tests through its e-commerce website via a hyperlink to our e-commerce site. The Company
accounts for sales commissions due to Amway Global under the Merchant Network and Channel Partner Agreement in accordance with
SEC Staff Accounting Bulletin (“SAB”) 104. Commissions are recorded as an expense at the time they become due which
is at the point of sale. The cost of commissions was $225,000 and $302,000 for the years ended December 31, 2016 and 2015, respectively.
Accounts Receivable
Accounts receivable
is stated at estimated net realizable value, which is generally the invoiced amount less any estimated discount related to payment
terms. The Company offers its commercial genetic test customers a 2% cash discount if payment is made by bank wire transfer within
10 days of the invoice date. No accounts receivable reserve is required at December 31, 2016 as all accounts receivable are
expected to be collected.
Inventory
Kit inventory is carried
at lower of cost (first-in, first-out method) or market and no inventory reserve was deemed necessary for the years ended December
31, 2016 and 2015. As the Company does not manufacture any products, no overhead costs are included in inventory. Inventory is
stored at a fulfillment provider. Inventory consisted of the following at December 31, 2016 and 2015:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
68,447
|
|
|
$
|
112,372
|
|
Finished goods
|
|
|
4,617
|
|
|
|
12,211
|
|
Total inventory, net
|
|
$
|
73,064
|
|
|
$
|
124,583
|
|
Stock-Based Compensation
The Company accounts for
stock-based compensation expense in accordance with FASB ASC 718,
Compensation – Stock Compensation
. The standard
addresses all forms of share-based payment (SBP) awards, including shares issued under employee stock purchase plans, stock options,
restricted stock and stock appreciation rights. The Company expenses SBP awards within compensation cost for SBP transactions measured
at fair value. Compensation cost for the portion of awards for which the requisite service has not been rendered that are outstanding
as of the effective date shall be recognized as the requisite service is rendered on or after the effective date. The compensation
cost for that portion of awards shall be based on the grant-date fair value of those awards as calculated under the Black-Scholes
option pricing model. Common stock purchased pursuant to our employee stock purchase plan will be expensed based upon the fair
market value in excess of purchase price.
Income Taxes
The Company accounts for
income taxes in accordance with FASB ASC 740,
Income Taxes
, which requires the recognition of taxes payable or refundable
for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized
in the financial statements or tax returns. The measurement of current and deferred tax liabilities and assets is based on provisions
of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The Company records a valuation
allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized.
Significant management
judgment is required in determining the Company’s provision (benefit) for income taxes, its deferred tax assets and liabilities
and any valuation allowance recorded against deferred tax assets. The Company has recorded a full valuation allowance against its
deferred tax assets of approximately $36.4 million as of December 31, 2016, due to uncertainties related to its ability to utilize
these assets. The valuation allowance is based on management’s estimates of taxable income by jurisdiction in which the Company
operates and the period over which the deferred tax assets will be recoverable. In the event that actual results differ from these
estimates or management adjusts these estimates in future periods, the Company may need to adjust its valuation allowance, which
could materially impact its financial position and results of operations.
As a result of the Company’s
change in its capital structure during the quarters ended June 30, 2013, December 31, 2014 and September 30, 2016 the Company may
have undergone IRC section 382 ownership changes which would limit its ability to realize the benefit of its tax attributes (i.e.,
federal/state net operating losses and research and development credits) during their respective carry forward periods. The Company
has not performed an analysis to determine the extent of such limitations, if any.
The Company reviews its recognition threshold
and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax
return. The Company reviews all material tax positions for all years open to statute to determine whether it is more likely than
not that the positions taken would be sustained based on the technical merits of those positions. The Company did not recognize
any adjustments for uncertain tax positions as of and during the year ended December 31, 2016.
Research and Development
Research and development costs are expensed
as incurred.
Basic and Diluted Net Loss per Common Share
The Company applies the
provisions of FASB ASC 260,
Earnings per Share
, which establishes standards for computing and presenting earnings per share.
