UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal year ended December 31, 2016 | |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to | |
Commission File Number: 001-32715
INTERLEUKIN GENETICS, INC.
(Name of Registrant in its Charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
94-3123681 (I.R.S. Employer Identification No.) |
| 135 Beaver Street, Waltham, MA (Address of principal executive offices) |
02452 (Zip Code) |
Registrant’s Telephone Number: (781) 398-0700
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. YES ¨ NO x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer ¨ (Do not check if a smaller reporting company) |
Smaller reporting company x |
Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO x
The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) computed by reference to the price at which the common stock was last sold as of the last business day of the registrant’s most recently completed second quarter was $5,284,540.
As of April 13, 2017, there were 229,471,392 shares of the registrant’s Common Stock issued and outstanding.
Documents Incorporated By Reference
Portions of the registrant’s Definitive Proxy Statement for the 2017 Annual Meeting of Shareholders are incorporated by reference in Part III hereof.
INTERLEUKIN GENETICS, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2016
Table of Contents
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Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K and, in particular, the description of our Business set forth in Item 1, the Risk Factors set forth in Item 1A and Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 7, and the documents incorporated by reference into this report contain or incorporate certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Words or phrases such as “may,” “will,” “could,” “should,” “potential,” “continue,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “likely,” “outlook,” or similar words or expressions or the negatives of such words or expressions are intended to identify forward-looking statements. We base these statements on our beliefs as well as assumptions we made using information currently available to us. Such statements are subject to risks, uncertainties and assumptions, including those identified in Item 1A “Risk Factors” and elsewhere in this report, as well as other matters not yet known to us or not currently considered material by us. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Given these risks and uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. Forward-looking statements do not guarantee future performance and should not be considered as statements of fact. All information set forth in this Form 10-K is as of the date of filing this Form 10-K and should not be relied upon as representing our estimate as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.
Smaller Reporting Company – Scaled Disclosure
Pursuant to Item 10(f) of Regulation S-K promulgated under the Securities Act of 1933, as indicated herein, we have elected to comply with the scaled disclosure requirements applicable to “smaller reporting companies,” including providing two years of audited financial statements.
| Item 1. | Business |
Overview
Interleukin Genetics, Inc. develops and markets proprietary genetic tests for chronic diseases and health-related conditions, and for informing lifestyle choices to facilitate wellness. Our tests provide information that is not otherwise available to empower individuals and their healthcare providers to manage their health and wellness through genetics-based insights and actionable guidance. We leverage our research, intellectual property, and genetic test development expertise in inflammation and metabolism to identify individuals whose risk for certain chronic diseases may be increased due to variants in one or more genes, which can enable a more personalized approach to the individual’s healthcare. We market our tests through healthcare professionals, partnerships with health and wellness companies, and through other distribution channels. Our lead products are our proprietary cardiovascular risk test and the ILUSTRA™ Inflammation Management Program (the “ILUSTRA Program”), which includes the ILUSTRA Genetic Risk Test (the “ILUSTRA Test”, formerly referred to as the PerioPredict® Genetic Risk Test) that identifies individuals with a life-long predisposition to over-produce inflammation and our Inherent Health® line of genetic tests We continue to support the ILUSTRA Program deployments with customers and will advance new customer relationships that expand the evidence base of this program’s effectiveness.
Our Platform
We have developed a scientific and commercial platform that we believe offers unique approaches to improving outcomes for individuals at high risk for elevated systemic inflammation. Our platform is characterized by:
| · | Our expertise in IL-1 biology. We have been at the forefront of understanding the role of IL-1 genetic variation in the clinical expression of inflammation in humans. |
| · | Proprietary assays and algorithms. Our existing tests, led by our cardiovascular risk test and the ILUSTRA Test, are proprietary and provide unique insights that we believe enable individuals and their healthcare providers to better manage their health. We expect to develop and introduce more proprietary assays for specific inflammatory diseases. |
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| · | Unique test development approach. We identify and validate patterns of genetic variations with clinical utility for selected chronic inflammatory diseases. This approach uses our proprietary patterns of IL-1 gene variations or may use those proprietary variations to anchor a broader set of other, non-proprietary genetic factors that can be added to a test to capture risk for a specific health outcomes that are of high clinical value. |
| · | Ability to support drug development. Our technology has been shown to also be useful in assessing differential drug outcomes in clinical trials, and may have similar value in the future. |
| · | Highly automated CLIA lab. All our tests use customized genetic arrays that allow processing of clinical samples in our CLIA approved clinical genetics laboratory, located in Waltham, MA. |
| · | Value-added commercial approach. We partner with health and wellness companies, employers and others to leverage the unique information provided by our tests to drive greater patient engagement, more effective disease management and improved outcomes. |
Market Conditions and Trends
Until recently, physicians and dentists treated patients with physical symptoms, such as pain or altered function, based on how early the diseases were discovered and the severity of damage produced. Management of chronic diseases has largely focused on identifying factors that “cause” the disease and ways to alter or reverse the disease after it has been diagnosed. Some causes, such as elevation of “bad” cholesterol in heart disease, are used for public health awareness and for patient testing to draw attention to early management. Common examples of altering or reversing initiating factors include calorie reduction in the case of being overweight, reducing levels of LDL cholesterol in the case of heart disease, reduction of bacteria with reduction of inflammation in the case of periodontal disease, and increasing estrogen levels in the case of osteoporosis. However, it is now well established that while initiating factors are essential for disease, the severity of chronic diseases and their complications are mostly the result of modifying factors, such as smoking and genetics, that alter an individual’s response to the disease initiator, and consequently the amount of damage produced.
The future of healthcare has been described as P4 medicine: Predictive, Preventive, Personalized, and Participatory. Predictive, can we identify that you are on the disease path prior to development of severe disease; Prevention, if we can identify early which path you are on, what can we do to tilt the curve down to extend the years of wellness or prevent the disease complications entirely; Personalization, which path are you on; and Participatory, to acknowledge the individual’s responsibility in managing and preventing chronic diseases.
Many people have the mistaken impression that genetics dictates how an individual will look or feel and that there is nothing one can do to change that genetic destiny. While it is true that some genetics have a permanent effect on a person's appearance or condition (referred to as a phenotype), the vast majority of genetic influences on one’s phenotype can be modified. An active field of research in healthcare today is to better understand the interaction between our environment, behavior, and genes. The scientific community is learning more each day about the role and significance of genetic variations, such as single nucleotide polymorphisms, or SNPs, and haplotypes, on an individual’s health. SNP and haplotype analysis, coupled with detailed knowledge of environmental factors, now is an important area of study aimed at improving human health. A SNP may cause a gene to make a different amount of a protein for a given condition, change the timing of protein synthesis or make a variant form of the protein; each of these changes may lead to a discernible biological impact. However, certain lifestyle changes can influence significantly whether a set of genes are activated or inactivated despite the variation in the gene. Thus, while the propensity for physiological impact is always present for a given set of genes and their variants, whether or not the condition manifests itself is often controlled by our environment and the lifestyle choices we make.
We have focused our research, development and commercialization efforts on identifying combinations of SNP variations that alter biology involved in inflammation or metabolic disease. We have worked with leading universities throughout the world to identify genetic variations that influence the body’s inflammatory response. Our scientific advisory board includes Sir Gordon Duff, a pioneer in understanding the role that genetics plays in inflammatory disease pathways. In addition, we have conducted clinical studies for various indications throughout the world involving tens of thousands of individuals to demonstrate clinical value of our tests. To date, some of our clinical research collaborations include studies at: Stanford University; the University of North Carolina at Chapel Hill; the Mayo Clinic; Brigham & Women’s Hospital (Harvard Medical School); University of California at San Francisco; University of California at San Diego; New York University Medical Center; University of Sheffield, (UK); Yonsei University Medical Center, (Korea); Tongji Medical College, (China); University Hospital of Ioannina, (Greece); and Tuft’s University Medical Center.
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Inflammation is one of the body’s most basic protective mechanisms, and the understanding of the role of inflammation in disease has increased over the past few years. It is generally accepted that many chronic conditions begin with a challenge to the tissues of the body and that the inflammatory response system of an individual mediates the clinical manifestation. It is also now thought that SNP variations in the genes that influence the inflammatory process can have an important impact on the variation of disease progression among individuals who experience the same initiating events or conditions.
Chronic conditions that have traditionally been considered to be primarily inflammatory diseases include periodontitis and rheumatoid arthritis. In recent years, inflammation has been found to affect several other major diseases of aging that were not previously thought of as inflammatory diseases, including heart disease, diabetes and osteoarthritis. For example, an individual who has a strong inflammatory response may be more successful in clearing a bacterial infection than an individual with a less robust inflammatory response. However, that strong inflammatory response may actually cause that individual to be at increased risk for a more severe course in one or more of the chronic diseases that generally affect people in mid to later life, such as cardiovascular disease, osteoarthritis, and periodontal disease. There is growing evidence that genetic variants in IL-1 influence individual risk of developing these diseases and their severity and complications.
IL-1 is now recognized as a major driver of the inflammation involved in many of the chronic diseases, as evidenced by more than ten IL-1 blocking drugs now in active clinical development by pharmaceutical and biotechnology companies for major indications, including secondary cardiovascular events and type 2 diabetes mellitus.
Our proprietary IL-1 genetic patterns provide multiple access points to improve management of serious, highly prevalent conditions that are currently undermanaged. Our tests have shown significant value in predicting secondary heart attacks, severe and progressive periodontitis, and progression of knee osteoarthritis, and have the ability to differentiate clinical responses to IL-1 blocking drugs and preventive dental care. Since our IL-1 genetic tests identify individuals with a lifelong tendency to over produce IL-1, we are also engaged in projects to demonstrate how some of our tests may add value in the clinical management of the overall systemic inflammatory burden.
Our Product Focus
Cardiovascular Disease
Use of IL-1 pro-inflammatory genetic variations to guide drug development and use to prevent recurrent cardiovascular disease (“CVD”) events
During late 2016 and early 2017 we redefined our strategy to add emphasis to our CVD program based on confirming evidence from a second 4-year prospective clinical study and increased interest from potential collaborators working on next-generation CVD drugs.
Inflammation is well documented to contribute to CVD events through biological effects on multiple components of the atherothrombotic cardiovascular disease process. Inflammatory biomarkers such as high-sensitivity C-reactive protein (hsCRP) identify individuals at high risk for both first and recurrent CVD events even in individuals without elevated lipid levels. We have previously reported that individuals with elevated oxidized phospholipids, as carried in the blood mostly by Lp(a), are at increased risk for coronary artery disease (Tsimikas et al. 2005). Following treatment for coronary artery disease the majority of individuals who developed recurrent CVD events in the subsequent four years were those who had elevated blood levels of Lp(a) and tested positive for our pro-inflammatory IL-1 genetic patterns (Tsimikas et al. 2014). The combination was significantly better than either factor alone and suggests that the bad lipids are working in part through the gene variations in our test that amplify inflammation. These results were corroborated in a second study population at the University Hospital of Ioannina, Greece (presented at the Annual Meeting of the American College of Cardiology, March 2017), which further established that the role of Lp(a) in determining patients at elevated risk for recurrent CVD events is conditional on our IL-1 genetic patterns. This finding suggests a potential pharmacogenomic relationship that could be important to companies developing therapeutics and to clinicians managing certain high risk CVD patients.
In 2015, we announced a collaboration with Ionis Pharmaceuticals to use our IL-1 genetic test in a Phase 2 study of their anti-sense drug that has been shown in Phase 1 trials to reduce Lp(a) levels as well as to use our genetic test in a new Phase 1 study. Additional companies are testing other drugs candidates to help treat high risk CVD patients by potentially lowering bad cholesterol such as LDL and Lp(a) or by blocking IL-1 production and are studying their impact on recurrent heart events. Amgen, Sanofi, Novartis and The Medicines Company have active development programs in this area. We believe that our proprietary IL-1 genetic patterns that identify patients who over-produce IL-1 may have value in guiding development and use of drugs that directly or indirectly target IL-1 effects on CVD events. We are currently seeking strategic interest in this program.
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ILUSTRATM Inflammation Management Program
On November 25, 2013 we announced the introduction of the PerioPredict Genetic Risk Test, and during 2016 our principal focus was on repositioning the test and commercializing the ILUSTRA Program. As part of our work force restructuring in March 2017, we are streamlining our commercial strategy for the ILUSTRA Program. We continue to support the ILUSTRA Program deployments with customers and will advance new customer relationships that expand the evidence base of this program’s effectiveness. We will continue to refine our strategy for this program based on our financial resources and its commercial success.
Product Definition and Positioning
The ILUSTRA Test is a genetic risk test that analyzes genetic variations associated with inflammation and identifies individuals with a life-long predisposition to over-produce inflammation. The ILUSTRA Test identifies specific polymorphisms (genetic variations) in genes that regulate the production of interleukin-1 cytokines. Higher gingival levels of these proteins are associated with destruction of soft tissue attachment and bone, and increased severity of periodontitis in certain patient populations. Results from several clinical studies indicate that certain inflammatory cytokine levels in the gingival crevicular fluid were significantly higher in ILUSTRA Program/Test positive patients than in patients who were ILUSTRA Program/Test negative. ILUSTRA Program testing need only be done once in a lifetime and identifies “at risk” patients early on, often before the onset of clinical symptoms, to enable targeted treatment. This objective information allows the dentist and hygienist to better guide treatment to reduce complications and costs associated with chronic inflammatory disease, such as severe periodontitis. The test may also help to establish long-term patient relationships based on the patient’s prevention and care plan guided by the individual’s genetic predisposition. Sample collection requires only a simple, easy-to-use cheek swab, and the ILUSTRA Test has been validated for use in all major ethnic groups. The ILUSTRA Test identifies adults at increased risk for severe periodontal disease who would not have otherwise been identified by a history of smoking or diabetes.
We position the ILUSTRA Program as a tool to drive medical value; empowering individuals and healthcare professionals with actionable genetics data. The ILUSTRA Test serves as the central component in a program to identify individuals at high risk for elevated systemic inflammation, enabling a risk stratification framework to personalize care interventions and patient outreach. The ILUSTRA Program creates value through early identification of risk, elevated professional surveillance for disease detection, and enhanced patient engagement and compliance.
Elevated systemic inflammation levels are implicated in the development and complications of numerous chronic diseases, such as heart attack, stroke, and type 2 diabetes. Severe periodontitis is one of the most common causes of increased systemic inflammation and is implicated as a risk factor for several other diseases. Studies demonstrate that preventive dental care can lower a patient’s systemic inflammatory burden and is a practical, low-cost intervention access point to help manage systemic health. Additional health economic studies document that treatment of periodontitis is associated with substantial medical cost savings for patients with certain chronic diseases.
Leveraging this substantial clinical and health economics data, the ILUSTRA Program can be an essential element in an enhanced benefits design or employer-sponsored wellness initiative to identify individuals at high risk and to drive a risk stratification framework to personalize care interventions and patient outreach. The program integrates three components: 1) ILUSTRA genetic test, 2) professional education to dental offices and 3) outreach to high risk members to enhance engagement and compliance. The overall goal of the program is to target high-risk individuals for more proactive dental care and to provide the education and support to ensure compliance with a modified care-plan designed to reduce systemic inflammation.
Clinical Utility and Health Economics
The clinical utility of the ILUSTRA Test is supported by the large validation study conducted by the University of Michigan and referred to as the Michigan Personalized Prevention Study, or MPPS. The objective of the MPPS was to improve dental care by identifying and using certain risk factors to set preventative treatment regimens. On August 6, 2012, we announced that we had received top line results from the MPPS, and on June 10, 2013, we announced the publication of the MPPS results in the Journal of Dental Research. The study examined data from 5,117 patients monitored for 16 consecutive years. These results indicated that in low risk patients (those with none of three risk factors: smoking, diabetes, and a ILUSTRA Program/Test result indicating the individual was at high risk of contracting periodontitis) there was no significant difference between two dental preventive visits per year and one preventive visit per year in the percentage of patients who had tooth extractions over the 16 year monitoring period; 13.8% versus 16.4%, respectively. In addition, these results indicate that in high risk patients (those with any one of the three risk factors, with ILUSTRA being the most common of the three), two preventive visits per year significantly reduced the percentage of patients who had extractions over a 16 year monitoring period compared to one preventive visit per year; 16.9% vs. 22.1%. There was also a positive relationship between the number of risk factors and the percentage of patients with extractions. For patients with two or three risk factors, and smoking plus ILUSTRA Program/Test positive represented approximately 67% of those patients, two cleanings annually did not appear to be sufficient to control risk for tooth loss.
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IL-1 genetic information may be used to target more intensive periodontitis management and prevention to those patients more likely to have a level of disease that influences the systemic inflammatory burden. In a recent analysis of insurance claims data from more than 300,000 patients, treatment of periodontitis was associated with subsequent reduced cost of medical care for those with selected chronic diseases, including type 2 diabetes, coronary artery disease, stroke, and adverse pregnancy outcomes. The annual per patient decrease in medical costs over the three years following periodontitis treatment were $2,840 for type 2 diabetes mellitus, $5,681 for stroke, and $1,090 for coronary artery disease (Jeffcoat et al. 2014).
The value of preventive dental care in reducing the cost of managing type 2 diabetes and its complications has been confirmed in a second study by United Healthcare and Optum, where claims data on more than 130,000 patients showed that regular preventive dental cleanings were associated with annual per patient cost decreases for diabetes management of $2,045, compared to irregular preventive dental care, an annual mean per patient cost reduction of 20%.
Commercial Strategy for ILUSTRA
We market the ILUSTRA Inflammation Management Program to employers and insurance carriers as a central component to an enhanced benefit design or wellness initiative that is intended to lower medical costs through disease avoidance and reduced disease progression and complications.
We target large employers, who are typically self-insured, that see value in the potential reduction of medical costs associated with the highly prevalent inflammatory diseases that our program can provide. Within this customer segment, initial targets tend to be progressive, wellness-minded companies that are engaged in other programs aimed at improving the overall health of their employees.
We also target insurance carriers, with a particular emphasis on companies with dental-medical integration (“DMI”) products, either in place or in development, and integrated delivery networks (“IDNs”), as these customers are best positioned to realize value from the reduction of medical costs associated with the highly prevalent inflammatory diseases that our program can provide.
This target customer segment represents a large market, as an estimated 170 million Americans have dental coverage through an insurance program. These customers are increasingly focused on DMI products, as the correlation between oral health and general health has become better understood. We believe the potential of our ILUSTRA Program to facilitate the realization of cost savings through reduced medical claims is well-aligned with this powerful trend in the insurance industry.
Our insurance carrier target customers are also seeking differentiation, and the opportunity to be seen as adding value to their customers through novel product offerings, such as benefit plans that include the ILUSTRA Program. For these customers, we typically establish demonstration projects aimed at providing evidence of the efficacy of our program in driving patient engagement, compliance and ultimately reduced costs. Once that demonstration is achieved, we believe the insurance carrier will be incentivized to incorporate our program broadly in their product offerings, thereby providing significant leverage to our commercialization efforts.
To create further leverage, we are creating partnerships with benefits consulting firms and employer benefits coalitions, to identify and facilitate initial interactions with potential customers.
The ILUSTRA Program is solely available through Interleukin Genetics. The web site for the ILUSTRA Program is www.ILUSTRA.com. The information contained on our websites are not incorporated by reference into this Form 10-K. We have included our website addresses only as an inactive textual reference and do not intend them to be active links to our websites.
