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.
The accompanying notes are an integral
part of these financial statements.
NOTES TO CONDENSED
FINANCIAL STATEMENTS
March 31, 2017
(UNAUDITED)
Note 1—Basis of Presentation
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.
The accompanying condensed
financial statements include the accounts of the Company as of March 31, 2017 and December 31, 2016.
The financial statements
have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America
for interim financial reporting. Accordingly, they do not include all of the information and notes required by generally accepted
accounting principles for complete financial statements. These unaudited condensed financial statements, which in the opinion
of management reflect all adjustments (including normal recurring adjustments) necessary for a fair presentation, should be read
in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2016. Operating results are not necessarily indicative of the results that may be expected
for any future interim period or for the entire 2017 fiscal year.
For information
regarding the Company’s critical accounting policies and estimates, please refer to “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and
Estimates” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 and Note 3
to the Company’s condensed financial statements contained herein.
Note 2—Operating Matters and Liquidity
The Company has experienced
net operating losses since its inception through March 31, 2017. The Company had net losses of $7.4 million and $7.9 million for
the years ended December 31, 2016 and 2015, respectively, and $2.5 million for the three months ended March 31, 2017, contributing
to an accumulated deficit of $138.9 million as of March 31, 2017.
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 Technology Finance Corporation
(including its affiliates, the “Lender”). 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.
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.
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.
As further discussed
in Note 10 “Subsequent Events”, the Company issued and sold $1,000,000 in aggregate principal Subordinated Convertible
Promissory Notes and amended the Venture Loan and Security Agreement to defer principal amounts due in 2017. As discussed below,
effective March 30, 2017, the Company 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.
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.
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 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.
On December 23,
2014, the Company entered into a Venture Loan and Security Agreement (the “Loan Agreement”) with 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 has been
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 March 31, 2017, the interest rate was 11.48% 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. If the milestones required to further reduce the principal payments are achieved, the Lender shall be
entitled to additional warrants. See Note 10 “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.
On March 31,
2017, the Company announced that the Board of Directors had approved a work force restructuring, which became effective and
was completed on March 30, 2017, to better utilize the Company’s resources, to align the Company’s organization
to support its emerging cardiovascular testing program, for which it is seeking strategic interest, and to support a more
targeted commercial strategy for its ILUSTRA Inflammation Management Program. As a consequence of the restructuring, the
Company reduced its workforce in its commercial organization and administrative functions by eight persons. The
Company continues to support the ILUSTRA Program deployments with customers and will advance new customer relationships that
expand the evidence base of this program’s effectiveness.
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. For the three months ended March 31, 2017, the Company recognized $141,000 of revenue
associated with genetic testing compared to $262,000 for the three months ended March 31, 2016. To the extent that tests have
been prepaid but results have not yet been reported, recognition of all related revenue is deferred. As of March 31, 2017 and
December 31, 2016, the Company had deferred revenue of $2.6 million and $2.5 million, respectively. Included in deferred revenue
at March 31, 2017 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 $2.23 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 for 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).
For the
three months ended March 31, 2017, the Company recognized $56,000 in Other revenue, compared to $698,000 for the three months
ended March 31, 2016. The $56,000 of Other revenue recognized for the three months ended March 31, 2017 was related to
royalties received related to the Company’s license agreement with ABG. Of the $698,000 of Other revenue recognized
for the three months ended March 31, 2016, $637,000 was related to contracted research revenue and $61,000 was related to
royalties received related to the Company’s license agreement with ABG. Revenue from contracted research projects is
recognized when the deliverables for which the Company is obligated have been provided to the customer who contracted the
project.
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
2016 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 three months ended March 31, 2017 and 2016 is $12,000 and $61,000,
respectively, of breakage revenue related to unredeemed genetic test kits sold in the first quarter of 2014 and 2013, 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. 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 the
Company’s 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 $113,000 and
$67,000 for the three months ended March 31, 2017 and 2016, 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 March 31, 2017 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 as of March 31, 2017. 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 March 31, 2017 and December 31, 2016:
Inventory consisted
of the following:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
63,164
|
|
|
$
|
68,447
|
|
Finished goods
|
|
|
4,247
|
|
|
|
4,617
|
|
Total inventory, net
|
|
$
|
67,411
|
|
|
$
|
73,064
|
|
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 the Company’s 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 $38.2 million as of March 31, 2017, 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 three months ended March 31, 2017.
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 March
31,
|
|
|
|
2017
|
|
|
2016
|
|
Options outstanding
|
|
|
37,432,023
|
|
|
|
22,089,527
|
|
Warrants outstanding
|
|
|
149,733,227
|
|
|
|
88,301,079
|
|
Total
|
|
|
187,165,250
|
|
|
|
110,390,606
|
|
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 March 31, 2017, its concentration of credit risk related to cash was not significant. Cash is
available on demand and amounts are generally in excess of FDIC insurance limits. As of March 31, 2017, the Company did not
have any cash equivalents.