Basic and diluted net loss per share was determined by dividing net loss applicable to common stockholders by the weighted average
number of shares of common stock outstanding during the period. Diluted net loss per share is the same as basic net loss per share
for all the periods presented, as the effect of the potential common stock equivalents is anti-dilutive due to the loss in each
period. Potential common stock equivalents excluded from the calculation of diluted net loss per share are as follows:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Options outstanding
|
|
|
31,363,319
|
|
|
|
21,657,776
|
|
Warrants outstanding
|
|
|
149,733,227
|
|
|
|
88,301,079
|
|
Total
|
|
|
181,096,546
|
|
|
|
109,958,855
|
|
Comprehensive Income (Loss)
Comprehensive income (loss)
is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances
from non-owner sources. During the years ended December 31, 2016 and 2015, there were no items other than net loss included
in the determination of comprehensive loss.
Fair Value of Financial Instruments
The Company, using available
market information, has determined the estimated fair values of financial instruments. The stated values of cash, accounts receivable
and accounts payable approximate fair value due to the short term nature of these instruments. The fair value of warrants is calculated
using the Black-Scholes pricing model.
Cash
The Company maintains its
cash with a domestic financial institution that the Company believes to be of high credit standing. The Company believes that,
as of December 31, 2016, its concentration of credit risk related to cash was not significant. Cash is available on demand and
is generally in excess of FDIC insurance limits.
Fixed Assets
Fixed assets are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are provided using the straight-line method over estimated useful
lives of three to five years. Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or
the remaining term of the lease.
Impairment of Long-Lived Assets
The Company evaluates its
long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that carrying
amounts of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. Any write-downs, based
on fair value, are to be treated as permanent reductions in the carrying amount of the assets. For the year ended December 31,
2015, the Company recorded a write down of $66,000 associated with the patents that no longer were needed to support the Company’s
business. The Company determined that no impairment existed related to the Company’s long-lived assets at December 31, 2016.
Segment Reporting
As of December 31, 2016
and 2015, the Company has one segment, the genetic test business. The Company develops genetic tests for sale into the emerging
personalized health market and performs testing services that can help individuals improve and maintain their health through preventive
measures. The Company’s principal operations and markets are located in the United States.
Recent Accounting Pronouncements
FASB ASC 606 ASU 2014-09 - Revenue from contracts with customers.
In May 2014, the FASB
issued amended guidance on contracts with customers to transfer goods or services or contracts for the transfer of nonfinancial
assets, unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). The guidance
requires an entity to recognize revenue on contracts with customers to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The guidance requires that an entity depict the consideration by applying the following five steps:
|
·
|
Identify the contract(s) with a customer.
|
|
·
|
Identify the performance obligations in the contract.
|
|
·
|
Determine the transaction price.
|
|
·
|
Allocate the transaction price to the performance obligations in the contract.
|
|
·
|
Recognize revenue when (or as) the entity satisfies a performance obligation.
|
The amendments in this
ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting
period. Early application is not permitted. This amendment is to be either retrospectively adopted to each prior reporting period
presented or retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application.
In April 2015, the FASB
voted to defer the required implementation date of ASU 2014-09 to December 2017. Public companies may elect to adopt the standard
along the original timeline. Revenue from the Company’s genetic testing services is recognized when there is persuasive evidence
of an arrangement, service has been rendered, the sales price is determinable and collectability is reasonably assured. Service
is deemed to be rendered when the results have been reported to the individual who ordered the test or the requesting physician.
To the extent that tests have been prepaid but results have not yet been reported, recognition of all related revenue is deferred.
The Company is not electing to adopt early and is evaluating the impact of ASU 2014-09 on the Company’s financial disclosures.
FASB ASU 2016-02 - Leases (Topic 842).
In February 2016, the FASB issued ASU No. 2016-02,
“Leases” (Topic 842). The updated standard aims to increase transparency and comparability among organizations by requiring
lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about
leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years. The Company is currently evaluating the impact of ASU 2016-02 on its consolidated financial statements.
FASB ASU No. 2016-09, - Compensation - Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
In
March 2016, the FASB issued ASU No. 2016-09. The standard is intended to simplify several areas of accounting for share-based compensation
arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective
for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted.