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Additional Products Marketed
We market additional genetic tests through our Inherent Heath brand:
| · | Weight Management Genetic Test: This test determines whether individuals will lose weight more predictably on a low fat, low carbohydrate or balanced diet and whether normal or vigorous exercise is needed to most efficiently lose existing body fat. The test results guide more effective long-term weight loss. | |
| · | Bone Health Genetic Test: This test is designed to identify whether an individual is more likely to be susceptible to spine fractures and low bone mineral density associated with osteoporosis. | |
| · | Heart Health Genetic Test: This test is designed to identify genetic predisposition to excess inflammation, which is a risk factor for heart attack. | |
| · | Nutritional Needs Genetic Test: This test is designed to identify DNA variations in genes crucial to B-vitamin metabolism and the ability to manage oxidative stress. | |
| · | Wellness Select Genetic Test: This allows buyers to purchase any combination of Inherent Health genetic tests at a discounted price. |
Weight Management Genetic Test
Our Weight Management Genetic Test helps take the guesswork out of finding an effective diet and exercise solution by revealing actionable steps to achieve weight goals based on genetics. The test determines whether a low fat, low carbohydrate or balanced diet may be best, as well as whether normal or vigorous exercise is needed to most efficiently lose existing body fat. The test provides new information beyond traditional assessments, so that nutritional intake and fitness routines can be tailored for improved, sustainable results. This test identifies five SNPs in four human genes that are involved in certain physiological pathways relating to body weight. Certain patterns of markers are associated with differential response to certain diet and exercise regimens.
Bone Health Genetic Test
Our Bone Health Genetic Test is designed to identify whether an individual is more likely to develop spine fractures and low bone mineral density associated with osteoporosis. Although it typically starts later in life, early intervention can help prevent osteoporosis. Preventive measures can reduce the risk for bone loss and fractures, which in the case of vertebral fractures leads to a hunched over appearance. The test identifies a SNP in each of three genes involved in processes that affect bone; estrogen receptor alpha (ER1 Xba1), vitamin D receptor (VDR), and interleukin-1 (IL-1). Certain patterns of variations are associated with increased risk of spine fracture and/or low bone mineral density. The test can be used as an aid to making diet, exercise, and other lifestyle choices to maintain and improve bone health.
Heart Health Genetic Test
Our Heart Health Genetic Test is designed to identify genetic predisposition to excess inflammation, which is a risk factor for heart attack. The genetic analysis identifies individuals that have a lifelong tendency to overproduce certain chemicals in the body that lead to inflammation. Overproduction of these chemicals may start a chain reaction that ultimately may lead to a heart attack. Knowing genetic risk will enable individuals to take specific actions to decrease overall risk. The test identifies three SNPs in two genes involved in inflammation, IL-1 alpha and IL-1 beta. Certain IL-1 variations are associated with increased inflammation, which is a risk factor for early heart attack. The test may be used as an aid to making diet, exercise, and other lifestyle choices to reduce inflammation-based risk.
Nutritional Needs Genetic Test
Our Nutritional Needs Genetics Test is designed to identify DNA variations in genes crucial to B-vitamin metabolism and the ability to manage oxidative stress. Individuals with certain variations in these genes may be at increased risk for ineffective utilization of B-vitamins and potential for cell damage caused by oxidative stress, both of which can in some cases lead to increased risk for certain diseases. The test identifies the presence or absence of human genotypic markers involved in vitamin B metabolism and markers in response to oxidative stress. Certain variations are associated with less efficient B-vitamin metabolism or reduced activity of endogenous anti-oxidant systems. The test may be used to aid individuals in deciding whether to supplement their diet with B vitamins and/or antioxidants.
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Wellness Select Genetic Test
Our Wellness Select Genetic Test allows buyers to purchase any combination of Inherent Health genetic tests at a discounted price.
Marketing and Distribution of Inherent Health Tests
We market our Inherent Health Weight Management and Nutritional Needs Genetic tests using our e-commerce website and under contract with Amway-affiliated companies, which are affiliates of Alticor, Inc., the parent of Pyxis Innovations Inc., a significant stockholder (“Pyxis”), and several regional weight management focused organizations. The Bone Health and Heart Health tests are ordered by physicians for their patients. Amway sells the Inherent Health Weight Management test in the U.S. and fifteen countries in Europe. The European tests are processed through two European laboratories that have been validated for quality assurance purposes by Interleukin Genetics. We receive a royalty payment from each test processed in Europe but do not receive a test processing fee. We have developed a complete e-commerce solution for our Inherent Health brand of genetic tests. We have subcontracted with a fulfillment center to distribute tests to customers ordering via our online store. The e-commerce solution has provided a friendly and easy to use method for the purchase of our genetic tests. We are partnered with a number of websites that have established a link to our site in order to distribute tests. We pay these sites commissions for all orders made via a click through from their site to ours.
Laboratory Testing Procedure
To conduct a genetic risk assessment test, the customer collects cells from inside the cheek using a buccal swab brush and submits it by mail to our laboratory. Samples are processed only with a requisition signed by either a customer’s physician, one provided by an Interleukin Genetics physician or a patient’s dentist and a customer consent for the genetic test. Our CLIA-certified clinical laboratory performs the ordered genetic test using stringent standard operating protocols. Following state and country regulations the test results are provided directly to the customer and/or the designated health care provider.
We process test samples in our CLIA-certified genetic testing laboratory. The regulatory requirements associated with a CLIA-certified clinical laboratory are addressed under the section titled “Government Regulation.” We have upgraded the systems and processes for the laboratory with the addition of high volume analytical equipment as well as updated protocols for all of the laboratory processes. We currently hold laboratory permits or licenses for all U.S. states that require a genetic test processing license and meet the regulatory requirements as needed for other countries.
Intellectual Property
Our intellectual property is focused on the discoveries that link variations in key inflammation and metabolic genes to various conditions or illnesses. We initially concentrated our efforts on variations in the genes for the interleukin family of cytokines, because these compounds appear to be one of the strongest control points for the development and severity of inflammation. Some of our tests may include our proprietary genetic variations plus other gene variations that may be publicly available or in-licensed by Interleukin Genetics.
We have and have been granted patents and pending applications directed to single SNPs and SNP patterns in gene clusters as they relate to use for identifying individuals on a rapid path to several medical conditions or for use in guiding the selection of diets, exercise, vitamin needs, preventive care and also therapeutic agents. Groups of SNPs are often inherited together as patterns called haplotypes. We have a U.S. patent issued on haplotypes in an interleukin gene cluster and their biological and clinical significance. We believe these patents are controlling relative to interleukin SNPs and haplotype patterns that would be used for genetic risk assessment tests.
Our patents are “use” patents that claim that a SNP, or set of SNPs in unique patterns can be used in a novel way to predict disease development or progression, predict responses to preventive or therapeutic interventions and identify specific actions that improve health outcomes. We currently own rights in nine issued U.S. patents that have expiration dates between 2017 and 2032, five U.S. patent applications and one U.S. Provisional patent application pending, that are based on novel associations between particular gene sequences and certain metabolic and inflammatory conditions and disorders. The nine issued U.S. patents relate to genetic tests for, periodontal disease, osteoporosis, coronary artery disease, and other diseases associated with interleukin inflammatory haplotypes. Our newest patent applications relate to the commercial use of SNP panels in the fields of weight management, periodontal disease, osteoarthritis and IL-1 blocking drug indications. If granted, we expect many of these patents are not likely to expire until between 2029 and 2037.
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Our intellectual property and proprietary technology are subject to numerous risks, which we discuss in “Risk Factors” below in Part I, Item 1A of this Form 10-K. Our commercial success will depend at least in part on our ability to obtain appropriate patent protection on our therapeutic and diagnostic products and methods and our ability to avoid infringing on the intellectual property of others.
We have been granted a number of corresponding foreign patents and have a number of foreign counterparts of our U.S. patents and patent applications pending.
Competition
The competition in the field of personalized health is changing. The markets and customer base are not well established. There are a number of companies involved in identifying and commercializing genetic markers. The companies differ in product end points and target customers. There are companies that market individual condition genetic tests for complex diseases to consumers and those that sell only to physicians. There are companies that market testing services for rare monogenic diseases mainly to physicians. There are companies that sell genome-scanning services to provide customers (usually the consumer directly) reports on large numbers of SNPs or the person’s entire genome. There are also technology platform companies that sell SNP testing equipment.
The key competitive factors affecting the success of any genetic test is its perceived benefit by the user, price (potentially including availability of reimbursement) and the level of market acceptance. In the case of newly introduced products requiring “change of behavior” (such as genetic risk assessment tests), we believe the presence of multiple competitors may accelerate market acceptance and penetration through increasing awareness. Moreover, two different genetic risk assessment tests for the same disease may in fact test or measure different components, and thus, actually be complementary when given in parallel as an overall assessment of risk, rather than being competitive with each other. Furthermore, the primary focus of most companies in the field is performing gene-identification research for pharmaceutical companies for therapeutic purposes, with genetic risk assessment testing being a secondary goal. In contrast, our primary business focus is developing and commercializing genetic risk assessment tests for health risks and forward-integrating these tests with additional products and services.
For a discussion of the risks associated with competition, see “Risks Related to Our Business, Our Financial Results and Need for Financing - We could become subject to intense competition from other companies, which may damage our business.” under "Risk Factors" below in Part I, Item 1A of this Form 10-K.
Government Regulation
Federal and state governmental authorities regulate the testing services that we provide. Failure to comply with the applicable laws and regulations can subject us to civil and criminal penalties, loss of licensure, certification, or accreditation. We intend to comply with all applicable government regulations and believe that we are currently in compliance. We cannot predict what new legislation or regulations governing our operations will be enacted by legislative bodies or promulgated by agencies that regulate its activities, or what changes in interpretations of existing regulations may be adopted. In particular, the FDA’s approach to regulating laboratory developed tests is evolving, including such tests that are made available directly to the consumer, and we are in discussions with the FDA about how our tests, primarily certain of our Inherent Health tests, may be impacted, as discussed further in the “Government Regulation - Food and Drug Administration” section below.
CLIA and Other Laboratory Licensure
Our clinical laboratory must hold certain licenses, certifications, and permits to conduct our business. Laboratories that perform testing on human specimens for the purpose of providing information for the diagnosis, prevention or treatment of disease or assessment of health are subject to the Clinical Laboratory Improvement Amendments of 1988 (CLIA). CLIA requires such a laboratory to be certified by the federal government and mandates compliance with various operational, personnel, facilities, administration, quality and proficiency testing requirements intended to ensure that testing services are accurate, reliable and timely. Requirements for testing under CLIA vary based on the level of complexity of the testing performed. Laboratories performing high complexity tests, such as genetic tests, must comply with more stringent requirements than laboratories performing moderate or waived testing.
As a condition of CLIA certification, our laboratory is subject to survey and inspection every other year, in addition to being subject to additional random inspections. The biennial survey is conducted by the Centers for Medicare & Medicaid Services, or CMS, a CMS agent (typically a state agency), or, if the laboratory is accredited, a CMS-approved accreditation organization.
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CLIA provides that a state may adopt laboratory regulations that are more stringent than those under federal law. In some cases, state licensure programs actually substitute for the federal CLIA program. In other instances, the state’s regulations may be in addition to the CLIA requirements. In addition, our laboratory holds multiple state licenses to the extent that we accept specimens from one or more of these states, each of which require out-of-state laboratories to obtain licensure. If a laboratory is out of compliance with state laws or regulations governing licensed laboratories, penalties for violation vary from state to state but may include suspension, limitation, revocation or annulment of the license, assessment of financial penalties or fines, or imprisonment. We believe that we are in material compliance with all applicable licensing laws and regulations.
We may become aware from time to time of other states that require out-of-state laboratories to obtain licensure to accept specimens from the state, and other states may impose such requirements in the future. If we identify any other state with such requirements, or if we are contacted by any other state advising us of such requirements, we intend to follow all instructions from the state regulators regarding compliance with such requirements.
Laboratories must renew certification every two years, which typically includes an inspection of the laboratory. Our laboratory was most recently inspected in September 2015 and no deficiencies or other issues were noted and our CLIA license was renewed.
Food and Drug Administration
Although the Food and Drug Administration (FDA) has consistently claimed that it has the authority to regulate laboratory-developed tests, or LDTs, that are validated by the developing laboratory and performed only by that laboratory, it has generally exercised enforcement discretion in not otherwise regulating most tests developed and performed by high complexity CLIA-certified laboratories.
In July 2010, FDA held a public meeting in which FDA officials including those from the Office of In Vitro Diagnostic Products (OIR), within the Center for Devices and Radiological Health (CDRH) announced their intention to develop a regulatory framework for LDTs that would be based on the risks posed by such tests. In particular, FDA officials stated that laboratory developed tests offered directly to consumers would no longer be subject to enforcement discretion. Concomitant with that meeting, FDA sent letters to more than a dozen companies offering direct-to-consumer, or DTC, genetic tests, including us, stating that their tests appeared to be subject to regulation as medical devices and requesting information on how the companies planned to come into compliance with FDA requirements. The FDA letter inquired about our Inherent Health brand of DTC genetic tests and stated that these tests appeared to meet the definition of a “device” under the Federal Food, Drug, and Cosmetic (FD&C) Act. The letter requested that the Company provide FDA with the clearance or approval number for the tests or with the basis for determination that the tests do not require FDA clearance or approval. In the letter, FDA offered to meet with us, “to discuss whether there are tests you are promoting that do not require review by FDA and what information you would need to submit in order for your products to be legally marketed.”
In March 2011, FDA convened an expert advisory panel to discuss and make recommendations on scientific issues concerning DTC genetic tests that make medical claims. The panel expressed a variety of concerns regarding DTC genetic testing and recommended that certain tests not be permitted to be sold DTC. We submitted a position paper to the FDA in advance of the meeting and presented testimony to the panel at a public meeting on March 8, 2011. After that meeting, the OIR director publicly stated that FDA would likely take a case-by-case approach with respect to which types of genetic tests may be offered DTC. He also stated that OIR planned to issue three guidance documents addressing oversight of laboratory-developed tests. However, he did not provide a timeframe for OIR’s release of these documents. In March 2012, an FDA spokesperson stated that FDA’s plan to adjust its enforcement discretion policy for LDT’s is currently under “administrative review.”
On July 31, 2014 the FDA provided 60-day notice to Congress of its plan to issue draft guidance on the regulation of laboratory developed tests. On September 30, 2014, the FDA posted two draft guidances on its website, followed by notice in the Federal Register on October 3, 2014 announcing their release and the opening of a 120-day public comment period. This comment period lasted until February 2, 2015. FDA has not to date issued final versions of either of these guidance documents. In a footnote to one of these draft guidance documents, FDA stated that laboratory tests offered directly to consumers were not considered LDTs and would not be subject to FDA enforcement discretion.
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The FDA issued a Draft Guidance for Industry and Food and Drug Administrative Staff on In Vitro Companion Diagnostic Devices on July 14, 2011, which, if finalized, is intended to assist companies developing in vitro companion diagnostics and companies developing therapeutic products that depend on the use of a specific in vitro companion diagnostic for the safe and effective use of the product. The FDA defined an in vitro companion diagnostic device, or IVD Companion Diagnostic Device, as a device that provides information that is essential for the safe and effective use of a corresponding therapeutic product. This definition is much narrower than the commonly used term “companion diagnostic,” which refers generally to tests that may be useful, but are not necessarily a determining factor in the safe and effective use of the therapeutic product. The FDA expects that the therapeutic sponsor will address the need for an approved or cleared IVD Companion Diagnostic Device in its therapeutic product development plan. The sponsor of the therapeutic product can decide to develop its own IVD Companion Diagnostic Device, partner with a diagnostic device sponsor to develop the appropriate IVD Companion Diagnostic Device, or explore modification of an existing IVD diagnostic device (its own or another sponsor’s) to accommodate the appropriate intended use. The FDA has approved a number of drug/diagnostic device companions in accordance with the Draft Guidance. However, this guidance will not apply to the LDTs that are used as companion diagnostics that merely provide useful information and are not linked to a specific drug indication.
On November 1, 2010, we met with the director and staff members of the OIR to present information on our tests. At FDA’s request, we submitted a plan for how our tests would be submitted to FDA in December 2010 and requested a follow-up meeting to obtain feedback on the plan from OIR personnel. We did not receive any substantive feedback on this plan from FDA.
In October and November 2015 the FDA sent a number of “Untitled Letters” to entities marketing genetic tests directly to consumers, including to us. Specifically, on November 2, we received an Untitled Letter from the FDA requesting information about whether certain specified tests had obtained FDA clearance. We submitted a written reply to this letter on December 16, 2015, in which we responded that (1) we do not currently offer an osteoarthritis test; (2) that the ILUSTRA Test is a LDT subject to FDA “enforcement discretion; and (3) that the Weight Management Genetic test is not a medical device subject to FDA’s statutory jurisdiction or, if it is, should be subject to enforcement discretion because it is a low-risk wellness product. We requested a meeting with OIR to discuss the Inherent Health tests.
On February 3, 2016 we met with the director and staff members of OIR to further discuss our letter response. The FDA issued minutes of the meeting on February 16, 2016, which confirmed that we do not offer an Osteoarthritis test and that the ILUSTRA Test is currently offered only as an LDT and is therefore currently subject to FDA enforcement discretion. In addition, they confirmed their interest in obtaining further information on how we would come into compliance with respect to the Inherent Health tests, since those tests are offered DTC and therefore are not subject to FDA enforcement discretion. We are continuing to engage with OIR regarding the appropriate next steps for these tests.
On April 5, 2016, we announced the results of discussions with the U.S. Food and Drug Administration (“FDA”) in response to an Untitled Letter issued by the FDA on November 4, 2015 and a meeting on February 3, 2016 with personnel within FDA’s Office of In Vitro Diagnostics and Radiological Health (OIR) to discuss Interleukin’s written response to OIR with respect to the Untitled Letter. OIR personnel confirmed that the ILUSTRA Test is a laboratory developed test (LDT) currently subject to FDA enforcement discretion and may continue to be marketed without prior marketing authorization at this time. Our Bone Health and Heart Health tests, which are part of the Inherent Health line of tests, will be transitioned from a direct-to-consumer (DTC) distribution channel to a distribution model under which a licensed healthcare provider orders tests and oversees any resulting change in care. These two tests were available through Interleukin Genetics’ DTC retail channels until May 22, 2016, at which time they were no longer available unless requested by an authorized healthcare provider.
HIPAA and Other Privacy Laws
The Administrative Simplification provisions of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) established for the first time comprehensive federal protection for the privacy and security of health information. The Health Information Technology for Economic and Clinical Health Act (“HITECH”), part of the American Recovery and Reinvestment Act of 2009, significantly expanded the scope of HIPAA and increased penalties for violating HIPAA. The HIPAA standards apply to three types of organizations (“Covered Entities”): health plans, health care clearing houses, and health care providers who conduct certain health care transactions electronically. They also apply to vendors of Covered Entities called “Business Associates” that access protected health information to provide services to or perform functions on behalf of Covered Entities. Covered Entities and Business Associates must have in place administrative, physical and technical standards to guard against the misuse of individually identifiable health information. We are not currently a Covered Entity subject to the HIPAA privacy and security standard. It is possible that in the future we will become a Covered Entity (for example if any of the tests that we perform become reimbursable by insurers). Regardless of our own Covered Entity status, HIPAA may apply to our customers, such as health care providers and health plans. Even though we are not directly subject to HIPAA, we could be subject to penalties, lawsuits and experience other adverse consequences if we wrongfully acquire protected health information, aid and abet a HIPAA violation by a customer or if we obtain or disclose protected health information maintained by a Covered Entity without authorization in violation of HIPAA. In addition, some lawsuits, including class action lawsuits, have been pursued at the state level against both covered entities and entities that are not directly subject to HIPAA for breach of confidentiality and security violations.