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.
Segment Reporting
As of March 31, 2017
and 2016, 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 annual reporting periods beginning after December 15, 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 accounting practices as well as its 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 financial
statements.
FASB ASU 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 accounts for stock options based on their grant date fair value and recognizes compensation expense on a straight-line
basis over their vesting period. The Company estimates the fair value of stock options as of the grant date using the Black-Scholes
option pricing model. The Company, in conjunction with the adoption of ASU 2016-09, has elected to estimate forfeitures as the
time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from its estimates. The Company uses
historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards
that are expected to vest. To the extent that actual forfeitures differ from the Company’s estimates, the difference is
recorded as a cumulative adjustment in the period the estimates were revised. Stock-based compensation expense is classified as
research and development or selling, general and administrative based on the grantee’s respective compensation classification.
Prior to January
1, 2017, the Company recognized the excess tax benefits of stock-based compensation expense as additional paid-in capital (“APIC”),
and tax deficiencies of stock-based compensation expense in the income tax provision or as APIC to the extent that there were
sufficient recognized excess tax benefits previously recognized. As a result of the prior guidance that excess tax benefits reduce
taxes payable prior to being recognized as an increase in paid in capital, the Company had not recognized certain deferred tax
assets (all tax attributes such as loss or credit carryforwards) that could be attributed to tax deductions related to equity
compensation in excess of compensation recognized for financial reporting. As of January 1, 2017, the Company had generated
federal net operating loss carryforwards due to excess tax benefits of $2.5 million.
Effective as of
January 1, 2017, the Company adopted a change in accounting policy in accordance with ASU 2016-09 to account for excess tax benefits
and tax deficiencies as income tax expense or benefit, treated as discrete items in the reporting period in which they occur,
and to recognize previously unrecognized deferred tax assets that arose directly from (or the use of which was postponed by) tax
deductions related to equity compensation in excess of compensation recognized for financial reporting. No prior periods were
restated as a result of this change in accounting policy as the Company previously maintained a valuation allowance against its
deferred tax assets that could be attributed to equity compensation in excess of compensation recognized for financial reporting.
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 Global, a subsidiary of 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 the Company’s e-commerce site. The Company paid Amway
Global $113,000 in commissions for the three months ended March 31, 2017 and $67,000 in commissions for the three months ended
March 31, 2016, representing a percentage of net sales to their customers. The Company expenses commissions owed to Amway Global
in the month of sale to the customer.
In
2012 and 2013, ABG, an affiliate of Alticor placed purchase orders totaling approximately $3.3 million consisting of the
Company’s Weight Management test kits. The kits are included as part of a promotional bundle of products that Amway
sells 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 the Company’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 in June 2013. Thereafter, the term will automatically
renew for additional one-year periods unless at least 60 days prior notice is delivered by either party. During the three months
ended March 31, 2017 and 2016, $54,000 and $59,000, respectively, related to license fees was earned.
For the
three months ended March 31, 2017 and 2016, approximately 46% and 14%, respectively, of the Company’s revenue came from
sales through the Merchant Network and Channel Partner Agreement with Amway Global, and 8% and 3%, respectively, of the
Company’s 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 for a customer of affiliates of RHSC. 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 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 March 31, 2017,
the interest rate was 11.48% 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 10 “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 March 31, 2017, the unamortized discount associated with the loan
was $496,000. 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 three months ended March 31, 2017 and 2016 was $106,000
and $113,000, respectively. Non-cash interest expense was $109,000 for the three months ended March 31, 2017 compared to $38,000
for the three months ended March 31, 2016.
Note 6—Commitments and Contingencies
Operating Lease
The Company
leases approximately 13,000 square feet of office and laboratory space in Waltham, Massachusetts under a
non-cancelable operating lease. In September 2016, the Company entered into the Third Amendment to
extend the lease 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.
Rent expense was $85,000
and $84,000 for the three months ended March 31, 2017 and 2016, respectively.
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.
Note 7—Capital Stock
Authorized Preferred and Common Stock
As of March 31, 2017,
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 March 31, 2017 the Company has 229,435,726 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
|
|
|
15,455
|
|
|
|
|
|
|
|
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 March 31, 2017
|
|
|
201,841,145
|
|
|
|
|
|
|
|
Total common shares
issued and outstanding at March 31, 2017
|
|
|
229,435,726
|
|
|
|
|
|
|
|
Total common shares outstanding and reserved
for issuance at March 31, 2017
|
|
|
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 at 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 September 30, 2016. The fair value of the warrants at issuance was recorded
as equity totaling $24,000 and was fully amortized as of September 30, 2016. These warrants were fully exercisable as of March
31, 2017.