The
Company is currently evaluating the impact of ASU 2016-09 on its consolidated financial statements.
Note 4—Related Party Transactions
Since March 2003, the Company
has maintained a broad strategic alliance with several affiliates of the Alticor Inc. family of companies, a related party. The
alliance initially included an equity investment, a multi-year research and development agreement, a licensing agreement with royalties
on marketed products, the deferment of outstanding loan repayment and the refinancing of bridge financing obligations.
On October 26, 2009, the
Company entered into a Merchant Network and Channel Partner Agreement with Amway Corp., d/b/a/ Amway Global (“Amway Global”),
a subsidiary of Alticor Inc. Pursuant to this Agreement, Amway Global sells the Company’s Inherent Health
®
brand
of genetic tests through its e-commerce website via a hyperlink to our e-commerce site. The Company paid Amway Global $225,000
and $302,000 in commissions for the years ended December 31, 2016 and 2015, respectively, representing a percentage of net sales
to their customers. The Company expenses commissions owed to Amway Global at the point of sale with the customer.
In 2012 and 2013, Access
Business Group LLC (“ABG”), an affiliate of Alticor, placed purchase orders totaling approximately $3.3 million consisting
of Weight Management test kits. The kits are included as part of a promotional bundle of products that Amway sold to their Individual
Business Owners (IBOs). Of the $3.3 million in orders, $1.5 million was received for the 2013 program and $1.8 million for the
2014 program. As a component of the 2013 promotional program, and not reflective of actual product expiry, the kits were required
to be redeemed by December 31, 2013. In February 2014, the Company removed the redemption date requirement for the 2013 promotional
program, for which ABG paid the Company $519,000 as a retrospective increase in the product purchase price. All cash received related
to the 2013 promotional program, including the $519,000, will be treated as deferred revenue until specific kits are returned for
processing or the breakage analysis determines the probability of eventual redemption is remote. In October 2014, the Company received
$250,000 as a retrospective increase in the product purchase price for unsold kits as consideration for extending the required
redemption date of the 2014 promotional program to December 31, 2017. All cash received for these kits will be treated as deferred
revenue until specific kits are returned for processing or on the final allowed redemption date of December 31, 2017.
On September 21, 2012,
the Company entered into a License Agreement (the “License Agreement”) with Access Business Group International LLC
(“ABGI”), an affiliate of Alticor. Pursuant to the License Agreement, the Company has granted ABGI and its affiliates
a non-exclusive license to use the technology related to Interleukin’s Weight Management genetic test and to sell the Weight
Management test in Europe, Russia and South Africa (the “Territories”). ABGI, or a laboratory designated by ABGI, will
be responsible for processing the tests, and the Company will receive a royalty for each test sold, which royalty will increase
if certain pending patent applications are issued. The License Agreement has an initial term of five years from the date of first
commercial sale of the Weight Management test under the agreement which was June 2013. Thereafter, the term will automatically
renew for additional one-year periods unless notice is delivered by either party at least 60 days prior to the anniversary date.
During the years ended December 31, 2016 and 2015, $199,000 and $191,000, respectively, of revenue was earned.
In connection with the
execution of the License Agreement, the Company and ABGI also entered into a Professional Services Agreement (the “PSA”)
pursuant to which the Company has agreed to provide services to ABGI in connection with its sale and processing of the tests within
the Territories.
No fees were earned in the years ended December 31, 2016 and 2015 under the PSA.
For years ended December
31, 2016 and 2015, approximately 24% and 45%, respectively, of our revenue came from sales through our Merchant Network and Channel
Partner Agreement with Amway Global, a subsidiary of Alticor, and 4% and 13%, respectively, of our revenue came from sales through
ABG’s promotional product bundle program.
On February 25, 2013, the
Company entered into a Preferred Participation Agreement with Renaissance Health Services Corporation (“RHSC”), for
itself and on behalf of certain of its affiliates and subsidiaries. This agreement was amended and restated on November 1, 2013.
RHSC is a related party through its affiliation with Delta Dental of Michigan, Inc. (“DDMI”), a stockholder of the
Company.