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Our activities must also comply with other applicable privacy laws, including state data security laws that apply to personal data of our employees as well as our customers. “Personal data” includes information such as name coupled with social security number, state issued identification number, or financial account number. State data security laws impose specific security measures for the protection of personal data and require notification to affected individuals and government authorities in the event of breach. Non-compliance may result in government investigations, fines and significant negative publicity for our company.
Many states protect health information with confidentiality laws that are more stringent than HIPAA and that are not preempted by HIPAA. Most states protect certain categories of sensitive health information, such as infectious disease status or behavioral health history. Genetic information, including genetic test results, is often a protected category of health information. We must comply with all of these state-imposed laws. There are also international privacy laws, such as the European Data Directive, that impose restrictions on the access, use, and disclosure of health information and personal data across national lines.
In addition to health care privacy and data security laws, many states have adopted laws governing genetic testing and the use and disclosure of genetic test results. These laws typically require a specific form of written consent in advance of genetic testing and require special protections for test results. Given the complexity of genetic testing and the variety of techniques available for evaluating similar clinical conditions, these laws can be difficult to apply, making compliance more complex and potentially delaying implementation of a testing program when parties disagree on interpretation. Our failure to comply with these laws may result in fines, government enforcement, privacy litigation and adverse publicity for our company.
If we become subject to HIPAA or other state or federal privacy and security laws, we will have to establish and maintain an active compliance program. We will be subject to audit and investigation and may also be audited in connection with a complaint. We would also be subject to prosecution and/or administrative enforcement and increased civil and criminal penalties for non-compliance, including a new, four-tiered system of monetary penalties adopted under HITECH. We would also subject to enforcement by state attorneys general who were given authority to enforce HIPAA under HITECH.
We are subject to laws and regulations related to the protection of the environment, the health and safety of employees and the handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials. For example, the U.S. Occupational Safety and Health Administration, or OSHA, has established extensive requirements relating specifically to workplace safety for healthcare employers in the U.S. This includes requirements to develop and implement multi-faceted programs to protect workers from exposure to blood-borne pathogens, such as HIV and hepatitis B and C, including preventing or minimizing any exposure through needle stick injuries. For purposes of transportation, some biological materials and laboratory supplies are classified as hazardous materials and are subject to regulation by one or more of the following agencies: the U.S. Department of Transportation, the U.S. Public Health Service, the United States Postal Service and the International Air Transport Association. We generally use third-party vendors to dispose of regulated medical waste, hazardous waste and radioactive materials and contractually require them to comply with applicable laws and regulations.
GINA Legislation
In 2008, the Congress passed and the President signed into law, the Genetic Information Non-discrimination Act or GINA. GINA prohibits certain entities from discriminating using genetic information, which includes information from genetic tests, genetic tests of family members and family medical history. It also includes information about an individual’s or family member’s request for or receipt of genetic services. This law generally prohibits health insurers or health benefit plans from:
| · | increasing the group premium or contribution amounts (such as co-payments) based on genetic information; | |
| · | requesting or requiring an individual or family member to undergo a genetic test; or | |
| · | requesting, requiring or purchasing genetic information prior to or in connection with enrollment, or at any time for underwriting purposes. |
The law also prohibits employers and certain other entities, including employment agencies, from using genetic information in employment decision-making and from requesting, requiring, or purchasing genetic information. It also strictly limits such entities from disclosing genetic information.
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In October 2009, the Department of Health and Human Services issued a proposed rule to modify the HIPAA Privacy Rule to implement Title I of GINA. Final regulations were adopted in January, 2013. Among other things, this rule revises the definition of health information under HIPAA to include genetic information.
GINA applies to some of our customers and to us as an employer. We could be subject to penalties, lawsuits or experience other adverse consequences if our operations violate GINA or cause another entity to violate GINA.
Federal Trade Commission
The Federal Trade Commission (FTC) has jurisdiction over the advertisements of many types of products, including most medical devices, and prohibits unfair or deceptive trade practices. Advertising for our tests, including statements made on our website, is subject to FTC requirements. In recent years, the FTC instituted enforcement actions against several dietary supplement companies for false and misleading marketing practices and advertising of certain products, including those intended for weight loss. These enforcement actions have resulted in consent decrees and monetary payments by the companies involved. Although the FTC has never threatened an enforcement action against us for the advertising of our products, there can be no assurance that the FTC will not question the advertising for our products in the future.
Other Information
Our executive offices are located at 135 Beaver Street, Waltham, Massachusetts 02452, and our telephone number is (781) 398-0700. We were incorporated in Texas in 1986 and we re-incorporated in Delaware in March 2000. We maintain websites at www.ilgenetics.com, www.inherenthealth.com and www.ILUSTRA.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to such reports are available to you free of charge through the Investor Relations Section of www.ilgenetics.com as soon as practicable after such materials have been electronically filed with, or furnished to, the Securities and Exchange Commission. The information contained on our websites are not incorporated by reference into this Form 10-K. We have included our website addresses only as an inactive textual reference and do not intend them to be active links to our websites.
Risks Related to Our Business, Our Financial Results and Need for Financing
If we fail to obtain additional capital or enter into a collaboration or strategic transaction by the second quarter of 2017, we may have to end our operations and seek protection under bankruptcy laws.
We expect that our current and anticipated financial resources will be adequate to maintain our current and planned operations through the second quarter of 2017. We need significant additional capital to fund our continued operations, including to capitalize on the opportunity in CVD testing, for the commercialization efforts for our ILUSTRA Program, continued research and development efforts, obtaining and protecting patents and administrative expenses. We are actively seeking additional funding, however, based on current economic conditions, additional financing may not be available, or, if available, it may not be available on favorable terms. In addition, the terms of any financing may adversely affect the holdings or the rights of our existing shareholders. For example, if we raise additional funds by issuing equity securities, further dilution to our then-existing shareholders will result. Debt financing, if available, may involve restrictive covenants that could limit our flexibility in conducting future business activities. We also could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our technologies, tests or products in development. We have also been considering potential strategic alternatives. Such strategic alternatives include, but are not limited to, a sale of the company, a business combination or collaboration, and an orderly liquidation of the company. We do not know if we will be successful in pursuing any strategic alternative or that any transaction will occur. If we cannot obtain additional funding on acceptable terms or enter into a strategic transaction, we may have to discontinue operations and seek protection under U.S. bankruptcy laws.
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There is substantial doubt concerning our ability to continue as a going concern.
Our financial statements have been prepared assuming that we 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. We expect to incur additional losses in 2017 and beyond and, accordingly, we are dependent on financings and potential revenue to fund our operations, to advance interest in our CVD program and support the market adoption of the ILUSTRA Program. The timing of any revenues that we may receive from the ILUSTRA Program is uncertain at this time, and is contingent upon a number of factors, including our ability to attract employer and insurance carriers as customers directly, to consummate arrangements with additional partners to promote the ILUSTRA Program, our partners’ ability to attract customers for the ILUSTRA Program, and the timing of utilization of the ILUSTRA Program by customers, among other possible variables. We cannot assure you that we will ever receive substantial revenues from the ILUSTRA Program. We expect that our current cash will be sufficient to support our operations only through the second quarter of 2017.
Our ability to realize the carrying value of our fixed assets and intangible assets is especially dependent on management’s ability to successfully execute on its plan. We need to generate additional funds in order to meet our financial obligations. If we are unsuccessful in doing so, we may not be able to realize the carrying value of its fixed assets and intangible assets.
The timing and amount of revenues, if any, that we may receive pursuant to any existing or future agreement we may enter into with insurance carriers or large employers is uncertain.
The timing of any revenues that we may receive under any agreement we have or may enter into with an insurance carrier, large employer or other customer is very uncertain at this time and is dependent on a number of variables that are or may be beyond our control. We continue to engage in discussions for the use of our technology for CVD testing and the ILUSTRA Program with insurance companies and large employers who might ultimately adopt enhanced benefits designs or employer-sponsored wellness initiatives that incorporate the ILUSTRA Test, or utilize the ILUSTRA Program through other arrangements, through the use of consultants, channel partners and our internal management team. However, we cannot assure you that we will be able to successfully enter into any such agreements or arrangements, or that if entered into, such agreements or arrangements will provide significant revenue. The failure to enter into any agreement with other insurance carriers or large employers and to receive significant revenues under any such agreement would have a material adverse effect on our business.
We have a history of operating losses and expect these losses to continue in the future.
We have experienced significant operating losses since our inception and expect these losses to continue for some time. We incurred losses from operations of $7.3 million in 2015 and $6.7 million in 2016. As of December 31, 2016, our accumulated deficit was $136.4 million. Our losses result primarily from research and development expenses, selling, general and administrative expenses and amortization of intangible assets. Although we generate revenues from sales of our genetic risk assessment tests, this may not be sufficient to result in net income in the foreseeable future. We will need to generate significant revenue to continue our research and development programs and achieve profitability. We cannot predict when, if ever, we will achieve profitability.
The market for personalized health generally and genetic risk assessment tests in particular is unproven.
The markets and customer base in the field of personalized health are not well established. Adoption of technologies in this emerging field requires substantial market development and there can be no assurance that channels for marketing our products can or will be successfully developed by us or others. As a result, there can be no assurance that our products will be successfully commercialized or that they can be sold at sufficient volumes to make them profitable. If our potential customers do not accept our products, or take a longer time to accept them than we anticipate, it will reduce our anticipated sales and materially harm our business.
The market for genetic risk assessment tests, as part of the field of personalized health, is at an early stage of development and may not continue to grow. The scientific community, including us, has only a limited understanding of the role of genes in predicting disease. The success of our genetic risk assessment tests will depend upon their acceptance as being useful and cost-effective to the customers who purchase these products, the physicians and other members of the medical community who recommend or prescribe them, as well as third-party payers, such as insurance companies and the government. We can only achieve broad market acceptance with substantial education about the benefits and limitations of genetic risk assessment tests while providing the tests at a fair cost. We expect to expend significant funds and resources to educate patients, dentists and other providers, and payers on the benefits of our ILUSTRA Program. There is no assurance that we will be able to successfully do so. Furthermore, while positive media attention resulting from new scientific studies or announcements can spur rapid growth in individual segments of the market, and also impact individual brands, news that challenges individual segments or products can have a negative impact on the industry overall as well as on sales of the challenged segments or products. The marketplace may never accept our products, and we may never be able to successfully commercialize our products, including the ILUSTRA Program.
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We could become subject to intense competition from other companies, which may damage our business.
The field of personalized health is highly competitive. Our potential competitors in the United States and abroad are numerous and include, among others, major pharmaceutical and diagnostic companies, consumer products companies, specialized biotechnology firms, universities and other research institutions. Many of our competitors have considerably greater financial, technical, marketing and other resources. Furthermore, many of these competitors are more experienced than we are in discovering, commercializing and marketing products. These greater resources may allow our competitors to discover important genes or genetic markers and more quickly and effectively develop and commercialize genetic tests than we or our partners are able to do. If we are not able to successfully market genetic tests, either alone or through collaborations, our business will be materially harmed. We expect competition to intensify in our industry as technical advances are made and become more widely known.
Ethical, legal and social issues related to genetic testing may reduce demand for our products.
Genetic testing has raised concerns regarding the appropriate utilization and the confidentiality of information provided by genetic testing. Genetic tests for assessing a person’s likelihood of developing a chronic disease have focused public attention on the need to protect the privacy of genetic information. For example, concerns have been expressed that insurance carriers and employers may use these tests to discriminate on the basis of genetic information, resulting in barriers to the acceptance of genetic tests by consumers. This could lead to governmental authorities prohibiting genetic testing or calling for limits on or regulating the use of genetic testing, particularly for diseases for which there is no known cure. Any of these scenarios could decrease demand for our products.
Technological changes may cause our tests to become obsolete.
We have to date focused our efforts on genetic tests based on a small number of candidate genes and genetic variants. It is now possible to use array technology to conduct whole genome association studies for risk assessment, which may make our technologies obsolete. In order to develop customers and markets for our genetic risk assessment tests, we may be required to invest substantial additional capital and other resources.
We have limited experience and capabilities with respect to distributing, marketing and selling genetic tests on our own and will continue to depend substantially on third parties to commercialize our tests.
We have limited experience and capabilities with respect to distributing, marketing and selling genetic risk assessment tests on our own. In June 2009, we announced the launch of our new Inherent Health brand of genetic tests. On October 26, 2009, we entered into an agreement with Amway Global, an affiliate of Alticor, pursuant to which it sells our Inherent Health brand of genetics tests through its e-commerce Web site via a hyperlink to our e-commerce site. In 2016 and 2015, revenues from this agreement accounted for 24% and 45% of our revenues, respectively. In addition, beginning in September 2012 and again in 2013, Access Business Group LLC, an affiliate of Alticor, placed purchase orders totaling approximately $3.3 million consisting of weight management kits. The kits are included as part of a promotional bundle of products that Amway sold to their Individual Business Owners. In 2016 and 2015, revenues from this arrangement accounted for 4% and 13% of our revenues, respectively. We continue to engage in discussions with potential partners for the use of our IL-1 technology for CVD testing and with insurance companies and large employers for the use of our ILUSTRA Program, through the use of consultants, channel partners and our internal management team. We have, to date, had very limited success in marketing and selling our genetic tests, including the CVD and ILUSTRA Tests, and we can provide no assurance that our current or planned commercialization efforts will be successful.
If we are unsuccessful in establishing additional strategic alliances, our ability to develop and market products and services may be damaged.
Entering into additional strategic alliances for the development and commercialization of products and services based on our discoveries is an important element of our business strategy. We face significant competition in seeking appropriate collaborators. If we fail to maintain our existing alliances or to establish additional alliances or other alternative arrangements, then our ability to develop and market products and services will be damaged. In addition, the terms of any future strategic alliances may be unfavorable to us or these strategic alliances may be unsuccessful.
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Because our products are based on emerging science, if we make changes to our tests based on new scientific findings, market acceptance of our products may decrease and we may be exposed to liability in excess of our product liability insurance coverage.
Our genetic test products are based on emerging science, and we continue to conduct studies to further enhance the usefulness and scientific credibility of our products. If we make changes to our tests based on new data, it could harm our credibility, decrease market acceptance of our products or expose us to liability claims. We currently maintain product liability insurance, but it is often difficult to obtain, is expensive and may not be available in the future on economically acceptable terms. In addition, potential product liability claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of our policy. We may become subject to product liability claims that, even if they are without merit, could result in significant legal defense costs to us. If we are held liable for claims for which we are not indemnified or for damages exceeding the limits of our insurance coverage, those claims could materially damage our business and our financial condition. Any product liability claim against us or resulting recall of our products could create significant negative publicity.
Current economic conditions could adversely affect our business and results of operations.
Economic conditions and financial markets have been experiencing extreme disruption including, among other things, extreme volatility in prices of publicly traded securities, rating downgrades of certain investments and declining valuations of others. We believe current economic conditions and financial market turmoil could adversely affect our operations. Uncertainty about current and future economic conditions may cause consumers to reign in their spending generally, the impact of which may be that they stop or delay their purchases of our genetic tests and consumer products. If these circumstances persist or continue to worsen, our future operating results could be adversely affected, particularly relative to our current expectations.
Our dependence on key executives and scientists could adversely impact the development and management of our business.
Our success depends on the ability, experience and performance of our senior management and other key personnel. If we lose one or more of the members of our senior management or other key employees, it could damage our business. In addition, our success depends on our ability to continue to hire, train, retain and motivate skilled managerial and scientific personnel. The pool of personnel with the skill that we require is limited. Competition to hire from this limited pool is intense. We compete with numerous pharmaceutical and healthcare companies, as well as universities and non-profit research organizations in the highly competitive Boston, Massachusetts business area. Our current senior management team is employed by us under agreements that may be terminated by them for any reason upon adequate notice. There can be no assurances, therefore, that we will be able to retain our senior executives or replace them, if necessary. We do not maintain key man life insurance on any of our personnel.
If Pyxis or any of its affiliates enters a business in competition with ours, certain of our directors might have a conflict of interest.
We have entered into an agreement with our stockholder, Pyxis (collectively, with its affiliates, the “Interested Parties”), allocating corporate opportunities as permitted under Section 122(17) of the Delaware General Corporation Law. This agreement regulates and defines the conduct of certain of our affairs as they may involve the Interested Parties, and our powers, rights, duties and liabilities and those of our officers and directors in connection with corporate opportunities. Except under certain circumstances, the Interested Parties have the right to engage in the same or similar activities or lines of business or have an interest in the same classes or categories of corporate opportunities as we do. If any Interested Parties or one of our directors appointed by an Interested Party acquire knowledge of a potential transaction or matter that may be a corporate opportunity for both the Interested Party and us, to the fullest extent permitted by law, the Interested Party will not have a duty to inform us about the corporate opportunity. In addition, the Interested Party will not be liable to us or to other stockholders for breach of any fiduciary duty as a stockholder of ours for not informing us of the corporate opportunity, keeping it for its own account, or referring it to another person. Additionally, except under limited circumstances, if an officer or employee of an Interested Party who is also one of our directors is offered a corporate opportunity, such opportunity shall not belong to us. In addition, we agreed that such director will have satisfied his duties to us and not be liable to us or to you in connection with such opportunity.
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We may be prohibited from fully using our net operating loss carryforwards, which could affect our financial performance.
As a result of the losses incurred since inception, we have not recorded a federal income tax provision and have recorded a valuation allowance against all future tax benefits of our net operating loss carryforwards. As of December 31, 2016, we had gross net operating loss (NOL) and research tax credit carryforwards of approximately $94.9 million and $1.7 million, respectively for federal income tax purposes, and of approximately $17.6 million and $1.1 million for state income tax purposes, expiring in varying amounts through the year 2036. Our ability to use these NOLs and credit carryforwards is subject to restrictions contained in the Internal Revenue Code which provide for limitations on our utilization of our net operating loss and credit carryforwards following a greater than 50% ownership change during the prescribed testing period. On March 5, 2003, we had such a change. As a result, all of our NOL carryforwards as of that date are limited as to utilization. The annual limitation may result in the expiration of certain of the carryforwards prior to utilization. In addition, our equity offerings, including those in 2013, 2014 and 2016 may have resulted in qualifying changes in ownership. A formal study, which we have not undertaken, is required to determine applicability of restrictions and might indicate that our NOL carryforwards are subject to additional limitations on utilization. In addition, in order to realize the future tax benefits of our net operating loss and tax credit carryforwards, we must generate taxable income, of which there is no assurance.
Risks Related to Our Intellectual Property
If we fail to obtain patent protection for our products and preserve our trade secrets, then competitors may develop competing products and services, which will likely decrease our sales and market share.
Our success will depend on our ability to obtain patent protection in the United States and in other countries for our products and services. In addition, our success will also depend upon our ability to preserve our trade secrets and to operate without infringing upon the proprietary rights of third parties. We own rights to 9 issued U.S. patents and have a number of additional U.S. patent applications pending. We have also been granted a number of corresponding foreign patents and have a number of foreign counterparts of our U.S. patents and patent applications pending. Our patent positions, and those of other pharmaceutical and biotechnology companies, are generally uncertain and involve complex legal, scientific and factual questions. Our ability to develop and commercialize products and services depends on our ability to:
| · | obtain patents; |
| · | obtain licenses to the proprietary rights of others; |
| · | prevent others from infringing on our proprietary rights; and |
| · | protect trade secrets. |
Our pending patent applications may not result in issued patents and any issued patents may never afford meaningful protection for our technology or products or provide us with a competitive advantage. Further, others may develop competing products, which avoid legally infringing upon, or conflicting with, our patents. There is no assurance that another company will not replicate one or more of our products, and this may harm our ability to do business. In addition, competitors may challenge any patents issued to us, and these patents may subsequently be narrowed, invalidated or circumvented.