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, 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 three months ended March 31, 2017 and 2016 totaled
$106,000 and $113,000, respectively. Non-cash interest related to debt discounts was $109,000 for the three months ended March
31, 2017, compared to $38,000 for the three months ended March 31, 2016. The debt discount balance was $496,000 as of March 31,
2017.
Note 8—Stock-Based Compensation Arrangements
Total stock-based
compensation is as follows:
|
|
Three Months Ended March
31,
|
|
|
|
2017
|
|
|
2016
|
|
Stock option grants beginning of period
|
|
$
|
309,872
|
|
|
$
|
210,340
|
|
Stock-based arrangements during the period:
|
|
|
|
|
|
|
|
|
Stock option grants
|
|
|
44,976
|
|
|
|
3,367
|
|
Restricted stock issued:
|
|
|
|
|
|
|
|
|
Employee stock purchase plan
|
|
|
1,093
|
|
|
|
563
|
|
|
|
$
|
355,941
|
|
|
$
|
214,270
|
|
Stock option and restricted stock grants
The following table details stock option
activity:
|
|
Three Months
Ended March 31, 2017
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding, beginning of period
|
|
|
31,363,319
|
|
|
$
|
0.19
|
|
Stock options granted
|
|
|
6,979,994
|
|
|
|
0.12
|
|
Cancelled/Expired
|
|
|
(911,290
|
)
|
|
|
0.15
|
|
Outstanding, end of period
|
|
|
37,432,023
|
|
|
$
|
0.18
|
|
Exercisable, end of period
|
|
|
12,282,593
|
|
|
$
|
0.22
|
|
As of March 31, 2017
and 2016, there was approximately $2.1 million and $2.1 million, respectively, of total unrecognized compensation related to non-vested
share-based compensation arrangements granted under the Company’s stock plans.
Restricted Stock Awards
At March 31, 2017 and
2016, there were no outstanding restricted stock awards.
Stock Option Grants
On August 9, 2013,
the Company’s shareholders’ approved the 2013 Employee, Director and Consultant Equity Incentive Plan (the “2013
Plan”). The 2013 Plan allows for the issuance of up to 8,860,000 additional shares of the Company’s common stock pursuant
to awards granted under the 2013 Plan. Additionally, the 2013 Plan allows for the issuance of up to a maximum of 2,435,500 additional
shares of the Company’s common stock, pursuant to the cancellation, forfeiture, or expiry, of awards granted under the 2004
Employee, Director and Consultant Stock Plan and terminated on or after the 2013 Plan approval on August 9, 2013. On July 21,
2015, the Company’s stockholders approved an amendment to the 2013 Plan to increase the number of shares of common stock
available for issuance thereunder by 30,000,000 shares. During the three months ended March 31, 2017, the Company granted 6,979,994
stock options under the 2013 Plan. At March 31, 2017, the Company had an aggregate of 14,660,440 shares of common stock available
for grant under the 2013 Plan.
Per his employment
agreement, Mark Carbeau was entitled to receive a grant of options to purchase shares of the Company’s common stock equal
to 5% of the number of shares of the Company’s stock issued in the 2016 Private Placement, assuming the conversion of all
convertible securities issued in the 2016 Private Placement, which equals 5,626,257 shares, at a per share exercise price equal
to the fair market value of the Company’s common stock on the date of the grant. Pursuant to the terms of the 2013 Plan,
the Company cannot issue options or other grants for more than 5,000,000 shares to any one person in a calendar year. Consequently,
on October 20, 2016, the Company granted Mr. Carbeau options to purchase 5,000,000 shares of the Company’s common stock
at an exercise price of $0.17544 per share and expects to grant the remaining options to which Mr. Carbeau is entitled in 2017.
These options will vest as to 25% of the shares on July 29, 2017 and as to an additional 2.083% of the shares on the last day
of each successive month thereafter, provided that Mr. Carbeau remains employed by Company on the vesting date.
Per his employment
agreement, Stephan Toutain was entitled to receive a grant of options to purchase shares of the Company’s common stock equal
to 1% of the Company’s fully diluted shares 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. Consequently, on October 20, 2016, the Company granted Mr. Toutain
options to purchase 3,738,933 shares of the Company’s common stock at an exercise price of $0.17544 per share. These options
will vest as to 25% of the shares on August 15, 2017, and as to an additional 2.083% of the shares monthly thereafter.