Pursuant to this agreement, as amended, affiliates of RHSC agreed to reimburse the Company a fixed
price for each ILUSTRA Test that the Company processed. This amended agreement had a term of three years beginning February 25,
2013 and
terminated on February 25, 2016. A revised agreement with substantially similar terms was executed
in April 2016.
Note 5—Debt
Instruments
Venture Loan and Security Agreement
On December 23, 2014, the
Company entered into a Venture Loan and Security Agreement (the “Loan Agreement”) with Horizon Technology Finance Corporation
(the “Lender”) under which the Company borrowed $5.0 million. The loan bore interest at a floating rate equal to the
One Month LIBOR Rate (with a floor of 0.50%) plus 8.50%. In the event that the One Month LIBOR Rate, as reported in the Wall Street
Journal, exceeded 0.50%, the interest rate would have been adjusted by an amount equal to the difference between such rates at
the end of that particular month. The loan was to be repaid in forty-five (45) monthly payments consisting of fifteen (15) monthly
payments of only interest followed by thirty (30) equal monthly payments of principal and interest (the “Payment Terms”).
In addition, at the end of the repayment term (or at early termination of the loan) a final payment equal to 4.5% of the loan would
have been due and payable. The Company’s obligations under the Loan Agreement were secured by a first priority security interest
in substantially all of its assets other than its intellectual property. The Company had also agreed not to pledge or otherwise
encumber its intellectual property assets, subject to certain exceptions. In connection with the Loan Agreement, the Company issued
to the Lender and its affiliates warrants to purchase a total of 2,492,523 shares of common stock at an exercise price of $0.1003
per share, which the Company refers to herein as the 2014 Lender Warrants. The 2014 Lender Warrants vested immediately, are all
currently exercisable and have a term of ten (10) years.
On August 25, 2016, the Company and the Lender
entered into the First Amendment of Venture Loan and Security Agreement and an Amended and Restated Secured Promissory Note (collectively
referred to herein as the “2016 Debt Restructuring”), which was effective as of August 1, 2016, pursuant to which the
principal payments due from August 2016 through December 2016 was reduced to 33% of the principal payments due for these periods
under the Loan Agreement. In consideration of these changes, (i) the Company paid the Lender an amendment fee of $25,000 and reimbursed
the Lender’s legal expenses in the amount of $5,000, (ii) the Company granted the Lender a first priority security interest
in substantially all of its assets, including its intellectual property, (iii) the interest rate of the loan was increased to 11.00%
plus the amount by which the one month LIBOR Rate exceeds 0.50%, and (iv) the final payment was increased from 4.5% of the loan,
or $225,000, to 6.5% of the loan, or $325,000. At December 31, 2016, the interest rate was 11.27% per annum. In connection with
the 2016 Debt Restructuring, the Company also issued to the Lender a warrant to purchase up to 5,169,577 shares of the Company’s
common stock at an exercise price of $0.0994 per share (the “2016 Lender Warrant”). The 2016 Lender Warrant vested
immediately, is currently exercisable and has a term of ten (10) years. See Note 15 “Subsequent Events” for additional
information with respect to an amendment to the Venture Loan and Security Agreement entered into in April 2017.
The Company recorded a
discount on the loan comprised of (i) $89,000 in cash fees paid to the Lender related to the Loan Agreement, (ii) $261,000 as the
intrinsic value of the 2014 Lender Warrants, (iii) $30,000 in cash fees paid to the Lender related to the 2016 Debt Restructuring
and (iv) $504,000 as the intrinsic value of the 2016 Lender Warrants. The discount on the loan is amortized over the term of the
loan in the Company’s Statements of Operations. As of December 31, 2016, the unamortized discount associated with the loan
was $579,000. The amended final non-principal payment of $325,000 will be accrued as additional interest expense, using the effective
interest method, over the term of the loan. Cash interest expense for the years ended December 31, 2016 and 2015 was $429,000 and
$456,000, respectively. Non-cash interest expense was $294,000 for the year ended December 31, 2016 compared to $153,000 for the
year ended December 31, 2015.