From time to time, the U.S. Supreme Court, other federal courts, the U.S. Congress or the USPTO may change the standards of patentability and any such changes could have a negative impact on our business. There have been several cases involving “gene patents” and diagnostic claims that have been considered by the U.S. Supreme Court. A suit brought by multiple plaintiffs, including the American Civil Liberties Union, or ACLU, against Myriad Genetics, or Myriad, and the USPTO, could impact biotechnology and diagnostic patents. That case involves certain of Myriad’s U.S. patents related to the breast cancer susceptibility genes BRCA1 and BRCA2. The Federal Circuit issued a written decision on July 29, 2011 that reversed the decision of the U.S. District Court for the Southern District of New York that Myriad’s composition claims to “isolated” DNA molecules cover unpatentable subject matter. The Federal Circuit court instead held that the breast cancer genes are patentable subject matter. Subsequently, on March 20, 2012, the Supreme Court issued a decision in Mayo Collaborative v. Prometheus Laboratories, or Prometheus, a case involving patent claims directed to optimizing the amount of drug administered to a specific patient. According to that decision, Prometheus’ claims failed to add enough inventive content to the underlying correlations to allow the processes they describe to qualify as patent-eligible processes that apply natural laws. The Supreme Court subsequently granted certiorari in the Myriad case, vacated the judgment, and remanded the case back to the Federal Circuit for further consideration in light of their decision in the Prometheus case. The Federal Circuit heard oral arguments on July 20, 2012, and issued a decision on August 16, 2012. The Federal Circuit reaffirmed its earlier decision and held that composition of matter claims directed to isolated nucleic acids are patent-eligible subject matter, but that method claims consisting of only abstract mental processes are not patent-eligible. On September 25, 2012, the ACLU filed a petition for a writ of certiorari asking the Supreme Court to review the Federal Circuit’s decision with respect to the composition of matter claims. On November 30, 2012, the Supreme Court granted the petition and agreed to review the case. On June 13, 2013, the Supreme Court issued a decision in the Myriad case. According to the decision, claims directed to genomic DNA cover unpatentable subject matter. However, claims directed to cDNA are patent eligible subject matter.
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On March 4, 2014, the USPTO issued a memorandum to patent examiners providing guidelines for examining process claims for patent eligibility in view of the Supreme Court decision in Prometheus. On December 16, 2014 an interim guidance was issued that supersedes the March 4, 2014 memorandum but essentially followed the same direction for patent eligibility. The guidance indicates that claims directed to a law of nature, a natural phenomenon, or an abstract idea that do not meet the eligibility requirements should be rejected as non-statutory subject matter. We cannot assure you that the decision described above, rulings in other cases or changes in guidance or procedures issued by the USPTO will not negatively impact our patent portfolio.
Congress directed the USPTO to study effective ways to provide independent, confirming genetic diagnostic test activity where gene patents and exclusive licensing for primary genetic diagnostic tests exist. This study will examine the impact that independent second opinion testing has on providing medical care to patients; the effect that providing independent second opinion genetic diagnostic testing would have on the existing patent and license holders of an exclusive genetic test; the impact of current practices on testing results and performance; and the role of insurance coverage on the provision of genetic diagnostic tests. The USPTO was directed to report the findings of the study to Congress and provide recommendations for establishing the availability of independent confirming genetic diagnostic test activity by June 16, 2012. On August 28, 2012, the Department of Commerce sent a letter to the House and Senate Judiciary Committee leadership updating them on the status of the genetic testing report. The letter stated in part: “Given the complexity and diversity of the opinions, comments, and suggestions provided by interested parties, and the important policy considerations involved, we believe that further review, discussion, and analysis are required before a final report can be submitted to Congress.” The USPTO issued a Request for Comments and Notice of Public Hearing on Genetic Diagnostic Testing on January 25, 2012, and held additional public hearings in February and March 2013. It is unclear whether the results of this study will be acted upon by the USPTO or result in Congressional efforts to change the law or process in a manner that could negatively impact our present or future patent portfolio.
There can be no assurance that the Supreme Court’s decision in either the Myriad or Prometheus case will not have a negative impact gene or diagnostic patents generally or the ability of biotechnology and diagnostic companies to obtain or enforce their patents in the future. Such negative decisions by the Supreme Court could have a material adverse effect on our existing patent portfolio and our ability to protect and enforce our intellectual property in the future.
We also rely on trade secrets and proprietary know-how that we seek to protect, in part, with confidentiality agreements. The third parties we contract with may breach these agreements, and we may not have adequate remedies for any breach. If they do not protect our rights, third parties could use our technology, and our ability to compete in the market would be reduced. We also realize that our trade secrets may become known through other means not currently foreseen by us. Our competitors may discover or independently develop our trade secrets.
Third parties may own or control patents or patent applications and require us to seek licenses, which could increase our costs or prevent us from developing or marketing our products or services.
We may not have rights under patents or patent applications that are related to our current or proposed products. Third parties may own or control these patents and patent applications in the United States and abroad. Therefore, in some cases, to develop or sell any proposed products or services with patent rights controlled by third parties, our collaborators or ourselves may seek, or may be required to seek, licenses under third-party patents and patent applications. If this occurs, we may have to pay license fees, royalties or both, to the licensor. If licenses are not available to us on acceptable terms, our collaborators or we may be prohibited from developing or selling our products or services.
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Risks Related to Development, Clinical Testing and Regulatory Approval of Our Tests
Any tests that may be developed by us may be subject to regulatory clearance or approval, which can be lengthy, costly and burdensome.
Our currently marketed tests were launched as laboratory developed tests, or LDTs, performed in our CLIA-certified clinical laboratory operating in Waltham, Massachusetts. We expect that our future LDTs will also be performed at our CLIA-certified laboratory. Although FDA believes that tests such as ours fall within its jurisdiction as medical devices, it has historically exercised enforcement discretion with respect to LDTs, meaning that such tests generally have not been subject to FDA regulatory requirements. However, the Agency’s regulatory approach to LDTs is uncertain, and whether or when FDA will issue final guidance documents implementing the agency’s proposed regulatory framework is unclear. It is also unclear how a final regulatory framework will affect our current and future tests, as the level of regulation will depend on FDA’s evaluation of the risk posed by the specific test. With respect to our LDTs that are not offered DTC, such as the ILUSTRA Test, if FDA issues final guidance implementing a risk-based regulatory framework for LDTs, we intend to comply fully and acknowledge that non-compliance may result in enforcement actions, which could affect our ability to market and sell our tests and may harm our reputation. We are uncertain as to what, if any, regulatory requirements may apply to our tests in the future. We cannot provide any assurance that FDA regulation, including pre-market review or approval, will not be required in the future.
With respect to our Inherent Health tests, which have historically been offered DTC, we have been working with the FDA to address concerns and bring our tests into compliance for DTC. At this time two of our tests are still offered DTC, Weight Management and Nutritional Needs and we are in the midst of finalizing changes in marketing materials required for these tests. We cannot provide any assurance that FDA regulation, including pre-market review or approval, will not be required for these tests in the future.
If the FDA requires us to obtain clearance through its 510k premarket notification process or obtain approval through its premarket approval, or PMA process, either as a condition of continuing to market our tests or bringing future tests to market, our business could be negatively impacted. Requiring FDA clearance or approval could be lengthy, costly and burdensome. In addition, depending upon the FDA’s response to a submission we may be required to stop selling our tests, revise our tests significantly, or delay introduction of new tests. Additionally, if our tests become subject to more active regulation as medical devices by the FDA, we would be required to comply with requirements including establishment registration, device listing, adverse event reporting, and good manufacturing practices. We would also be subject to penalties, including seizure and injunction, for noncompliance with FDA requirements. Complying with FDA requirements could add additional costs and burdens to our operations.
We are subject to government regulation which may significantly increase our costs and delay introduction of our products.
We are subject to a variety of federal and state legal requirements including CLIA, the FD&C Act, state clinical laboratory licensure laws and implementing regulations. The growth of our business may increase the potential of being found in violation of these laws. Our risk of being found in violation of these laws and regulations is further increased by the fact that the technologies at issue are new and the applicability of statutory and regulatory provisions to these technologies has not been fully developed, implemented, or subjected to judicial review, and the statutory and regulatory provisions themselves are open to a variety of interpretations. Any action brought against us, or any business partners, for violation of these laws or regulations, even if we or they successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If their or our operations are found to be in violation of any of these laws and regulations, they or we may be subject to any applicable penalty associated with the violation, including civil and criminal penalties, damages and fines, and they or we could be required to curtail or cease operations. Any of the foregoing consequences could seriously harm our business and our financial results.
If we do not comply with governmental regulations applicable to our CLIA-certified laboratory, we may not be able to continue our operations.
The establishment and operation of our laboratory is subject to regulation by numerous federal, state and local governmental authorities in the United States. The laboratory holds a CLIA certificate of compliance and is licensed by the Commonwealth of Massachusetts, and other states as required, which enables us to provide testing services to residents of all states. Failure to comply with state regulations or changes in state regulatory requirements, could result in a substantial curtailment or even prohibition of the operations of our laboratory and could have a material adverse effect on our business. CLIA is a federal law that regulates clinical laboratories that perform testing on human specimens for the purpose of providing information for the diagnosis, prevention or treatment of disease. To renew CLIA certification, laboratories are subject to survey and inspection every two years. Moreover, CLIA inspectors may make unannounced inspections of these laboratories. If we were to lose our CLIA certification or our state licenses, whether as a result of a revocation, suspension or limitation, we would no longer be able to continue our testing operations which would have a material adverse effect on our business.
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Tests based on our technology may require clinical trial testing, which can be lengthy, costly and burdensome.
If the FDA decides to require pre-market clearance or approval of LDT’s, we may be required to perform clinical trials prior to submitting a marketing application. If we are required to conduct clinical trials, whether using prospectively acquired tissue samples or archival samples, delays in the commencement or completion of clinical testing could significantly increase development costs and delay commercialization. The commencement of clinical trials may be delayed due to insufficient patient enrollment, which is a function of many factors, including the size of the patient population and the nature of the disease or condition being studied.
Future therapeutic collaborators, if any, may be unable to obtain regulatory approval of any therapeutic product that they may develop.
If, in the future, we enter into any collaborations relating to the use of our technology in the development of therapeutic products, any therapeutic products that our collaborators may develop will be subject to extensive governmental regulations relating to development, clinical trials, manufacturing and commercialization. Rigorous preclinical testing and clinical trials and an extensive regulatory review process are required to be successfully completed in the United States and in many foreign jurisdictions before a new therapeutic product can be sold. Satisfaction of these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. The time required to obtain FDA and other approvals for therapeutic products is unpredictable but typically exceeds several years. It is possible that none of the therapeutic products our collaborators may develop will obtain the appropriate regulatory approvals necessary for us or our collaborators to begin selling them. In addition, if the use of any test that we develop is necessary for the safe use of a collaborator’s therapeutic product, we might be required to obtain clearance or approval of our test.
Furthermore, any regulatory approval to market a therapeutic product may be subject to limitations on the indicated uses. These limitations may limit the size of the market for the therapeutic product. Any therapeutic product that our collaborators may develop will also be subject to numerous foreign regulatory requirements governing the conduct of clinical trials, manufacturing and marketing authorization, pricing and third-party reimbursement. The foreign regulatory approval process includes all of the risks associated with FDA approval described above as well as risks attributable to the satisfaction of local regulations in foreign jurisdictions. Therefore, approval by the FDA of a therapeutic product does not assure approval by regulatory authorities outside the United States or vice versa.
If we fail to comply with regulatory requirements, we could be subject to enforcement actions, which could affect our ability to market and sell our tests and may harm our reputation.
If we in the future fail to comply with applicable federal, state or foreign laws or regulations, we could be subject to enforcement actions, which could affect the ability to successfully develop, market and sell our tests and could harm our reputation and lead to reduced acceptance of such tests or products by the market. These enforcement actions could include:
| · | warning letters; |
| · | recalls, public notification or medical device safety alerts; |
| · | restrictions on, or prohibitions against, marketing such tests or products; |
| · | product seizures; |
| · | injunctions; |
| · | civil penalties, including monetary fines; and |
| · | criminal penalties. |
If we do not comply with laws regulating the protection of the environment and health and human safety, our business could be adversely affected.
Our research and development activities involve the use of hazardous and chemicals materials, and we maintain quantities of various flammable and toxic chemicals in our facilities. We believe our procedures for storing, handling and disposing these materials in our facilities comply with the relevant local and Federal guidelines. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards mandated by applicable regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. If an accident occurs, we could be held liable for resulting damages, which could be substantial. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials. We may incur substantial costs to comply with, and substantial fines or penalties if we violate, any of these laws or regulations.
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Changes in healthcare policy could impact commercialization of our tests.
In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or the ACA, became law. This law substantially changes the way health care is financed by both governmental and private insurers. The ACA contains a number of provisions that may impact our business and operations in ways we cannot currently predict. In particular, we believe that the ACA may impact adoption of Reimbursed Dental Plans and other reimbursed insurance plans that include our ILUSTRA Test because there is uncertainty in the cost of compliance with the ACA and how that may impact employer coverage for adult dental care in their overall benefits plan.
In addition to the ACA, there will likely continue to be proposals by legislators at both the federal and state levels, regulators and third-party payors to reduce costs while expanding individual healthcare benefits. Certain of these changes could impose additional limitations on the prices we will be able to charge for our tests or the amounts of reimbursement available for our tests from governmental agencies or third-party payors. While in general it is too early to predict specifically what effect the ACA or any future healthcare reform legislation or policies will have on our business, current and future healthcare reform legislation and policies could have a material adverse effect on our business and financial condition.
Risks Related to Our Common Stock
Our common stock is listed on the OTCQB®, which could result in a limited market for our common stock.
Our common stock was listed on the NYSE Amex until August 16, 2010, when it was suspended for failure to comply with the NYSE Amex continued listing standards. Our common stock then began trading on the OTCQB® under the symbol ILIU. This delisting could hurt our investors by reducing the liquidity and market price of our common stock. Additionally, the delisting could negatively affect us by reducing the number of investors willing to hold or acquire our common stock, which could negatively affect our ability to raise capital.
Our stock price has been and is likely to continue to be volatile and the market price of our common stock may drop.
In the three years ended December 31, 2016, our stock price has fluctuated from a low of $0.01 to a high of $0.46. The volatility of stocks for companies in our industry often does not relate to the operating performance of the companies represented by the stock. Some of the factors that may cause the market price of our common stock to fluctuate include:
| · | our ability to enter into a partnership or partnerships for the CVD test; |
| · | the commercial success of the ILUSTRA Program; |
| · | demand for and acceptance of our products; |
| · | our ability to develop new relationships and maintain and enhance existing relationships with strategic partners; |
| · | regulatory developments or enforcement in the United States and foreign countries; |
| · | developments or disputes concerning patents or other proprietary rights; |
| · | introduction of technological innovations or new products or services by us or our competitors; |
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| · | failure to secure adequate capital to fund our operations, or the issuance of equity securities at prices below fair market price; |
| · | changes in estimates or recommendations by securities analysts, if any cover our common stock; |
| · | litigation; |
| · | future sales of our common stock; |
| · | general market conditions; |
| · | economic and other external factors or other disasters or crises; |
| · | period-to-period fluctuations in our financial results; and |
| · | overall fluctuations in U.S. equity markets. |
These and other external factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.
Members or our Board of Directors and their affiliates and management own a significant percentage of our stock and will be able to exercise significant influence over matters subject to stockholder approval.
As of April 13, 2017, our executive officers, directors and their respective affiliates, beneficially owned approximately 46.5% of our outstanding common stock. Accordingly, these stockholders will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of our board of directors and approval of significant corporate transactions. This concentration of ownership could have the effect of entrenching our management and/or the board of directors, delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material and adverse effect on the fair market value of our common stock.
We do not expect to pay dividends for the foreseeable future and you should not expect to receive any funds without selling your shares of common stock, which you may only be able to do at a loss.
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, our ability to pay cash dividends is currently prohibited by the terms of the Loan Agreement with Horizon Technology Finance Corporation, and any future debt financing arrangement may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. Therefore, you should not expect to receive any funds without selling your shares, which you may only be able to do at a loss.
| Item 1B. | Unresolved Staff Comments |
Not applicable.
| Item 2. | Properties |
We lease approximately 13,000 square feet of office and laboratory space in Waltham, Massachusetts under a non-cancelable operating lease which expires on March 31, 2017. In September 2016, we entered into the 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.
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| Item 3. | Legal Proceedings |
Not applicable.
| Item 4. | Mine Safety Disclosures |
Not applicable.
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
Our common stock currently trades under the symbol “ILIU” on the OTCQB™. The following table sets forth, for the periods indicated, the high and low sales prices for our common stock, as reported by the OTCQB™.
| High | Low | |||||||
| 2016: | ||||||||
| First Quarter | $ | 0.11 | $ | 0.04 | ||||
| Second Quarter | $ | 0.41 | $ | 0.08 | ||||
| Third Quarter | $ | 0.25 | $ | 0.08 | ||||
| Fourth Quarter | $ | 0.20 | $ | 0.04 | ||||
| High | Low | |||||||
| 2015: | ||||||||
| First Quarter | $ | 0.46 | $ | 0.11 | ||||
| Second Quarter | $ | 0.18 | $ | 0.09 | ||||
| Third Quarter | $ | 0.16 | $ | 0.08 | ||||
| Fourth Quarter | $ | 0.12 | $ | 0.01 | ||||
Stockholders
As of April 13, 2017, there were approximately 122 stockholders of record and according to our estimate, approximately 2,402 beneficial owners of our common stock.
Dividends
We have not declared any dividends to date and do not plan to declare any dividends on our common stock in the foreseeable future. In addition, our ability to pay cash dividends is currently prohibited by the terms of the Loan Agreement with Horizon Technology Finance Corporation, and any future debt financing arrangement may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock.
Sales of Unregistered Securities
Not applicable.
Issuer Purchases of Equity Securities
Not applicable.
| Item 6. | Selected Financial Data |
As a smaller reporting company, we have elected scaled disclosure reporting obligations and therefore are not required to provide the information required by this Item 6.
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion of our financial condition and results of operations should be read in conjunction with our audited Financial Statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. As a smaller reporting company, we have elected scaled disclosure reporting obligations and therefore are required to provide the information requested by this Item 7 for only the last two most recent fiscal years.
General Overview and Trends
Interleukin Genetics, Inc. develops and markets proprietary genetic tests for chronic diseases and health-related conditions. Our products provide information that is not otherwise available to empower individuals and their healthcare providers to manage their health and wellness through genetics-based insights and actionable guidance. We leverage our research, intellectual property, and genetic test development expertise in inflammation and metabolism to identify an individual’s risk for severe and progressive chronic inflammatory diseases, thereby enabling personalized healthcare. We market our tests through healthcare professionals, partnerships with health and wellness companies, and other distribution channels. We have patents covering the use of specific patterns of gene variations for a number of common chronic diseases. Our lead products are our proprietary cardiovascular risk test and the ILUSTRA Test that identifies individuals with a life-long predisposition to over-produce inflammation, and our Inherent Health line of genetic tests.