In January 2017, Mark
Carbeau was granted an option to purchase 1,278,653 shares of the Company’s common stock related to the 2016 performance
review process. This option has an exercise price of $0.1237 per share. The option vests as to ¼ of the shares on January
25, 2018, and as to 1/36 of the remaining unvested shares at the beginning of each calendar month thereafter beginning on February
1, 2018.
In January 2017, Kenneth
Kornman was granted an option to purchase 3,625,746 shares of the Company’s common stock related to the 2016 performance
review process. This option has an exercise price of $0.1237 per share. The option vests as to ¼ of the shares on January
25, 2018, and as to 1/36 of the remaining unvested shares at the beginning of each calendar month thereafter beginning on February
1, 2018.
In January 2017, Stephan
Toutain was granted an option to purchase 365,093 shares of the Company’s common stock related to the 2016 performance review
process. This option has an exercise price of $0.1237 per share. The option vests as to ¼ of the shares on January 25,
2018, and as to 1/36 of the remaining unvested shares at the beginning of each calendar month thereafter beginning on February
1, 2018.
It is the Company’s
policy to grant stock options with an exercise price equal to the fair market value of the Company’s common stock at the
grant date, and stock options to employees generally vest over four years based upon continuous service. Historically, the majority
of the Company’s stock options have been granted in connection with the employee’s start date with the Company. In
addition, the Company may grant stock options in recognition of promotion and/or performance.
Employee Stock Purchase Plan
Purchases made under
the Company’s Employee Stock Purchase Plan are deemed to be compensatory because employees may purchase stock at a price
equal to 85% of the fair market value of the Company’s common stock on either the first day or the last day of a calendar
quarter, whichever is lower. During the three months ended March 31, 2017 and 2016, employees purchased 54,667 and 66,219 shares,
respectively, of common stock at a weighted-average purchase price of $0.05 and $0.05, respectively, while the weighted-average
market value was $0.06 and $0.06 per share, respectively, resulting in compensation expense of $1,093 and $563, respectively.
Note 9—Industry Risk and
Concentration
The Company develops
genetic risk assessment tests and performs research for its own benefit. As of March 31, 2017, the Company sells five genetic
risk assessment tests. Commercial success of the Company’s genetic risk assessment tests will depend on their success at
being deemed to be scientifically credible and cost-effective by consumers and the marketing success of the Company and its collaborative
partners.
Research in the field
of disease predisposing genes and genetic markers is intense and highly competitive. The Company has many competitors in the United
States and abroad that have considerably greater financial, technical, marketing, and other resources available. If the Company
does not discover disease predisposing genes or genetic markers and develop risk assessment tests and launch such services or
products before its competitors, then the potential for significant revenues may be reduced or eliminated.
During the three
months ended March 31, 2017 and 2016, approximately 46% and 14%, respectively, of the Company’s revenue came from sales
through the Company’s Merchant Network and Channel Partner Agreement with Amway Global, a subsidiary of Alticor, and
8% and 3%, respectively, of the Company’s revenue came from sales through ABG’s promotional product bundle
program.
Note 10—Subsequent Events
On April 17,
2017, the Company sold $500,000 of Convertible Notes (the “2017 Notes”) to each of Bay City Capital and the
Lender (the “Note Holders”), for a total of $1,000,000 in aggregate principal. The 2017 Notes will convert into
common stock if certain conditions are met. In connection with the issuance of the 2017 Notes, the Company also issued
warrants to purchase common stock to the Note Holders. See Item 2 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Recent Developments – Bridge Financing” for more
details.
Also on April
17, 2017, the Company entered into a series of agreements, including the Second Amendment of Venture Loan and Security
Agreement and a warrant to purchase common stock, to restructure its existing debt under the Loan Agreement with the Lender,
which resulted in the deferral of the principal amount due to the Lender on April 1, May 1, and June 1, 2017, and the
potential deferral of the principal amount due to the Lender on July 1, August 1 and September 1, 2017, such potential
deferral of principal is dependent upon whether, as of June 15, 2017, the Company provides evidence reasonably satisfactory
to the Lender that the Company is actively negotiating a clinical services or similar agreement, the terms of which are
satisfactory to the Lender, which the Company believes, in good faith, it will enter into no later than September 1, 2017. In
exchange for agreeing to defer principal payments, the Lender was granted a warrant to purchase common stock. The number of
shares of common stock issuable upon exercise of the warrant is determined by dividing the amount of principal payments
deferred by the exercise price of the warrant, which could result in the warrant being exercisable for between approximately
5,519,604 and 11,039,209 shares. The warrant has an exercise price of $0.10438 per share, is exercisable on a net issuance
basis and has a 10-year term. See Item 2 “Management’s Discussion and Analysis of Financial Condition and Results
of Operations – Recent Developments – Amendment to Venture Loan and Security Agreement” for more
details.