Note 6—Fixed Assets
The useful lives and balances
of fixed assets at December 31, 2016 and 2015 consisted of the following:
|
|
Useful Life
|
|
2016
|
|
|
2015
|
|
Computer software, computer equipment and office equipment
|
|
3 years
|
|
$
|
516,511
|
|
|
$
|
516,511
|
|
Laboratory equipment
|
|
5 years
|
|
|
1,896,417
|
|
|
|
1,887,454
|
|
Furniture and fixtures
|
|
5 years
|
|
|
40,349
|
|
|
|
40,349
|
|
Leasehold improvements
|
|
5 years
|
|
|
309,618
|
|
|
|
309,618
|
|
Website development
|
|
3 years
|
|
|
374,453
|
|
|
|
298,553
|
|
|
|
|
|
|
3,137,348
|
|
|
|
3,052,485
|
|
Less — Accumulated depreciation and amortization
|
|
|
|
|
(2,626,156
|
)
|
|
|
(2,408,585
|
)
|
Total
|
|
|
|
$
|
511,192
|
|
|
$
|
643,900
|
|
Depreciation and amortization
expense was $218,000 and $212,000, for the years ended December 31, 2016 and 2015, respectively.
Note 7—Intangible Assets
Intangible assets at December 31,
2016 and 2015 consisted of the following:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Patent costs
|
|
$
|
1,154,523
|
|
|
$
|
1,154,523
|
|
Less — Accumulated amortization
|
|
|
(1,129,094
|
)
|
|
|
(1,029,497
|
)
|
Less — Write off related to patents no longer in use
|
|
|
—
|
|
|
|
(66,147
|
)
|
Total
|
|
$
|
25,429
|
|
|
$
|
58,879
|
|
Patent amortization expense
was $33,000 and $137,000 for the years ended December 31, 2016 and 2015, respectively.
Patent costs which are
being amortized on a straight-line basis over a 10-year life, are scheduled to amortize as follows:
Year ended December 31,
|
|
|
|
2017
|
|
|
19,117
|
|
2018
|
|
|
6,312
|
|
|
|
$
|
25,429
|
|
Note 8—Accrued Expenses
Accrued expenses at December 31, 2016 and 2015
consisted of the following:
|
|
2016
|
|
|
2015
|
|
Payroll and vacation
|
|
$
|
81,928
|
|
|
$
|
412,674
|
|
Other
|
|
|
156,159
|
|
|
|
85,014
|
|
Total accrued expenses
|
|
$
|
238,087
|
|
|
$
|
497,688
|
|
Note 9—Commitments and Contingencies
Off-Balance Sheet Arrangements
The Company has no off-balance
sheet arrangements that have, or are reasonably likely to have, a current or future material effect on its financial condition,
results of operations or cash flows.
Employment Agreements
On May 19, 2016, the Company
entered into an employment agreement with Stephan Toutain for the position of Chief Commercial Officer beginning on August 15,
2016 (the “Start Date”). The agreement provides for a minimum annual base salary of $315,000 and he is eligible for
a bonus of 30% of his base salary pursuant to the Company’s bonus plan. Pursuant to the agreement, Mr. Toutain was granted
options to purchase 3,738,933 shares of the Company’s common stock, which was equal to 1% of the Company’s fully diluted
shares of the Company as of his Start Date, at an exercise price equal to fair market value of the Company’s common stock
on the grant date of the option. The option will vest as to 25% of the shares on the first anniversary of the Start Date, and as
to an additional 2.083% of the shares monthly thereafter. Mr. Toutain’s agreement is terminable at will by the Company or
Mr. Toutain. If the Company terminates Mr. Toutain without cause, the Company will pay Mr. Toutain, in addition to any accrued,
but unpaid compensation prior to termination, an amount equal to six months of his base salary in effect at the time of the termination.
Bonus Plan
On February 26, 2014, the
Compensation Committee approved an Employee Bonus Plan (the “Employee Bonus Plan”) that replaces the Bonus Plan approved
on December 21, 2012. Under the Employee Bonus Plan, bonuses may be awarded upon the achievement of corporate goals, however, the
Compensation Committee has absolute discretion as to whether bonuses will be awarded and the size of any bonus, notwithstanding
whether any such corporate goals are met. Bonus accruals totaling $166,000 were recorded in 2015 in accrued expenses on the balance
sheet. In January 2016, the Board of Directors approved the 2015 bonus disbursement, which occurred in February 2016. For the year
ended December 31, 2016 there was no bonus accrual and will be no bonus payout in the first quarter of 2017.