Recent Developments
On April 17, 2017, we entered into a Subscription Agreement (the “Subscription Agreement”), with funds affiliated with Bay City Capital (“Bay City Capital”) and Horizon Technology Finance Corporation (“Horizon”) under which we issued and sold $500,000 of Subordinated Convertible Promissory Notes (the “2017 Notes”) to each of Bay City Capital and Horizon (the “Note Holders”), for a total of $1,000,000 in aggregate principal amount. The 2017 Notes will convert in common shares:
| (a) | Upon the closing of a Qualified Financing (defined as our next common stock financing, whether in a single transaction or series of related transactions, whether a public or private financing, yielding aggregate cash proceeds to us (inclusive of amounts converted under the 2017 Notes or other outstanding indebtedness) of at least $5.0 million on or before January 1, 2022. The unpaid principal amount and accrued interest outstanding under the 2017 Notes shall automatically convert in whole into fully paid and nonassessable shares of our common stock. The total number of shares of common stock issuable upon conversion of the 2017 Notes in this circumstance shall be determined by dividing (i) the then outstanding principal amount and accrued interest under the 2017 Notes by (ii) a conversion price equal to (A) eighty percent (80%) multiplied by (B) the lowest price per share of the common stock paid by investors in such Qualified Financing; |
| (b) | In the event that a change of control occurs before the closing of a Qualified Financing and on or before January 1, 2022, then upon the written election of the holders of 2017 Notes representing at least fifty percent (50%) of the aggregate principal amount of all 2017 Notes, the unpaid principal amount and accrued interest outstanding under the 2017 Notes shall convert in whole into fully paid and nonassessable shares of common stock immediately before the closing of the change of control. The total number of shares of common stock issuable upon conversion of the 2017 Notes in this circumstance shall be determined by dividing (i) the then outstanding principal amount and accrued interest under the 2017 Notes by (ii) a conversion price equal to (A) eighty percent (80%) multiplied by (B) the price per share of our common stock in such change of control; or |
| (c) | At the option of the individual Note Holder at any time before the Maturity Date, the unpaid principal amount and accrued interest outstanding under the 2017 Note may be converted in whole or in part into fully paid and nonassessable shares of common stock. The total number of shares of common stock issuable upon conversion of the particular 2017 Note in this circumstance shall be determined by dividing (i) the then outstanding principal amount and accrued interest under the 2017 Note by (ii) a conversion price equal to $0.125256. |
The 2017 Notes are secured by a security interest in all of our assets and are subordinated to our existing venture loan with Horizon.
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In addition, under the Subscription Agreement, each Note Holder received a Warrant to purchase our common stock (the “2017 Note Warrants”). The 2017 Note Warrants have an exercise price per share of $0.10438 and are exercisable for that number of shares of common stock equal to the original principal amount of the corresponding 2017 Note divided by such exercise price, or an aggregate of approximately 9,580,379 shares. The 2017 Note Warrants are exercisable on a net issuance basis and have a 5-year term.
Amendment to Venture Loan and Security Agreement
Also on April 17, 2017, we 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 our existing debt with Horizon, which resulted in the deferral of the principal amount due to Horizon on April 1, May 1, and June 1, 2017, and the potential deferral of the principal amount due to Horizon on July 1, August 1 and September 1, 2017, such potential deferral of principal is dependent upon whether, as of June 15, 2017, we provide evidence reasonably satisfactory to Horizon that we are actively negotiating a clinical services or similar agreement, the terms of which are satisfactory to Horizon, which we believe, in good faith, we will enter into no later than September 1, 2017. In exchange for agreeing to defer principal payments, Horizon was granted a warrant to purchase our 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 prices of $0.10438 per share, is exercisable on a net basis and has a 10-year term.
In March 2017, we implemented a work force restructuring to better utilize our resources, to align our organization to support our emerging cardiovascular testing program, for which we are seeking strategic interest, and to streamline our commercial strategy for the ILUSTRA Program. As a consequence of the restructuring, we reduced our workforce in our commercial organization and administrative functions by eight persons. We continue to support the ILUSTRA Program deployments with customers and will advance new customer relationships that expand the evidence base of this program’s effectiveness. We expect that the restructuring will result in approximately $948,000 in reduced annualized operating expenses when fully implemented.
During late 2016 and early 2017 we redefined our strategy to add emphasis to our CVD program based on confirming evidence from a second clinical study and increased interest from potential collaborators working on next-generation CVD drugs. In 2015, we announced a collaboration with Ionis Pharmaceuticals to use our IL-1 genetic test in a Phase 2 study of their anti-sense drug that has been shown in Phase 1 trials to reduce Lp(a) levels as well as to use our genetic test in a new Phase 1 study. Additional companies are testing other drug candidates for treatment of high risk CVD patients by potentially lowering bad cholesterol such as LDL and Lp(a) or by blocking IL-1 production. Amgen, Sanofi, Novartis and the Medicines Company have active development programs in this area. We believe that our proprietary IL-1 genetic patterns that identify patients who over-produce IL-1 may have value in guiding development and use of drugs that directly or indirectly target IL-1 effects on CVD events. We are currently seeking strategic interest in this program.
Our ILUSTRA Program and Other Information
During the early part of the year ended December 31, 2016, our principal focus was on commercializing our ILUSTRA Program, with less emphasis on the sales of our Inherent Health brand of genetic tests and related programs. As part of our work force restructuring in March 2017, we are streamlining our commercial strategy for the ILUSTRA Program. We continue to support the ILUSTRA Program deployments with customers and will advance new customer relationships that expand the evidence base of this program’s effectiveness. We will continue to refine our strategy for this program based on our financial resources and its commercial success.
The ILUSTRA Program serves as a central component to an enhanced benefit design or wellness initiative directed to lower medical costs through disease avoidance and reduced disease progression and complications. We position the ILUSTRA Program as a tool to drive medical value; empowering individuals and healthcare professionals with actionable genetics data. The test identifies individuals at high risk for elevated systemic inflammation, enabling a risk stratification framework to personalize care interventions and patient outreach. The program creates value through early identification of risk, elevated professional surveillance for disease detection, and enhanced patient engagement and compliance
We market the ILUSTRA Program to large employers, who are typically self-insured, and to insurance carriers. Our employer customers see value in the potential reduction of medical costs associated with the highly prevalent inflammatory diseases that our program can provide. Within this customer segment, initial targets tend to be progressive, wellness-minded companies that are engaged in other programs aimed at improving the overall health of their employees.
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Within the insurance carrier segment, we place particular emphasis on carriers with dental-medical integration (DMI) products, either in place or in development, and integrated delivery networks (IDNs), as these customers are best positioned to realize value from the potential reduction of medical costs associated with the highly prevalent inflammatory diseases that our program can provide. This insurance carrier segment represents a large market, as an estimated 170 million Americans have dental coverage through an insurance program. These customers are increasingly focused on DMI products, as the correlation between oral health and general health has become better understood. We believe the potential of our ILUSTRA Program to facilitate the realization of cost savings through reduced medical claims is well-aligned with this powerful trend in the insurance industry.
We pursue these customers through our internal team, and through consultants and other third parties, including channel partners, primarily benefits consulting firms, who may be helpful to identify, and facilitate initial interactions with, potential customers. We have established one such relationship at this point, with Employee Benefit Consulting Group LLC (EBCG), a firm with expertise in the U.S. insurance market and strong relationships with employers, insurance carriers, and health and wellness providers. We work with EBCG to build awareness of the ILUSTRA Program as a tool for personalizing patient care among insurance carriers, benefit plans and employer groups, and to potentially incorporate the test in the design of risk-based benefit plans.
The timing of any revenues that we may receive from our marketing efforts is very uncertain at this time and is dependent on a number of variables, many of which we may have a limited ability to influence. We may never receive significant revenues for the ILUSTRA Program.
Our Inherent Health brand of genetic tests includes the first-of-its-kind test for weight management that identifies an individual’s genetic tendencies for weight gain related to either fat or carbohydrates in the diet. The Inherent Health brand also offers customers a full suite of affordable, easy-to-use and meaningful genetic tests in heart health, bone health and nutritional needs. In addition, we launched additional products under the name Wellness Select that allows our e-commerce customers to purchase any combination of our Inherent Health genetic tests at a discounted price.
We market our Inherent Health brand of genetic assessment tests primarily through our commercial relationships with Alticor Inc. affiliated companies. Alticor is a related party. On October 26, 2009, we 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 our Inherent Health brand of genetic tests through its e-commerce website via a hyperlink to our e-commerce site. In 2016 and 2015, revenues from this agreement accounted for approximately 24% and 45% of our revenues, respectively.
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 kits. Of the $3.3 million in orders received in 2013, $1.8 million was related to the 2014 program and $1.5 million was related to the 2013 program. Cash for the kits purchased for the 2013 program was received in the first quarter of 2013 and cash for the kits purchased for the 2014 program was received by December 31, 2013. As a component of the 2013 promotional program, and not reflective of actual product expiry, the kits were required to be redeemed before December 31, 2013. In February 2014, we removed the redemption date requirement for the 2013 promotional program, for which ABG paid us $519,000 as a retrospective increase in the product purchase price. Cash related to the 2013 promotional program, including the $519,000, will be treated as deferred revenue until kits are redeemed or the breakage analysis determines the probability of eventual redemption is remote. In October 2014, we 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. Cash received for these kits will be treated as deferred revenue until kits are redeemed for processing or on the final allowed redemption date of December 31, 2017. For the years ended December 31, 2016 and 2015, approximately 4% and 13%, respectively, of our revenue came from sales through ABG’s promotional product bundle program.
On September 21, 2012, we entered into a License Agreement (the “License Agreement”) with Access Business Group International LLC (“ABGI”), an affiliate of Alticor. Pursuant to this License Agreement, we granted ABGI and its affiliates (the Licensees) a non-exclusive license to use the technology related to our Weight Management genetic test and to sell the Weight Management test in Europe, Russia and South Africa. ABGI, or a laboratory designated by ABGI, is responsible for processing the tests, and we receive a royalty for each test sold. 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. During the year ended December 31, 2016 $199,000 related to license fees was earned, compared to $191,000 for the same period in 2015.
| 27 |
Our research and development expenses are focused on our own development efforts related primarily to our ILUSTRA and cardiovascular disease genetic tests. We are also focusing on seeking potential commercial partners to validate our technology within their specific business model as a collaboration with little or no cost to us. This is different than in prior years when our development focus was concentrated in research and development to bring new test configurations to market.
We recognize revenue from genetic testing services 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. During the fourth quarter of 2013, we concluded that sufficient historical customer genetic test redemption patterns existed to determine the period of time after which the likelihood of test redemption was remote for Inherent Health tests purchased. Based on our analysis of the redemption data, we estimate that period of time to be three years after the sale of a genetic test kit. Prior to making this determination, revenue was recognized only on test kits returned and processed. Beginning in the fourth quarter of 2013, we began to recognize breakage revenue based on the likelihood of test redemption becoming remote. The term remote requires statistical analysis of customer redemption patterns for all tests sold and returned. We analyzed redemption patterns from 2009 through 2015. Included in genetic test revenue in the year ended December 31, 2016 is $191,000 of breakage revenue related to unredeemed genetic test kits from the year ended December 31, 2013, compared to $218,000 of breakage revenue in the same period in 2015 related to unredeemed genetic test kits from the year ended December 31, 2012. We expect to continue to recognize breakage revenue and the corresponding deferred cost of goods as well as analyze the data on a quarterly basis based on the historical analysis.
In the genetic test business, competition is in flux and the markets and customer base are not well established. Adoption of new technologies by customers requires substantial market development and customer education. Historically, we have focused on our relationship with our primary customer, Alticor, a significant direct marketing company, in order to assist us in developing the market for our products and educating our potential customers. Our challenge in 2017 and beyond will be to develop the market for our personalized health products, in particular our ILUSTRA Program, and we will allocate considerable resources to commercialization of our ILUSTRA Program. Due to the early stage of this initiative, we cannot predict with certainty fluctuations we may experience in our genetic test revenues or whether such revenues will ever be material, or if material, will be sustained in future periods.
Financing Transactions
On May 17, 2013, we entered into a Common Stock Purchase Agreement (the “2013 Purchase Agreement”) with various accredited investors (the “2013 Investors”), pursuant to which we sold securities to the 2013 Investors in a private placement transaction (the “May 2013 Private Placement”). In the May 2013 Private Placement, we sold an aggregate of 43,715,847 shares of our 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 are all currently exercisable and have a term of seven years from the date they became exercisable.
On December 23, 2014, we entered into a Securities Purchase Agreement (the “2014 Purchase Agreement”) with various accredited investors (the “2014 Investors”), pursuant to which we sold to the 2014 Investors in a private placement transaction (the “December 2014 Private Placement”) an aggregate of 50,099,700 shares of our common stock at a price of $0.1003 per share for gross proceeds of approximately $5.025 million. The 2014 Investors also received 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”). The 2014 Warrants 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 will be 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 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 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.
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On April 17, 2017, we 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 our existing debt under the Loan Agreement, 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, we provide evidence reasonably satisfactory to the Lender that we are actively negotiating a clinical services or similar agreement, the terms of which are satisfactory to the Lender, which we believe, in good faith, we 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 our 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, is exercisable on a net issuance basis and has a 10-year term.
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 April 17, 2017, we sold $500,000 of Convertible Notes (the “2017 Notes”) to each of Bay City Capital and Horizon Technology Finance Corporation (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, we also issued warrants to purchase common stock to the Note Holders. See “Recent Developments” above and Item 9B “Other Information” for more details of this bridge financing.
Liquidity and Capital Resources
As of December 31, 2016, we had cash of $2.7 million.
Cash used in operations was $6.5 million for the year ended December 31, 2016 compared to $6.7 million for the year ended December 31, 2015. Cash used in operations is primarily impacted by operating results and changes in working capital, particularly the timing of prepaid expenses, reduced payments from related party receivables, inventory levels, receipt of orders and the timing of payments to suppliers.
Cash used in investing activities was $85,000 for the year ended December 31, 2016, compared to $82,000 for the year ended December 31, 2015. Capital additions were $85,000 for the year ended December 31, 2016 which was related to the costs of creating the new ILUSTRA product website. Capital additions were $82,000 for the year ended December 31, 2015, of which approximately $11,000 related to internal use software, $50,000 related to the addition of laboratory equipment and $21,000 related to the addition of new servers.
Cash provided by financing activities was $4.6 million for the year ended December 31, 2016, compared to cash provided by financing activities of $13,000 for the year ended December 31, 2015. In July 2016 the Company received approximately $5.5 million in net proceeds, after $63,000 in related expenses, from the 2016 Private Placement. This was partially offset by $967,000 in principal payments related to our venture loan and security agreement with the Lender entered into on December 23, 2014, as restructured in August 2016. The Company received $16,000 from stock purchases through the employee stock purchase plan during the year ended December 31, 2016 compared to $21,000 for the year ended December 31, 2015. The $21,000 received through the employee stock purchase plan for the year ended December 31, 2015 was offset by $8,000 in additional fees related to the December 2014 Private Placement.
| 29 |
The amount of cash we generate from operations is currently not sufficient to continue to fund operations and grow our business. We expect that, taking into account the transactions described in Recent Developments above, our current financial resources will be adequate to maintain our current and planned operations through the second quarter of 2017. We believe our success depends on our ability to consummate a material collaboration related to our CVD test and to generate significant revenues for the ILUSTRA Program through potential partners. The timing of any revenues that we 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 our ability to consummate arrangements with other partners for the CVD asset or to promote the ILUSTRA Program, our 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. We do 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. We may never receive significant revenues.
Until such time, if ever, that we generate revenues sufficient to fund operations, we may fund our 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. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our 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 we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we 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 us or sell, license or relinquish rights to develop or commercialize our products, technologies or intellectual property. However, no assurance can be given at this time as to whether we will be able to achieve these objectives. The financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Results of Operations
Years Ended December 31, 2016 and 2015
Total revenue was $2.51 million for the year ended December 31, 2016 compared to $1.44 million for the year ended December 31, 2015. The change in total revenue is largely attributable to contracted research projects, partially offset by a decrease in kits returned for processing related to ABG’s promotional product bundle.
During the year ended December 31, 2016, 24% of our sales revenue came through our Merchant Network and Channel Partner Agreement with Amway Global compared to 45% during the year ended December 31, 2015. During the same periods, 4% and 13%, respectively, of our revenue came from sales through ABG’s promotional product bundle program.
Cost of revenue for the year ended December 31, 2016 was $1.60 million, or 63.7% of revenue, compared to $1.41 million, or 98.1% of revenue, for the year ended December 31, 2015. The decrease in the cost of revenue as a percentage of revenue in the year ended December 31, 2016 is primarily attributable to the fixed laboratory costs being applied to higher revenue in the period, which was due to contracted research projects. Deferred cost of revenue related to breakage revenue was $10,000 for the year ended December 31, 2016 compared to $10,000 for the year ended December 31, 2015. Also included in cost of revenue for the year ended December 31, 2016 is a charge of $17,000 from the write off of obsolete raw materials and kits related to the PerioPredict test.
Research and development expenses were $1.5 million for the year ended December 31, 2016, compared to $1.3 million for the year ended December 31, 2015. The 14% increase of $181,000 is primarily attributable to expenses related to Dr. Kornman moving back to the R&D department in April 2015 as President and Chief Scientific Officer from his previous position as CEO. While he served as CEO, expenses generated by Dr. Kornman were recorded as selling, general and administrative expenses. The increase in research and development expenses was also partially due to increased compensation expense related to annual salary increases for existing staff and our patient engagement study.
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Selling, general and administrative expenses were $6.1 million for the year ended December 31, 2016, compared to $5.9 million for the year ended December 31, 2015. The 3.3% increase is primarily attributable to higher legal fees and expenses related to the rebranding of the ILUSTRA Program partially offset by lower recruiting and patent fees as well as lower commissions related to our Merchant Network and Channel Partner Agreement with Amway Global.
Interest expense was $741,000 for the year ended December 31, 2016, compared to $609,000 for the year ended December 31, 2015. The interest expense is entirely related to our venture loan and security agreement with the Lender entered into on December 23, 2014, as restructured in August 2016.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements. The preparation of these financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires us to (i) make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenue and expenses; and (ii) disclose contingent assets and liabilities. A critical accounting estimate is an assumption that could have a material effect on our consolidated financial statements if another, also reasonable, amount were used or a change in the estimates is reasonably likely from period to period. We base our accounting estimates on historical experience and other factors that we consider reasonable under the circumstances. However, actual results may differ from these estimates. To the extent there are material differences between our estimates and the actual results, our future financial condition and results of operations will be affected. Our most critical accounting policies and estimates upon which our financial condition depends, and which involve the most complex or subjective decisions or assessments are set forth in Note 3 to our financial statements included in Item 8 presented elsewhere herein.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
As a smaller reporting company, we have elected scaled disclosure reporting obligations and therefore are not required to provide the information required by this item 7A.
| Item 8. | Financial Statements and Supplementary Data |
| 31 |
INTERLEUKIN GENETICS, INC.
INDEX TO FINANCIAL STATEMENTS
| 32 |
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Interleukin Genetics, Inc.
We have audited the accompanying balance sheets of Interleukin Genetics, Inc. (a Delaware corporation) (the “Company”) as of December 31, 2016 and 2015, and the related statements of operations, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Interleukin Genetics, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred recurring losses and negative cash flows from operations and as of December 31, 2016 the Company’s current liabilities exceeded its current assets. These conditions, along with other matters as set forth in Note 2, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| /s/ Grant Thornton LLP | ||
| Boston, Massachusetts | ||
| April 17, 2017 |
| 33 |
BALANCE SHEETS
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 2,657,214 | $ | 4,706,018 | ||||
| Accounts receivable from related party | 74,535 | 39,989 | ||||||
| Trade accounts receivable | 31,354 | 45,973 | ||||||
| Inventory | 73,064 | 124,583 | ||||||
| Prepaid expenses | 434,983 | 778,970 | ||||||
| Total prepaid expenses and other current assets | 3,271,150 | 5,695,533 | ||||||
| Fixed assets, net | 511,192 | 643,900 | ||||||
| Intangible assets, net | 25,429 | 58,879 | ||||||
| Other assets | 28,001 | 93,208 | ||||||
| Total assets | $ | 3,835,772 | $ | 6,491,520 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 505,630 | $ | 408,374 | ||||
| Accrued expenses | 238,087 | 497,688 | ||||||
| Deferred revenue | 2,502,966 | 3,238,541 | ||||||
| Short term debt | 2,304,545 | 1,333,333 | ||||||
| Total current liabilities | 5,551,228 | 5,477,936 | ||||||
| Long term debt | 1,130,094 | 3,474,984 | ||||||
| Total liabilities | 6,681,322 | 8,952,920 | ||||||
| Stockholders’ deficit: | ||||||||
| Convertible preferred stock, $0.001 par value — 6,000,000 shares authorized; 0 shares issued and outstanding at December 31, 2016 and 2015, respectively | –– | –– | ||||||
| Common stock, $0.001 par value — 450,000,000 and 300,000,000 shares authorized; 229,381,059 and 172,887,221 shares issued and outstanding at December 31, 2016 and 2015, respectively | 229,383 | 172,889 | ||||||
| Additional paid-in capital | 133,327,491 | 126,354,036 | ||||||
| Accumulated deficit | (136,402,424 | ) | (128,988,325 | ) | ||||
| Total stockholders’ deficit | (2,845,550 | ) | (2,461,400 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 3,835,772 | $ | 6,491,520 | ||||
The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF OPERATIONS
| For The Year Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Genetic testing | $ | 1,032,317 | $ | 1,155,980 | ||||
| Other | 1,481,139 | 284,930 | ||||||
| Total revenue | 2,513,456 | 1,440,910 | ||||||
| Cost of revenue | 1,601,958 | 1,414,113 | ||||||
| Gross profit | 911,498 | 26,797 | ||||||
| Operating expenses: | ||||||||
| Research and development | 1,480,882 | 1,299,542 | ||||||
| Selling, general and administrative | 6,070,746 | 5,878,940 | ||||||
| Amortization of intangibles | 33,450 | 136,886 | ||||||
| Total operating expenses | 7,585,078 | 7,315,368 | ||||||
| Loss from operations | (6,673,580 | ) | (7,288,571 | ) | ||||
| Other income (expense): | ||||||||
| Interest income | — | 222 | ||||||
| Interest expense | (740,519 | ) | (609,664 | ) | ||||
| Total other expense | (740,519 | ) | (609,442 | ) | ||||
| Loss before income taxes | (7,414,099 | ) | (7,898,013 | ) | ||||
| Net loss | $ | (7,414,099 | ) | $ | (7,898,013 | ) | ||
| Basic and diluted net loss per common share | $ | (0.04 | ) | $ | (0.05 | ) | ||
| Weighted average common shares outstanding, basic and diluted | 197,089,020 | 172,813,224 | ||||||
The accompanying notes are an integral part of these financial statements.
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INTERLEUKIN GENETICS, INC.
STATEMENTS OF STOCKHOLDERS’ DEFICIT
For the Years Ended December 31, 2016 and 2015
| Convertible Preferred Stock | Common Stock | Additional Paid-in | Accumulated | |||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance as of December 31, 2015 | — | — | 172,887,221 | $ | 172,889 | $ | 126,354,036 | $ | (128,988,325 | ) | $ | (2,461,400 | ) | |||||||||||||||
| Net loss | — | — | — | — | — | (7,414,099 | ) | (7,414,099 | ) | |||||||||||||||||||
| Common stock issued: | ||||||||||||||||||||||||||||
| Private placement of common stock, net of offering costs of $62,849 | — | — | 56,262,571 | 56,263 | 5,473,388 | — | 5,529,651 | |||||||||||||||||||||
| Horizon warrant | — | — | — | — | 503,667 | — | 503,667 | |||||||||||||||||||||
| Danforth warrant | — | — | — | — | 8,885 | — | 8,885 | |||||||||||||||||||||
| Exercise of employee stock options | 1,316 | 1 | 66 | — | 67 | |||||||||||||||||||||||
| Employee stock purchase plan | — | — | 229,951 | 230 | 15,761 | — | 15,991 | |||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | 971,688 | — | 971,688 | |||||||||||||||||||||
| Balance as of December 31, 2016 | — | — | 229,381,059 | $ | 229,383 | $ | 133,327,491 | $ | (136,402,424 | ) | $ | (2,845,550 | ) | |||||||||||||||
The accompanying notes are an integral part of these financial statements.
| 36 |
STATEMENTS OF CASH FLOWS
| For the Year Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| CASH FLOW FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (7,414,099 | ) | $ | (7,898,013 | ) | ||
| Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 251,021 | 349,254 | ||||||
| Amortization of loan issuance costs and FV of warrants | 171,127 | 108,224 | ||||||
| Stock-based compensation expense | 971,688 | 892,087 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Receivable from related party | (34,546 | ) | (16,445 | ) | ||||
| Trade accounts receivable | 14,619 | (31,960 | ) | |||||
| Inventory | 51,519 | 46,992 | ||||||
| Prepaid expenses and other assets | 343,987 | (274,251 | ) | |||||
| Accounts payable | 97,256 | (105,553 | ) | |||||
| Accrued expenses | (259,601 | ) | 154,463 | |||||
| Deferred revenue | (735,575 | ) | 84,043 | |||||
| Net cash used in operating activities | (6,542,604 | ) | (6,691,159 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Capital additions | (84,863 | ) | (82,489 | ) | ||||
| Net cash used in investing activities | (84,863 | ) | (82,489 | ) | ||||
| CASH FLOW FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from private placement of common stock and warrants | 5,592,500 | –– | ||||||
| Private placement offering costs | (62,849 | ) | (8,095 | ) | ||||
| Payment of notes payable | (967,045 | ) | –– | |||||
| Proceeds from employee stock purchase plan and employee option exercises | 16,057 | 20,954 | ||||||
| Net cash provided by financing activities | 4,578,663 | 12,859 | ||||||
| Net decrease in cash and equivalents | (2,048,804 | ) | (6,760,789 | ) | ||||
| Cash, beginning of period | 4,706,018 | 11,466,807 | ||||||
| Cash, end of period | $ | 2,657,214 | $ | 4,706,018 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | 429,267 | $ | 467,500 | ||||
| Supplemental disclosures of non-cash investing and financing activities: | ||||||||
| Warrants issued in connection with long term debt amendment | $ | 5,169,577 | $ | –– | ||||
The accompanying notes are an integral part of these financial statements
| 37 |
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.
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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.
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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:
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| 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.
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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.
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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.
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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.
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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.
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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.
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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 | |||||||||
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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.
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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.
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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 |
Note 11—Stock-Based Compensation Arrangements
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 our 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 our common stock, pursuant to the cancellation, forfeiture, or expiry, of awards granted under the 2004 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 year ended December 31, 2016, the Company granted 10,622,392 stock options under the 2013 Plan. At December 31, 2016, the Company had an aggregate of 20,729,144 shares of common stock available for grant under the 2013 Plan.
Stock Option Grants
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 the 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.
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.
For purposes of determining the stock-based compensation expense for stock option awards in 2016 and 2015, the Black-Scholes option-pricing model was used with the following weighted-average assumptions:
| 2016 | 2015 | |||||||
| Risk-free interest rate | 1.24 | % | 1.54 | % | ||||
| Expected life | 5.73 years | 5.73 years | ||||||
| Expected volatility | 146.3 | % | 138.8 | % | ||||
| Dividend yield | 0 | % | 0 | % | ||||
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Using these assumptions, the weighted average grant date fair value of options granted in 2016 and 2015 was $0.15 and $0.16, respectively.
Restricted Stock Awards
Holders of restricted stock awards participate fully in the rewards of stock ownership of the Company, including voting and dividend rights. Recipients of restricted stock awards are generally not required to pay any consideration to the Company for these restricted stock awards. The Company measures the fair value of the shares based on the last reported price at which the Company’s common stock traded on the date of the grant and compensation cost is recognized over the remaining service period. During each of the years ended December 31, 2016 and 2015, the Company granted no restricted stock awards.
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 years ended December 31, 2016 and 2015, employees purchased 229,951 and 203,879 shares, respectively, of common stock at a weighted-average purchase price of $0.08 and $0.10, respectively, while the weighted-average market value was $0.09 and $0.12 per share, respectively, resulting in compensation expense of $2,921 and $4,053, respectively.
The following table details stock option and restricted stock activity for the years ended December 31, 2016 and 2015.
| 2016 | 2015 | |||||||||||||||
| Shares | Weighted Avg. Exercise Price | Shares | Weighted Avg. Exercise Price | |||||||||||||
| Outstanding, beginning of period | 21,657,776 | $ | 0.21 | 4,523,900 | $ | 0.39 | ||||||||||
| Granted | 10,622,392 | 0.16 | 18,193,027 | 0.17 | ||||||||||||
| Stock options exercised | (1,316 | ) | .05 | –– | 0.00 | |||||||||||
| Restricted stock exercised | –– | 0.00 | –– | 0.00 | ||||||||||||
| Forfeited/Expired | (915,533 | ) | 0.33 | (1,059,151 | ) | 0.17 | ||||||||||
| Outstanding, end of period | 31,363,319 | $ | 0.19 | 21,657,776 | $ | 0.21 | ||||||||||
| Exercisable, end of period | 10,860,050 | $ | 0.23 | 3,665,124 | $ | 0.32 | ||||||||||
The following table details further information regarding stock options and restricted stock outstanding and exercisable at December 31, 2016:
| Stock Options/Restricted Stock Outstanding | Stock Options/Restricted Stock Exercisable | |||||||||||||||||||
| Range of Exercise Price: | Shares | Weighted Avg. remaining contractual life (years) | Weighted Avg. Exercise Price | Shares | Weighted Avg. Exercise Price | |||||||||||||||
| $0.01–$1.00 | 31,318,319 | 8.55 | $ | 0.19 | 10,815,050 | $ | 0.23 | |||||||||||||
| $1.01–$2.00 | 45,000 | 1.25 | 1.40 | 45,000 | 1.40 | |||||||||||||||
| $2.01–$3.00 | –– | –– | –– | –– | –– | |||||||||||||||
| $3.01–$4.00 | –– | –– | –– | –– | –– | |||||||||||||||
| $4.01–$5.00 | –– | –– | –– | –– | –– | |||||||||||||||
| 31,363,319 | 8.54 | $ | 0.19 | 10,860,050 | $ | 0.23 | ||||||||||||||
| Aggregate intrinsic value | $ | 69,547 | $ | 0 | ||||||||||||||||
The aggregate intrinsic value in the preceding table is based on the last reported price at which the Company’s common stock traded on December 31, 2016, of $0.11.
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The following table summarizes the status of the Company’s non-vested options for the years ended December 31, 2016 and 2015:
| 2016 | 2015 | |||||||||||||||
| Shares | Weighted Avg. Exercise Price | Shares | Weighted Avg. Exercise Price | |||||||||||||
| Non-vested options, beginning of year | 17,992,652 | $ | 0.18 | 2,878,739 | $ | 0.37 | ||||||||||
| Granted | 10,622,392 | 0.16 | 18,193,027 | 0.17 | ||||||||||||
| Vested | (8,035,609 | ) | 0.15 | (2,038,435 | ) | 0.33 | ||||||||||
| Forfeited | (76,166 | ) | 0.25 | (1,040,679 | ) | 0.17 | ||||||||||
| Non-vested options, end of year | 20,503,269 | $ | 0.17 | 17,992,652 | $ | 0.18 | ||||||||||
Total cost for stock-based compensation arrangements is as follows:
| Year Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Stock option grants beginning of period | $ | 846,347 | $ | 730,102 | ||||
| Stock-based arrangements during the period: | ||||||||
| Stock option grants | 122,420 | 157,932 | ||||||
| Restricted stock issued: | ||||||||
| Employee stock purchase plan | 2,921 | 4,053 | ||||||
| Director agreements | –– | –– | ||||||
| $ | 971,688 | $ | 892,087 | |||||
As of December 31, 2016 and 2015, there was approximately $2,705,027 and $2,248,591 respectively, of total unrecognized compensation related to non-vested share-based compensation arrangements granted under the Company’s stock plans. That cost is expected to be recognized over a weighted average period of approximately 2.8 and 3.11 years, respectively.
Note 12—Employee Benefit Plan
The Company sponsors a profit sharing plan covering substantially all of its employees. The profit sharing plan allows for pre-tax employee contributions. The Company may, at the discretion of the Board of Directors, match a portion of the participant contributions. The Company currently contributes 25% of any amount employees contribute, up to a maximum of $1,500 per participant per calendar year. Company contributions vest over a period of five years based on the participant’s initial service date with the Company. During the years ended December 31, 2016 and 2015, $13,520 and $2,239, respectively, was contributed by the Company to the plan.
Note 13—Income Taxes
For the years ended December 31, 2016 and 2015, the Company recorded no tax provision or benefit. While the Company has incurred losses from operations it has not recorded an income tax benefit for 2016 or 2015 as it has recorded a valuation allowance against net operating losses and other net deferred tax assets due to uncertainties related to the ability of these tax assets to be realized.
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Deferred tax assets and liabilities are determined based on the difference between financial statement and tax bases using enacted federal and state tax rates in effect for the year in which the differences are expected to reverse. As of December 31, 2016 and 2015, the expected income tax effect of the Company’s deferred tax assets (liabilities) consisted of the following:
| 2016 | 2015 | |||||||
| Deferred tax asset: | ||||||||
| Tax effect of: | ||||||||
| Net operating loss carryforwards | $ | 31,398,000 | $ | 29,122,000 | ||||
| Accrued expenses | 19,000 | 87,000 | ||||||
| Amortization of definite lived intangible assets | –– | 10,000 | ||||||
| Non-qualified stock option compensation | 598,000 | 315,000 | ||||||
| Depreciation | 68,000 | 72,000 | ||||||
| Deferred revenue | 943,000 | 880,000 | ||||||
| Other | 1,000 | 139,000 | ||||||
| Patents | –– | (23,000 | ) | |||||
| Deferred gain on installment sale | (1,000 | ) | –– | |||||
| State net operating loss carryforwards, net of federal tax benefit | 929,000 | 579,000 | ||||||
| Research tax credit carryforwards | 2,433,000 | 2,274,000 | ||||||
| Total deferred tax assets | 36,388,000 | 33,455,000 | ||||||
| Valuation allowance | (36,388,000 | ) | (33,455,000 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
As of December 31, 2016, the Company had gross net operating loss (NOL) and research tax credit carryforwards of approximately $94.9 million and $1.7 million, respectively, for federal income tax purposes, expiring in varying amounts through the year 2036. Of the $94.9 million NOL carryforward, $2.5 million relates to stock-based compensation and has not been reflected in the deferred taxes and when the benefit of these losses, if any, is realized, the Company will credit additional paid in capital.
As of December 31, 2016, the Company had gross NOL and research tax credit carryforwards of approximately $17.6 million and $1.1 million for state income tax purposes, expiring in varying amounts through the year 2036.
The Company’s ability to use its NOL and tax credit carryforwards to reduce future taxes is subject to the restrictions provided by Section 382 of the Internal Revenue Code of 1986. These restrictions provide for limitations on the Company’s utilization of its NOL and tax credit carryforwards following a greater than 50% ownership change during the prescribed testing period. On March 5, 2003, the Company had such a change. As a result, all of the Company’s NOL carryforwards as of that date are limited as to utilization. The annual limitation may result in the expiration of certain of the carryforwards prior to utilization. In addition, the Company’s equity offerings, including those in May 2013, December 2014 and July 2016, may have resulted in qualifying changes in ownership. A formal study, which the Company has not undertaken, is required to determine applicability of restrictions, and might indicate that the Company’s NOL carryforwards are subject to additional limitations on utilization.
The Company is subject to taxation in the United States and the Commonwealth of Massachusetts. As of December 31, 2016, tax years for 2013, 2014 and 2015 are subject to examination by the tax authorities. Since the Company is in a loss carry-forward position, the Company is generally subject to U.S. federal and state income tax examinations by tax authorities for all years for which a loss carry-forward is utilized. However, carryforward attributes from prior years may still be adjusted upon examination by tax authorities if they are used in an open period.
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The benefit for income taxes differs from the federal statutory rate due to the following:
| 2016 | 2015 | |||||||
| Tax at statutory rate | (34.0 | )% | (34.0 | )% | ||||
| State taxes, net of federal benefit | 0.0 | 0.0 | ||||||
| Research and development credit | (0.69 | ) | (1.3 | ) | ||||
| Share based payment expense | 0.0 | 1.6 | ||||||
| Other | 0.42 | 0.7 | ||||||
| Removal of deferred tax asset on federal net operating losses | 0.00 | 0.0 | ||||||
| Establishment of deferred tax asset on state net operating losses and state deferred taxes, net of federal income tax benefits | (5.3 | ) | (4.9 | ) | ||||
| Change in valuation allowance | 39.6 | 37.9 | ||||||
| Effective tax rate | 0.0 | % | 0.0 | % | ||||
Note 14—Risks and Uncertainties
The Company develops genetic risk assessment tests and performs research for its own benefit. As of December 31, 2016, the Company has introduced five genetic risk assessment tests commercially. Commercial success of the Company’s genetic risk assessment tests will depend on their success as 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 years ended December 31, 2016 and 2015, approximately 24% and 45%, respectively, of the Company’s 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.
Note 15—Subsequent Events
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.
On April 17, 2017, the Company sold $500,000 of Convertible Notes (the “2017 Notes”) to each of Bay City Capital and Horizon Technology Finance Corporation (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 9B “Other Information” for more details.
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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 9B “Other Information” for more details.
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 streamline its 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. We continue to support the ILUSTRA Program deployments with customers and will advance new customer relationships that expand the evidence base of this program’s effectiveness.
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None
| Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report on Form 10-K, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to give reasonable assurance that information required to be disclosed by us in the reports that the Company file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its 2013 revised guidelines. Based on our assessment and an independent review performed in 2015, management believes that, as of December 31, 2016, the Company’s internal control over financial reporting is effective based on those criteria.
This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding the Company’s internal control over financial reporting. Management’s report on internal control over financial reporting was not subject to attestation by the Company’s registered public accounting firm.
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Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| Item 9B. | Other Information |
Bridge Financing
On April 17, 2017, we entered into a Subscription Agreement (the “Subscription Agreement”), with funds affiliated with Bay City Capital (“Bay City Capital”) and Horizon Technology Finance Corporation (“Horizon”) under which we issued and sold $500,000 of Subordinated Convertible Promissory Notes (the “2017 Notes”) to each of Bay City Capital and Horizon (the “Note Holders”), for a total of $1,000,000 in aggregate principal amount. The 2017 Notes will convert in common shares:
| (a) | Upon the closing of a Qualified Financing (defined as our next common stock financing, whether in a single transaction or series of related transactions, whether a public or private financing, yielding aggregate cash proceeds to us (inclusive of amounts converted under the 2017 Notes or other outstanding indebtedness) of at least $5.0 million on or before January 1, 2022. The unpaid principal amount and accrued interest outstanding under the 2017 Notes shall automatically convert in whole into fully paid and nonassessable shares of our common stock. The total number of shares of common stock issuable upon conversion of the 2017 Notes in this circumstance shall be determined by dividing (i) the then outstanding principal amount and accrued interest under the 2017 Notes by (ii) a conversion price equal to (A) eighty percent (80%) multiplied by (B) the lowest price per share of the common stock paid by investors in such Qualified Financing; |
| (b) | In the event that a change of control occurs before the closing of a Qualified Financing and on or before January 1, 2022, then upon the written election of the holders of 2017 Notes representing at least fifty percent (50%) of the aggregate principal amount of all 2017 Notes, the unpaid principal amount and accrued interest outstanding under the 2017 Notes shall convert in whole into fully paid and nonassessable shares of common stock immediately before the closing of the change of control. The total number of shares of common stock issuable upon conversion of the 2017 Notes in this circumstance shall be determined by dividing (i) the then outstanding principal amount and accrued interest under the 2017 Notes by (ii) a conversion price equal to (A) eighty percent (80%) multiplied by (B) the price per share of our common stock in such change of control; or |
| (c) | At the option of the individual Note Holder at any time before the Maturity Date, the unpaid principal amount and accrued interest outstanding under the 2017 Note may be converted in whole or in part into fully paid and nonassessable shares of common stock. The total number of shares of common stock issuable upon conversion of the particular 2017 Note in this circumstance shall be determined by dividing (i) the then outstanding principal amount and accrued interest under the 2017 Note by (ii) a conversion price equal to $0.125256. |
The 2017 Notes are secured by a security interest in all of our assets and are subordinated to our existing venture loan with Horizon.