Operating Leases
The Company leases its
office and laboratory space under a non-cancelable operating lease which is scheduled to expire on March 31, 2017. The lease agreement
includes an initial base rent beginning in March 2014 with an escalation of 2.06% of the base rent in year two and another 2.06%
increase in year three. In September 2016, the Company entered into the third amendment to the commercial lease (“Third Amendment”)
to extend the lease from April 1, 2017 through March 31, 2019. The Third Amendment includes an initial base rent beginning in April
2017 with an escalation of 2.88% of the base rent in year two.
Future minimum lease commitments
under non-cancelable lease agreements with initial or remaining terms of one year or more at December 31, 2015, are as follows:
Year Ended
December 31,
|
|
Office Lease
|
|
|
Copier Lease
|
|
|
Net Lease
|
|
|
Office
Equipment
|
|
|
Total
Payments, Net
|
|
2017
|
|
|
335,279
|
|
|
|
6,624
|
|
|
|
341,903
|
|
|
|
2,226
|
|
|
|
344,129
|
|
2018
|
|
|
345,020
|
|
|
|
1,104
|
|
|
|
346,124
|
|
|
|
1,484
|
|
|
|
347,608
|
|
2019
|
|
|
86,864
|
|
|
|
—
|
|
|
|
86,864
|
|
|
|
—
|
|
|
|
86,864
|
|
|
|
$
|
767,163
|
|
|
|
7,728
|
|
|
$
|
774,891
|
|
|
$
|
3,710
|
|
|
$
|
778,601
|
|
Rent expense was $347,000
and $352,000 for the years ended December 31, 2016 and 2015, respectively
Note 10—Capital
Stock
Authorized Preferred and Common Stock
As of December 31, 2016,
the Company has 6,000,000 shares of preferred stock, par value $0.001 authorized and 450,000,000 shares of common stock, par value
$0.001 authorized. As of December 31, 2016 the Company has 229,381,059 shares of common stock outstanding and the following shares
of common stock are reserved for issuance:
|
|
Reserved for
issuance
|
|
|
Strike
Price
|
|
|
Expiry
|
|
|
|
|
|
|
|
|
|
Shares reserved under outstanding stock options and options available for grant
|
|
|
52,092,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rights associated with Employee Stock Purchase Plan
|
|
|
70,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock associated with the 2016 Debt Restructuring
|
|
|
5,169,577
|
|
|
$
|
0.0994
|
|
|
Aug 1, 2026
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock associated with July 2016 private placement
|
|
|
56,262,571
|
|
|
$
|
0.0994
|
|
|
Jul 29, 2023
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock associated with December 2014 private placement
|
|
|
50,189,431
|
|
|
$
|
0.1003
|
|
|
Dec 23, 2021
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock associated with December 2014 venture loan and security agreement
|
|
|
2,492,523
|
|
|
$
|
0.1003
|
|
|
Dec 23, 2024
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock associated with September 2014 consulting agreement with Danforth Advisors
|
|
|
100,000
|
|
|
$
|
0.2500
|
|
|
Sep 8, 2024
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding warrants issued in May 2013, vesting August 2013
|
|
|
14,426,230
|
|
|
$
|
0.2745
|
|
|
Aug 9, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding warrants issued in May 2013, vesting May 2013
|
|
|
20,655,737
|
|
|
$
|
0.2745
|
|
|
May 17, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding warrants issued in June 2012
|
|
|
437,158
|
|
|
$
|
0.2745
|
|
|
Jun 29, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Total common shares reserved for issuance at December 31, 2016
|
|
|
201,895,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total common shares issued and outstanding at December 31, 2016
|
|
|
229,381,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total common shares outstanding and reserved for issuance at December 31, 2016
|
|
|
431,276,871
|
|
|
|
|
|
|
|
On May 17, 2013, the Company
entered into a Common Stock Purchase Agreement (the “2013 Purchase Agreement”) with various accredited investors (the
“2013 Investors”), pursuant to which the Company sold securities to the 2013 Investors in a private placement transaction
(the “May 2013 Private Placement”). In the May 2013 Private Placement, the Company sold an aggregate of 43,715,847
shares of its common stock at a price of $0.2745 per share for gross proceeds of $12,000,000. The 2013 Investors also received
warrants to purchase up to an aggregate of 32,786,885 shares of common stock an exercise price of $0.2745 per share (the “2013
Warrants”). The 2013 Warrants were immediately exercisable as to 63% of the shares issuable thereunder. The remaining 37%
of the shares issuable under the 2013 Warrants were to become exercisable upon an increase in the number of authorized shares of
common stock. On August 9, 2013, the Company’s shareholders’ approved an amendment to the Company’s Certificate
of Incorporation to increase the number of authorized shares of common stock from 150,000,000 to 300,000,000 shares, which provided
for adequate authorized shares for all potential common stock equivalents issued pursuant to the May 2013 Private Placement. The
2013 Warrants are all currently exercisable and have a term of seven years from the date they became exercisable.
For its services in this
transaction, the placement agent received cash compensation in the amount of approximately $780,000 and the placement agent and
an affiliate received warrants to purchase an aggregate of 2,295,082 shares of common stock, at an exercise price of $0.2745 per
share (the “2013 Placement Agent Warrants”). The 2013 Placement Agent Warrants became exercisable on August 9, 2013,
following shareholder approval of an increase in the Company’s authorized shares of common stock and expire August 9, 2020.
The cash compensation and the fair value of the warrants were recorded as issuance costs resulting in a reduction to shareholders’
equity.
In connection with the
May 2013 Private Placement, all preferred stockholders converted their shares of Preferred Stock to common stock resulting in the
issuance of 39,089,161 shares of common stock (the “2013 Preferred Conversion”) and $14,316,255 in principal amount
of outstanding convertible debt held by a related party was converted into 2,521,222 shares of common stock (the “2013 Debt
Conversion”).
In
September 2014,
the Company
issued warrants to
the Company’s
financial
consultant, Danforth Advisors, to purchase up to 100,000 shares of common stock at a price of $0.25 per share. The warrants have
a ten (10) year term and vested on a monthly basis over two years. These warrants have fully vested as of December 31, 2016. The
fair value of the warrants at issuance was recorded as equity totaling $24,000 and was fully amortized as of December 31, 2016.
The non-cash compensation expense for the years ended December 31, 2016 and 2015 was $9,000 and $12,000 respectively.
On December 23, 2014, the
Company entered into the 2014 Purchase Agreement with the 2014 Investors, pursuant to which it sold to the 2014 Investors in the
December 2014 Private Placement an aggregate of 50,099,700 shares of common stock at a price of $0.1003 per share for gross proceeds
of approximately $5.025 million. The 2014 Investors also received 2014 Warrants to purchase up to an aggregate of 50,099,700 shares
of common stock at an exercise price of $0.1003 per share. The 2014 Warrants are all currently exercisable and have a term of seven
years.
For services related to
this transaction, the placement agent, its legal counsel and the Company’s legal counsel received an aggregate of $218,000
in cash fees and the placement agent and an affiliate received warrants to purchase an aggregate of 89,731 shares of common stock
(the “2014 Placement Agent Warrants”). The cash fees and the fair value of the 2014 Placement Agent Warrants were recorded
as equity issuance costs resulting in a reduction to shareholders’ equity.
The 2014 Warrants and the
2014 Placement Agent Warrants were recorded as equity at fair value on the date of issuance. On the closing date of the December
2014 Private Placement, the fair value of the 2014 Warrants was $5.2 million, and the fair value of the 2014 Placement Agent Warrants
was $9,000.