In addition, under the Subscription Agreement, each Note Holder received a Warrant to purchase our common stock (the “2017 Note Warrants”). The 2017 Note Warrants have an exercise price per share of $0.10438 and are exercisable for that number of shares of our common stock equal to the original principal amount of the corresponding 2017 Note divided by such exercise price, or an aggregate of approximately 9,580,379 shares. The 2017 Note Warrants are exercisable on a net issuance basis and have a 5-year term.
The 2017 Notes and 2017 Note Warrants were issued in a private placement pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
Copies of the Subscription Agreement, the form of 2017 Notes and the form of the 2017 Note Warrants are filed as Exhibits 10.21, 4.12 and 4.11, respectively, to this Annual Report on Form 10-K and are incorporated herein by reference. The foregoing description does not purport to be complete and is qualified in its entirety by reference to such Exhibits.
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Amendment to Venture Loan and Security Agreement
Also on April 17, 2017, we 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 our existing debt with Horizon, which resulted in the deferral of the principal amount due to Horizon on April 1, May 1, and June 1, 2017, and the potential deferral of the principal amount due to Horizon on July 1, August 1 and September 1, 2017, such potential deferral of principal is dependent upon whether, as of June 15, 2017, we provide evidence reasonably satisfactory to Horizon that we are actively negotiating a clinical services or similar agreement, the terms of which are satisfactory to Horizon, which we believe, in good faith, we will enter into no later than September 1, 2017. In exchange for agreeing to defer principal payments, Horizon was granted a warrant to purchase our 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.
The warrant issued to Horizon in connection with the debt restructuring was issued as a private placement pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
Copies of the Second Amendment of Venture Loan and Security Agreement and the form of warrant issued to Horizon in connection with the Second Amendment are filed as Exhibits 10.18.3 and 4.10, respectively, to this Annual Report on Form 10-K and are incorporated herein by reference. The foregoing description does not purport to be complete and is qualified in its entirety by reference to such Exhibits.
| Item 10. | Directors, Executive Officers and Corporate Governance |
Information responsive to this item is incorporated by reference from the relevant discussions in our Proxy Statement for the 2017 Annual Meeting of Stockholders under the captions “Management and Corporation Governance, “Compliance with Section 16(a) of the Securities Exchange Act of 1934” and “Code of Conduct and Ethics.”
| Item 11. | Executive Compensation |
Information responsive to this item is incorporated by reference from the relevant discussions in our Proxy Statement for the 2017 Annual Meeting of Stockholders under the caption “Executive Compensation.”
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information responsive to this item is incorporated by reference from the relevant discussions in our Proxy Statement for the 2017 Annual Meeting of Stockholders under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Information responsive to this item is incorporated by reference from the relevant discussions in our Proxy Statement for the 2017 Annual Meeting of Stockholders under the captions “Certain Relationships and Related Transactions” and “Management and Corporate Governance.”
| Item 14. | Principal Accountant Fees and Services |
Information responsive to this item is incorporated by reference from the relevant discussions in our Proxy Statement for the 2017 Annual Meeting of Stockholders under the proposal entitled “Ratification of Appointment of Independent Public Accountants.”
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| Item 15. | Exhibits |
| Item 15(a). | The following documents are filed as part of this Annual Report on Form 10-K: | |
| Item 15(a)(1) and (2). |
See “Index to Financial Statements” at Item 8 to this Annual Report on Form 10-K. Other financial statement schedules have not been included because they are not applicable or the information is included in the financial statements or notes thereto. | |
| Item 15(a)(3) | Exhibits: |
The exhibits listed below are filed as part of or incorporated by reference into this Annual Report. Where certain exhibits are incorporated by reference from a previous filing, the exhibit numbers and previous filings are identified in parentheses. The SEC file number for each Form 10-K, Form 10-Q and Form 8-K identified below is File No. 001-32715.
| Exhibit No. | Identification of Exhibit | |
| 3.1.1 | Restated Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on October 23, 2013 (incorporated herein by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q filed November 14, 2013) | |
| 3.1.2 | Certificate of Amendment of Restated Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on July 21, 2015 (incorporated herein by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed July 23, 2015) | |
| 3.2 | Amended and Restated Bylaws of the Company dated July 24, 2008 (incorporated by reference to the Current Report on Form 8-K filed on July 28, 2008) | |
| 4.1 | Form of Stock Certificate representing Common Stock, $0.001 par value, of the Company (incorporated herein by reference to Exhibit 4.1 of the Company’s Quarterly Report on Form 10-Q filed August 14, 2000) | |
| 4.2 | Form of Common Stock Purchase Warrant (incorporated herein by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on March 5, 2010) | |
| 4.3 | Form of Warrant issued to Investors in the May 2013 Private Placement (incorporated herein by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on May 20, 2013) | |
| 4.4 | Form of Warrant issued to the Placement Agent in the May 2013 Private Placement (incorporated herein by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on May 20, 2013) | |
| 4.5 | Form of Warrant issued to the Investors and the Placement Agent in the December 2014 Private Placement (incorporated herein by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on December 23, 2014) | |
| 4.6 | Form of Warrant issued to Horizon Technology Finance Corporation and its affiliates in the December 2014 Debt Transaction (incorporated herein by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on December 23, 2014) | |
| 4.7 |
Common Stock Purchase Warrant, dated September 8, 2014, issued to Danforth Advisors, LLC (incorporated herein by reference to Exhibit 4.5 of the Company’s Registration Statement on Form S-1 filed on February 6, 2015 (File No.: 333-201908)) | |
| 4.8 | Form of Warrant issued to Investors in the 2016 Private Placement (incorporated herein by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on August 1, 2016) | |
| 4.9 | Form of Warrant issued to Horizon Technology Finance Corporation and its affiliates in the 2016 Debt Restructuring (incorporated herein by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on August 26, 2016) | |
| 4.10* | Form of Warrant issued to Horizon Technology Finance Corporation and its affiliates in the April 2017 Debt Restructuring | |
| 4.11* | Form of Warrant issued to Investors in the April 2017 Bridge Financing | |
| 4.12* | Form of Subordinated Convertible Promissory Note issued to Investors in April 2017 Bridge Financing | |
| Leases | ||
| 10.1.1 | Commercial Lease Agreement between the Company and Clematis LLC dated February 13, 2004 (incorporated herein by reference to Exhibit 10.44 of the Company’s Annual Report on Form 10-K filed on March 29, 2004) | |
| 10.1.2 | Second Amendment to Commercial Lease, dated as of February 7, 2014, by and between the Company and Clematis, LLC (incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on February 12, 2014) |
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| Exhibit No. | Identification of Exhibit | |
| 10.1.3 | Third Amendment to Commercial Lease, dated as of September 27, 2016, by and between the Company and Clematis, LLC (incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 30, 2016) | |
| Equity Compensation Plans | ||
| 10.2.1@ | 2000 Employee Stock Compensation Plan for the Company (incorporated herein by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q filed August 14, 2000) | |
| 10.2.2@ | Form of Nonqualified Stock Option Agreement under the 2000 Employee Stock Compensation Plan (incorporated herein by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q filed August 14, 2000) | |
| 10.2.3@ | Form of Incentive Stock Option Agreement under the 2000 Employee Stock Compensation Plan (incorporated herein by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q filed August 14, 2000) | |
| 10.3.1@ | Interleukin Genetics, Inc. 2004 Employee, Director and Consultant Stock Plan (incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement filed on April 29, 2011) | |
| 10.3.2@ | Form of Nonqualified Stock Option Agreement under the 2004 Employee, Director and Consultant Stock Plan (incorporated by reference to Exhibit 10.5.1 of the Company’s Annual Report on Form 10-K filed March 25, 2010) | |
| 10.3.3@ | Form of Incentive Stock Option Agreement under the 2004 Employee, Director and Consultant Stock Plan (incorporated by reference to Exhibit 10.5.2 of the Company’s Annual Report on Form 10-K filed March 25, 2010) | |
| 10.4.1@ | 2013 Employee, Director and Consultant Equity Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on July 23, 2015) | |
| 10.4.2@ | Form of Nonqualified Stock Option Agreement under the 2013 Employee, Director and Consultant Equity Incentive Plan (incorporated by reference to Exhibit 10.6.2 of the Company’s Annual Report on Form 10-K filed on March 20, 2014) | |
| 10.4.3@ | Form of Incentive Stock Option Agreement under the 2013 Employee, Director and Consultant Equity Incentive Plan (incorporated by reference to Exhibit 10.6.3 of the Company’s Annual Report on Form 10-K filed on March 20, 2014) | |
| Agreements with Executive Officers and Directors | ||
| 10.5@ | Employment Letter Agreement, dated December 14, 2015, by and between Interleukin Genetics, Inc. and Kenneth S. Kornman (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on December 15, 2015) | |
| 10.6.1@ | Executive Employment Agreement, dated April 6, 2015, between Interleukin Genetics, Inc. and Mark B. Carbeau (incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on April 9, 2015 (File No. 001-32715)). | |
| 10.6.2 | Non-Qualified Stock Option Agreement, dated April 6, 2015, by and between Interleukin Genetics, Inc. and Mark Carbeau (incorporated herein by reference to Exhibit 99.2 of the Company’s Registration Statement on Form S-8 (File No. 333-208094) filed on November 18, 2015. | |
| 10.7@ | Form of Director Indemnity Agreement dated March 5, 2003 (incorporated herein by reference to Exhibit 10.13 of the Company’s Current Report on Form 8-K filed on March 5, 2003) | |
| 10.8@ | Director Compensation Policy dated April 29, 2010 (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed August 12, 2010) | |
| 10.9@ | Employment Agreement, dated May 19, 2016 and effective as of August 15, 2016, by and between Interleukin and Stephan Toutain (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q filed on November 14, 2016) | |
| 10.10@ | Offer Letter, dated March 31, 2014, between Interleukin Genetics, Inc. and James M. Weaver (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed March 31, 2014) | |
| 10.11@ | Consulting Agreement, dated September 8, 2014, by and between Interleukin Genetics, Inc. and Danforth Advisors, LLC. (incorporated herein by reference to Exhibit 10.13 of the Company’s Registration Statement on Form S-1 filed on February 6, 2015) | |
| Financing Agreements | ||
| 10.12.1 | Stock Purchase Agreement between the Company and Pyxis Innovations Inc. dated March 5, 2003 (incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on March 5, 2003) |
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| Exhibit No. | Identification of Exhibit | |
| 10.12.2 | Amendment No. 1 to Stock Purchase Agreement between the Company and Pyxis Innovations Inc. dated May 20, 2003 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on May 30, 2003) | |
| 10.12.3 | Second Amendment to Stock Purchase Agreement between the Company and Pyxis Innovations Inc. dated February 28, 2005 (incorporated by reference to Exhibit 10.41 of the Company’s Annual Report on Form 10-K filed on April 26, 2005) | |
| 10.12.4 | Third Amendment, dated June 29, 2012, to the Stock Purchase Agreement, dated March 3, 2003, between Interleukin and Pyxis Innovations Inc. (incorporated by reference to Exhibit 10.5 of the Current Report on Form 8-K filed on July 2, 2012) | |
| 10.13 | Stock Purchase Agreement Between the Company and Pyxis Innovations Inc. dated August 17, 2006 (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K/A filed on October 31, 2006) | |
| 10.14.1 | Common Stock Purchase Agreement, dated May 17, 2013, by and among Interleukin and the Investors in the May 2013 Private Placement (incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on May 20, 2013) | |
| 10.14.2 | First Amendment, dated March 31, 2014, to Common Stock Purchase Agreement, dated May 17, 2013 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed March 31, 2014) | |
| 10.14.3 | Second Amendment, dated May 30, 2014, to Common Stock Purchase Agreement, dated May 17, 2013 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed June 2, 2014) | |
| 10.14.4 | Third Amendment, dated April 9, 2015, to Common Stock Purchase Agreement, dated May 17, 2013 (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed April 9, 2015) | |
| 10.15 | Registration Rights Agreement, dated May 17, 2013, by and among Interleukin and the Investors in the May 2013 Private Placement, Pyxis Innovations Inc., Delta Dental Plan of Michigan, Inc. and BTIG, LLC (incorporated herein by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on May 20, 2013) | |
| 10.16.1 | Securities Purchase Agreement, dated December 23, 2014, by and among Interleukin and the Investors in the December 2014 Private Placement (incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on December 23, 2014) | |
| 10.16.2 | First Amendment, dated April 6, 2015, to Securities Purchase Agreement dated December 23, 2014, by and among Interleukin and the Investors in the December Private Placement (incorporated herein by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on April 9, 2015) | |
| 10.17 | Registration Rights Agreement, dated December 23, 2014, by and among Interleukin and the Investors in the December 2014 Private Placement and BTIG, LLC (incorporated herein by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on December 23, 2014) | |
| 10.18.1 | Venture Loan and Security Agreement, dated December 23, 2014, by and between Interleukin and Horizon Technology Finance Corporation (incorporated herein by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on December 23, 2014) | |
| 10.18.2 | First Amendment of Venture Loan and Security Agreement, dated August 25, 2016, by and among Interleukin Genetics, Inc. and Horizon Credit II LLC, as assignee of Horizon Technology Finance Corporation (incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on August 26, 2016) | |
| 10.18.3* | Second Amendment of Venture Loan and Security Agreement, dated April 17, 2017, by and among Interleukin Genetics, Inc. and Horizon Credit II LLC, as assignee of Horizon Technology Finance Corporation | |
| 10.19 | Securities Purchase Agreement, dated July 29, 2016, by and among Interleukin and the Investors in the 2016 Private Placement (incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on August 1, 2016) | |
| 10.20 | Registration Rights Agreement, dated July 29, 2016, by and among Interleukin and the Investors in the 2016 Private Placement (incorporated herein by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on August 1, 2017) | |
| 10.21* | Subscription Agreement, dated April 17, 2017 by and among Interleukin and the Investors in the April 2017 Bridge Financing | |
| Agreements with respect to Collaborations, Licenses and Research and Development | ||
| 10.22.1 | Exclusive License Agreement between the Company and Access Business Group dated March 5, 2003 (incorporated herein by reference to Exhibit 10.7 of the Company’s Current Report on Form 8-K filed on March 5, 2003) |
| 60 |
| Exhibit No. | Identification of Exhibit | |
| 10.22.2 | First Amendment to License Agreement by and between the Company and Access Business Group International, LLC, dated September 1, 2008 (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q filed on November 13, 2008) | |
| 10.23 | Merchant Network and Channel Partner Agreement dated October 26, 2009 by and between the Company and Amway Corp. (incorporated by reference to Exhibit 10.23 of the Company’s Annual Report on Form 10-K filed on March 25, 2010) | |
| 10.24+ | License Agreement, dated September 21, 2012, between Access Business Group International LLC and Interleukin Genetics, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed on November 14, 2012) | |
| 10.25 | Professional Services Agreement, dated September 21, 2012, between Access Business Group International LLC and Interleukin Genetics, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed on November 14, 2012) | |
| 10.26+ | Services Agreement, effective as of February 1, 2016, by and between Interleukin Genetics, Inc. and Metagenics, Inc. (incorporated by reference to Exhibit 10.23 of the Company’s Annual Report on Form 10-K filed on March 16, 2016) | |
| 10.27+ | Services Agreement, dated July 1, 2016, by and between Interleukin Genetics, Inc. and Alticor Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed on November 14, 2016) | |
| Consents, Certifications and Other Exhibits | ||
| 23.1* | Consent of Grant Thornton LLP | |
| 31.1* | Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 | |
| 31.2* | Certification of Principal Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 | |
| 32.1* | Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002 | |
| 101** | The following materials from Interleukin Genetics Inc.’s Annual Report on Form 10-K for the year ended December 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Stockholders’ Deficit, (iv) the Statements of Cash Flows, and (v) Notes to Financial Statements. |
| * | Filed herewith. | |
| ** | To be filed by amendment. |
| + | The Securities and Exchange Commission with respect to certain portions of this exhibit has previously granted confidential treatment. Omitted portions have been filed separately with the Securities and Exchange Commission. |
| ++ | Confidential treatment with respect to certain portions of this exhibit has been requested from the Securities and Exchange Commission. Omitted portions have been filed separately with the Securities and Exchange Commission. |
| @ | Management contract or compensatory plan, contract or arrangement. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| INTERLEUKIN GENETICS, INC. | ||
| By: | /s/ Mark B. Carbeau | |
| Mark B. Carbeau | ||
| Chief Executive Officer | ||
Date: April 17, 2017
Pursuant to the requirements of with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated below.
| Signatures | Title | Date Signed | ||
| /s/ Mark B. Carbeau | Chief Executive Officer, Director | April 17, 2017 | ||
| Mark B. Carbeau | (Principal Executive Officer) | |||
| /s/ Stephen J. DiPalma | Interim Chief Financial Officer | April 17, 2017 | ||
| Stephen J. DiPalma | (Principal Financial and Accounting Officer) | |||
| /s/ JAMES M. WEAVER | Chairman of the Board | April 17, 2017 | ||
| James M. Weaver | ||||
| /s/ Lionel Carnot | Director | April 17, 2017 | ||
| Lionel Carnot | ||||
| /s/ Joseph M. Landstra | Director | April 17, 2017 | ||
| Joseph M. Landstra | ||||
| /s/ Kenneth S. Kornman | Director | April 17, 2017 | ||
| Kenneth S. Kornman | ||||
| /s/ William C. Mills III | Director | April 17, 2017 | ||
| William C. Mills III | ||||
| /s/ Dayton Misfeldt | Director | April 17, 2017 | ||
| Dayton Misfeldt |
Exhibit 4.10
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THIS WARRANT.
INTERLEUKIN GENETICS, INC.
WARRANT TO PURCHASE SHARES
OF COMMON STOCK
THIS CERTIFIES THAT, for value received, HORIZON CREDIT II LLC and its assignees are entitled to subscribe for and purchase that number of the fully paid and nonassessable shares of Common Stock as is determined pursuant to the next paragraph hereof (as adjusted pursuant to Section 4 hereof, the “Shares”) of INTERLEUKIN GENETICS, INC., a Delaware corporation (the “Company”), at the price per share as is determined pursuant to the next paragraph hereof (such price and such other price as shall result, from time to time, from the adjustments specified in Section 4 hereof is herein referred to as the “Warrant Price”), subject to the provisions and upon the terms and conditions hereinafter set forth. As used herein, (a) the term “Date of Grant” shall mean April 17, 2017, and (b) the term “Other Warrants” shall mean any other warrants issued by the Company in connection with the transaction with respect to which this Warrant was issued, and any warrant issued upon transfer or partial exercise of or in lieu of this Warrant. The term “Warrant” as used herein shall be deemed to include Other Warrants unless the context clearly requires otherwise.