On July 29, 2016, the Company
entered into the 2016 Purchase Agreement with the 2016 Investors, pursuant to which the Company sold to the 2016 Investors in the
2016 Private Placement an aggregate of 56,262,571 shares of common stock at a price of $0.0994 per share for gross proceeds of
approximately $5.6 million. The 2016 Investors also received the 2016 Warrants to purchase up to an aggregate of 56,262,571 shares
of common stock at an exercise price of $0.0994 per share. The 2016 Warrants vested immediately, are all currently exercisable
and have a term of seven years.
For services related to
this transaction, the Company’s legal counsel received $63,000 in cash fees.
The fair value of the 2016
Warrants at issuance was $6.5 million. Fair value of the 2016 Warrants was calculated using the following inputs in a Black-Scholes
model:
|
|
July 29, 2016
|
|
Risk-free interest rate
|
|
|
1.52
|
%
|
Expected life
|
|
|
7 years
|
|
Expected volatility
|
|
|
147.03
|
%
|
Dividend yield
|
|
|
0
|
%
|
Registration Rights Agreements
In connection with the
December 2014 Private Placement, on December 23, 2014, the Company also entered into a Registration Rights Agreement with the 2014
Investors and the placement agent, pursuant to which the Company was required to file a registration statement on Form S-1 within
45 days of December 23, 2014 to cover the resale of (i) the shares of common stock sold to the 2014 Investors and the shares of
common stock underlying the 2014 Warrants and (ii) the shares of common stock underlying the 2014 Placement Agent Warrants. The
Company filed the registration statement on February 6, 2015, and it was declared effective on March 31, 2015.
In connection with the
July 2016 Private Placement, on July 29, 2106, the Company also entered into a Registration Rights Agreement with the 2016 Investors,
pursuant to which the Company was required to file a registration statement on Form S-1 within 45 days of July 29, 2016 to cover
the resale of the shares of common stock sold to the 2016 Investors and the shares of common stock underlying the 2016 Warrants.
The Company filed the registration statement on September 12, 2016, and it was declared effective on September 27, 2016.
Venture Loan and Security Agreement
On December 23, 2014, the
Company entered into the Loan Agreement with the Lender under which the Company has borrowed $5.0 million. In connection with the
Loan Agreement, the Company issued to the Lender and its affiliates 2014 Lender Warrants to purchase a total of 2,492,523 shares
of common stock at an exercise price of $0.1003 per share. The 2014 Lender Warrants vested immediately, are all currently exercisable
and have a term of ten (10) years. The fair value of the 2014 Lender Warrants at issuance was $261,000
On August 25, 2016, the
Company and The Lender agreed to the 2016 Debt Restructuring, which was effective as of August 1, 2016, pursuant to which the principal
payments due from August 2016 through December 2016 were reduced to 33% of the principal payments due for these periods under the
Loan Agreement. In connection with the 2016 Debt Restructuring, the Company issued to the Lender the 2016 Lender Warrant to purchase
up to 5,169,577 shares of the Company’s common stock at an exercise price of $0.0994 per share. The 2016 Lender Warrant vested
immediately, is currently exercisable and has a term of ten (10) years.
The 2014 Lender Warrants
and 2016 Lender Warrants were recorded as equity at fair value on the date of issuance. Fair value of the 2014 Lender Warrants
and 2016 Lender Warrants was calculated using the Black-Scholes model. Fair value of the 2016 Lender Warrants was calculated using
the following inputs in a Black-Scholes model:
|
|
August 1, 2016
|
|
Risk-free interest rate
|
|
|
1.78
|
%
|
Expected life
|
|
|
10 years
|
|
Expected volatility
|
|
|
138.81
|
%
|
Dividend yield
|
|
|
0
|
%
|
The fair value of the 2016
Lender Warrants at issuance was $504,000. Cash interest paid during the years ended December 31, 2016 and 2015 totaled $429,000
and $456,000, respectively. Non-cash interest related to debt discounts was $294,000 for the year ended December 31, 2016, compared
to $153,000 for the year ended December 31, 2015. The debt discount balance was $579,000 as of December 31, 2016.
Principal payments due under the terms of the
Loan Agreement and the 2016 Debt Restructuring are as follows:
2017
|
|
|
2,304,545
|
|
2018
|
|
|
1,920,455
|
|
|
|
$
|
4,225,000
|
|