The Warrant Price shall mean $0.10438. The number of shares for which this Warrant is exercisable shall be the nearest whole number determined by dividing the applicable Warrant Coverage Amount by the Warrant Price. As used herein, the term “Warrant Coverage Amount” shall mean Five Hundred Seventy-Six Thousand One Hundred Thirty-Six and 35/100 Dollars ($576,136.35), provided, however, if the Company meets the Extended Additional Interest Only Milestone (as defined in the Loan A Note as defined in the Loan Agreement)), the Warrant Coverage Amount shall be increased by One Hundred Ninety-Two Thousand Forty-Five and 45/100 Dollars ($192,045.45) on each Additional Interest Payment Date (as defined in the Loan A Note) occurring between July 1, 2017 and September 1, 2017 (for avoidance of doubt, the Warrant Coverage Amount shall not be increased for any payment occurring on a Payment Date (as defined in the Loan Agreement) between July 1, 2017 and September 1, 2017 on which the Company makes a payment of principal in the amount of Two Hundred Thousand and 00/100 Dollars in repayment of Loan A (as defined in the Loan Agreement)).
1. Term. The purchase right represented by this Warrant is exercisable, in whole or in part, at any time and from time to time from the Date of Grant through ten (10) years after the Date of Grant (the “Term”).
2. Method of Exercise; Payment; Issuance of New Warrant. Subject to Section 1 hereof, the purchase right represented by this Warrant may be exercised by the holder hereof, in whole or in part and from time to time, at the election of the holder hereof, by (a) the surrender of this Warrant (with the notice of exercise substantially in the form attached hereto as Exhibit A-1 duly completed and executed) at the principal office of the Company and by the payment to the Company, by certified or bank check, or by wire transfer to an account designated by the Company (a “Wire Transfer”) of an amount equal to the then applicable Warrant Price multiplied by the number of Shares then being purchased; (b) if in connection with a registered public offering of the Company’s securities, the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A-2 duly completed and executed) at the principal office of the Company together with notice of arrangements reasonably satisfactory to the Company for payment to the Company either by certified or bank check or by Wire Transfer from the proceeds of the sale of shares to be sold by the holder in such public offering of an amount equal to the then applicable Warrant Price per share multiplied by the number of Shares then being purchased; or (c) exercise of the “net issuance” right provided for in Section 10.2 hereof. The person or persons in whose name(s) any certificate(s) representing the Shares shall be issuable upon exercise of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the shares represented thereby (and such shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which this Warrant is exercised. In the event of any exercise of the rights represented by this Warrant, certificates for the shares of stock so purchased shall be delivered to the holder hereof as soon as possible and in any event within thirty (30) days after such exercise and, unless this Warrant has been fully exercised or expired, a new Warrant representing the portion of the Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof as soon as possible and in any event within such thirty-day period; provided, however, at such time as the Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, if requested by the holder of this Warrant, the Company shall cause its transfer agent to deliver the certificate representing Shares issued upon exercise of this Warrant to a broker or other person (as directed by the holder exercising this Warrant) within the time period required to settle any trade made by the holder after exercise of this Warrant.
3. Stock Fully Paid; Reservation of Shares. All Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance pursuant to the terms and conditions herein, be fully paid and nonassessable, and free from all preemptive rights and taxes, liens and charges with respect to the issue thereof. During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of the issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant.
4. Adjustment of Warrant Price and Number of Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows:
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(a) Reclassification or Merger. In case of any reclassification or change of securities of the class issuable upon exercise of this Warrant (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in case of any merger of the Company with or into another corporation (other than a merger with another corporation in which the Company is the acquiring and the surviving corporation and which does not result in any reclassification or change of outstanding securities issuable upon exercise of this Warrant), or in case of any sale of all or substantially all of the assets of the Company, the Company, or such successor or purchasing corporation, as the case may be, shall duly execute and deliver to the holder of this Warrant a new Warrant (in form and substance satisfactory to the holder of this Warrant), so that the holder of this Warrant shall have the right to receive upon exercise of this Warrant, at a total purchase price not to exceed that payable upon the exercise of the unexercised portion of this Warrant, and in lieu of the shares of Common Stock theretofore issuable upon exercise of this Warrant, (i) the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, change, merger or sale by a holder of the number of shares of Common Stock then purchasable under this Warrant, or (ii) in the case of such a merger or sale in which the consideration paid consists all or in part of assets other than securities of the successor or purchasing corporation, at the option of the holder of this Warrant, the securities of the successor or purchasing corporation having a value at the time of the transaction equivalent to the value of the Common Stock purchasable upon exercise of this Warrant at the time of the transaction. Any new Warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4. The provisions of this Section 4(a) shall similarly apply to successive reclassifications, changes, mergers and sales.
(b) Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its outstanding shares of Common Stock, the Warrant Price shall be proportionately decreased and the number of Shares issuable hereunder shall be proportionately increased in the case of a subdivision and the Warrant Price shall be proportionately increased and the number of Shares issuable hereunder shall be proportionately decreased in the case of a combination.
(c) Stock Dividends and Other Distributions. If the Company at any time while this Warrant is outstanding and unexpired shall (i) pay a dividend with respect to its Common Stock payable in Common Stock, then the Warrant Price shall be adjusted, from and after the date of determination of shareholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Price in effect immediately prior to such date of determination by a fraction (A) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution, and (B) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such dividend or distribution; or (ii) make any other distribution with respect to Common Stock (except any distribution specifically provided for in Sections 4(a) and 4(b)), then, in each such case, provision shall be made by the Company such that the holder of this Warrant shall receive upon exercise of this Warrant a proportionate share of any such dividend or distribution as though it were the holder of the Shares as of the record date fixed for the determination of the shareholders of the Company entitled to receive such dividend or distribution.
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(d) Adjustment of Number of Shares. Upon each adjustment in the Warrant Price, the number of Shares purchasable hereunder shall be adjusted, to the nearest whole share, to the product obtained by multiplying the number of Shares purchasable immediately prior to such adjustment in the Warrant Price by a fraction, the numerator of which shall be the Warrant Price immediately prior to such adjustment and the denominator of which shall be the Warrant Price immediately thereafter.
5. Notice of Adjustments. Whenever the Warrant Price or the number of Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof, the Company shall make a certificate signed by its chief financial officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price and the number of Shares purchasable hereunder after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (without regard to Section 13 hereof, by first class mail, postage prepaid) to the holder of this Warrant.
6. Fractional Shares. No fractional shares of Common Stock will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor based on the fair market value of the Common Stock on the date of exercise as reasonably determined in good faith by the Company’s Board of Directors.
7. Compliance with Securities Act; Disposition of Warrant or Shares of Common Stock.
(a) Compliance with Securities Act. The holder of this Warrant, by acceptance hereof, agrees that this Warrant, and the Shares to be issued upon exercise hereof are being acquired for investment and that such holder will not offer, sell or otherwise dispose of this Warrant, or any Shares except under circumstances which will not result in a violation of the Securities Act of 1933, as amended (the “Act”) or any applicable state securities laws. Upon exercise of this Warrant, unless the Shares being acquired are registered under the Act and any applicable state securities laws or an exemption from such registration is available, the holder hereof shall confirm in writing that the Shares so purchased are being acquired for investment and not with a view toward distribution or resale in violation of the Act and shall confirm such other matters related thereto as may be reasonably requested by the Company. This Warrant and all Shares issued upon exercise of this Warrant (unless registered under the Act and any applicable state securities laws) shall be stamped or imprinted with a legend in substantially the following form:
“THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE SECURITIES WERE ISSUED, DIRECTLY OR INDIRECTLY.”
Said legend shall be removed by the Company, upon the request of a holder, at such time as the restrictions on the transfer of the applicable security shall have terminated. In addition, in connection with the issuance of this Warrant, the holder specifically represents to the Company by acceptance of this Warrant as follows:
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(1) The holder is aware of the Company’s business affairs and financial condition, and has acquired information about the Company sufficient to reach an informed and knowledgeable decision to acquire this Warrant. The holder is acquiring this Warrant for its own account for investment purposes only and not with a view to, or for the resale in connection with, any “distribution” thereof in violation of the Act.
(2) The holder understands that this Warrant has not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the holder’s investment intent as expressed herein.
(3) The holder further understands that this Warrant must be held indefinitely unless subsequently registered under the Act and qualified under any applicable state securities laws, or unless exemptions from registration and qualification are otherwise available. The holder is aware of the provisions of Rule 144, promulgated under the Act.
(4) The holder is an “accredited investor” as such term is defined in Rule 501 of Regulation D promulgated under the Act.
(b) Disposition of Warrant or Shares. With respect to any offer, sale or other disposition of this Warrant or any Shares acquired pursuant to the exercise of this Warrant prior to registration of such Warrant or Shares, the holder hereof agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such holder’s counsel, or other evidence, if reasonably satisfactory to the Company, to the effect that such offer, sale or other disposition may be effected without registration or qualification (under the Act as then in effect or any federal or state securities law then in effect) of this Warrant or the Shares and indicating whether or not under the Act certificates for this Warrant or the Shares to be sold or otherwise disposed of require any restrictive legend as to applicable restrictions on transferability in order to ensure compliance with such law. Upon receiving such written notice and reasonably satisfactory opinion or other evidence, the Company, as promptly as practicable but no later than fifteen (15) days after receipt of the written notice, shall notify such holder that such holder may sell or otherwise dispose of this Warrant or such Shares, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this Section 7(b) that the opinion of counsel for the holder or other evidence is not reasonably satisfactory to the Company, the Company shall so notify the holder promptly with details thereof after such determination has been made. Notwithstanding the foregoing, this Warrant or such Shares may, as to such federal laws, be offered, sold or otherwise disposed of in accordance with Rule 144 or 144A under the Act, provided, however, that the Company shall have been furnished with such information as the Company may reasonably request to provide a reasonable assurance that the provisions of Rule 144 or 144A have been satisfied. Each certificate representing this Warrant or the Shares thus transferred (except a transfer pursuant to Rule 144 or 144A) shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with such laws, unless in the aforesaid opinion of counsel for the holder, such legend is not required in order to ensure compliance with such laws. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions.
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(c) Applicability of Restrictions. Neither any restrictions of any legend described in this Warrant nor the requirements of Section 7(b) above shall apply to any transfer of, or grant of a security interest in, this Warrant (or the Common Stock obtainable upon exercise thereof) or any part hereof (i) to a partner of the holder if the holder is a partnership or to a member of the holder if the holder is a limited liability company, (ii) to a partnership of which the holder is a partner or to a limited liability company of which the holder is a member, (iii) to any affiliate of the holder if the holder is a corporation, (iv) notwithstanding the foregoing, to any corporation, company, limited liability company, limited partnership, partnership, or other person managed or sponsored by Horizon Technology Finance Corporation ("HRZN") or in which HRZN has an interest, (v) or to a lender to the holder or any of the foregoing; provided, however, in any such transfer, if applicable, the transferee shall on the Company’s request agree in writing to be bound by the terms of this Warrant as if an original holder hereof.
8. Rights as Shareholders; Information. No holder of this Warrant, as such, shall be entitled to vote or receive dividends or be deemed the holder of Common Stock which may at any time be issuable upon the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised and the Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. Notwithstanding the foregoing, the Company will transmit to the holder of this Warrant such information, documents and reports as are generally distributed to the holders of any class or series of the securities of the Company concurrently with the distribution thereof to the shareholders; provided, however, that any such item which is available on the SEC’s EDGAR system (or successor thereto) or on the Company’s website need not be furnished in physical form.
9. Registration Rights. The Shares issuable hereunder initially shall be exempt from registration under the Securities Act. Following the Date of Grant, and in any case within ninety (90) days thereof, the Company shall promptly prepare, file and use its reasonable efforts to cause to become effective as soon as practicable thereafter, a registration statement on Form S-1 or such other form as may be appropriate to be filed with the SEC by the Company under the Act (together with any amendments or supplements thereto, whether prior to or after the effective date thereof, the “Registration Statement”) covering the public resale in the United States of the Shares to be issued pursuant to this Warrant, and the Company shall use its reasonable efforts to keep the Registration Statement continuously effective during the Term. Any such registration shall be subject to the customary terms and conditions used in connection with resale prospectuses. The Company’s obligations under this Section are contingent upon the holder hereof providing promptly all information concerning such holder and its proposed plan of distribution as the Company may reasonably request in connection with any of the foregoing. The Company may by written notice to the holder hereof immediately suspend the use of any resale prospectus for a period not to exceed sixty consecutive days in any one instance and for a period not to exceed one hundred twenty calendar days in any twelve-month period at any time that (i) the Company becomes engaged in a business activity or negotiation or any other event has occurred or is anticipated which is not disclosed in that prospectus which the Company reasonably believes should be disclosed therein under applicable law and which the Company desires to keep confidential for business purposes or (ii) the Company determines that a particular disclosure so determined to be required to be disclosed therein be premature or would adversely affect the Company or its business or prospects. The Company will use its commercially reasonable efforts to ensure that the use of the Registration Statement may be resumed as soon as practicable. The Company shall bear all costs and expenses associated with the registration of the Shares as specified in this Section and the preparation and filing of the Registration Statement, including, without limitation, all printing expenses, legal fees and disbursement of the Company’s outside counsel, commissions, NASDAQ and blue sky registration filing fees and transfer agents’ and registrars’ fees, but not including underwriting commissions or similar charges and legal fees and disbursements of counsel to the holder hereof. The Company shall keep the Registration Statement effective until the earlier of (a) all Shares have been disposed of in accordance with such effective Registration Statement, (b) all Shares have been previously sold in accordance with Rule 144, or (c) all Shares are eligible for resale without volume or manner-of-sale restrictions and without current public information pursuant to Rule 144 (assuming that this Warrant is exercised via the “net issuance” right provided for in Section 10.2 hereof), as reasonably determined by the Company, upon the advice of counsel to the Company.
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10. Additional Rights.
10.1 Acquisition Transactions. The Company shall provide the holder of this Warrant with at least twenty (20) days’ written notice prior to closing thereof of the terms and conditions of any of the following transactions (to the extent the Company has notice thereof): (i) the sale, lease, exchange, conveyance or other disposition of all or substantially all of the Company’s property or business, or (ii) the Compay’s merger into or consolidation with any other corporation or entity (other than a wholly-owned subsidiary of the Company), or any transaction (including a merger or other reorganization) or series of related transactions, in which more than 50% of the voting power of the Company capital stock is disposed of.
10.2 Right to Convert Warrant into Stock: Net Issuance.
(a) Right to Convert. In addition to and without limiting the rights of the holder under the terms of this Warrant, the holder shall have the right to convert this Warrant or any portion thereof (the “Conversion Right”) into shares of Common Stock as provided in this Section 10.2 at any time or from time to time during the term of this Warrant. Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant (the “Converted Warrant Shares”), the Company shall deliver to the holder (without payment by the holder of any exercise price or any cash or other consideration) that number of shares of fully paid and nonassessable Common Stock as is determined according to the following formula:
X = B - A
Y
| Where: | X = | the number of shares of Common Stock that shall be issued to holder | |
| Y = | the fair market value of one share of Common Stock |
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| A = | the aggregate Warrant Price of the specified number of Converted Warrant Shares immediately prior to the exercise of the Conversion Right (i.e., the number of Converted Warrant Shares multiplied by the Warrant Price) | ||
| B = | the aggregate fair market value of the specified number of Converted Warrant Shares (i.e., the number of Converted Warrant Shares multiplied by the fair market value of one Converted Warrant Share) |
No fractional shares shall be issuable upon exercise of the Conversion Right, and, if the number of shares to be issued determined in accordance with the foregoing formula is other than a whole number, the Company shall pay to the holder an amount in cash equal to the fair market value of the resulting fractional share on the Conversion Date (as hereinafter defined). For purposes of Section 10 of this Warrant, shares issued pursuant to the Conversion Right shall be treated as if they were issued upon the exercise of this Warrant.
(b) Method of Exercise. The Conversion Right may be exercised by the holder by the surrender of this Warrant at the principal office of the Company together with a written statement (which may be in the form of Exhibit A-1 or Exhibit A-2 hereto) specifying that the holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to this Warrant which are being surrendered (referred to in Section 10.2(a) hereof as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the “Conversion Date”), and, at the election of the holder hereof, may be made contingent upon the closing of the sale of the Company’s Common Stock to the public in a public offering pursuant to a Registration Statement under the Act (a “Public Offering”). Certificates for the shares issuable upon exercise of the Conversion Right and, if applicable, a new warrant evidencing the balance of the shares remaining subject to this Warrant, shall be issued as of the Conversion Date and shall be delivered to the holder within thirty (30) days following the Conversion Date.
(c) Determination of Fair Market Value. For purposes of this Section 10.2, “fair market value” of a share of Common Stock as of a particular date (the “Determination Date”) shall mean:
(i) If the Conversion Right is exercised in connection with and contingent upon a Public Offering, and if the Company’s Registration Statement relating to such Public Offering (“Registration Statement”) has been declared effective by the Securities and Exchange Commission, then the initial “Price to Public” specified in the final prospectus with respect to such offering.
(ii) If the Conversion Right is not exercised in connection with and contingent upon a Public Offering, then as follows:
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(A) If traded on a securities exchange, the fair market value of the Common Stock shall be deemed to be the average of the closing prices of the Common Stock on such exchange over the five trading days immediately prior to the Determination Date;
(B) If traded on an over-the-counter system, the fair market value of the Common Stock shall be deemed to be the average of the closing prices of the Common Stock over the five trading days immediately prior to the Determination Date; and
(C) If there is no public market for the Common Stock, then fair market value shall be determined by mutual agreement of the holder of this Warrant and the Company.
If closing prices or closing bid prices are no longer reported by a securities exchange or other trading system, the closing price or closing bid price shall be that which is reported by such securities exchange or other trading system at 4:00 p.m. New York City time on the applicable trading day.
10.3 Exercise Prior to Expiration. To the extent this Warrant is not previously exercised as to all of the Shares subject hereto, and if the fair market value of one share of the Common Stock is greater than the Warrant Price then in effect, this Warrant shall be deemed automatically exercised pursuant to Section 10.2 above (even if not surrendered) immediately before its expiration. For purposes of such automatic exercise, the fair market value of one share of the Common Stock upon such expiration shall be determined pursuant to Section 10.2(c). To the extent this Warrant or any portion thereof is deemed automatically exercised pursuant to this Section 10.3, the Company agrees to promptly notify the holder hereof of the number of Shares, if any, the holder hereof is to receive by reason of such automatic exercise.
11. Representations and Warranties. The Company represents and warrants to the holder of this Warrant as follows:
(a) This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and the rules of law or principles at equity governing specific performance, injunctive relief and other equitable remedies.
(b) The Shares have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free from preemptive rights.
(c) A true and correct copy of the Company’s Restated Certificate of Incorporation, as amended through the Date of Grant has been provided to the holder hereof (the “Charter”). The rights, preferences, privileges and restrictions granted to or imposed upon the classes and series of the Company’s capital stock and the holders thereof are as set forth in the Charter.
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(d) The execution and delivery of this Warrant are not, and the issuance of the Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company’s Charter or by-laws, do not and will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company, and do not and will not conflict with or contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration or filing with or the taking of any action in respect of or by, any Federal, state or local government authority or agency or other person, except for the filing of notices pursuant to federal and state securities laws, which filings will be effected by the time required thereby.
(e) There are no actions, suits, audits, investigations or proceedings pending or, to the knowledge of the Company, threatened against the Company in any court or before any governmental commission, board or authority which, if adversely determined, could have a material adverse effect on the ability of the Company to perform its obligations under this Warrant.
(f) The number of shares of Common Stock of the Company outstanding on the date hereof, on a fully diluted basis (assuming the conversion of all outstanding convertible securities and the exercise of all outstanding options and warrants) and including the issuance of the notes and warrants in the concurrent bridge offering, does not exceed 439,241,838 shares.
12. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought.
13. Notices. Any notice, request, communication or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered, or shall be sent by certified or registered mail, postage prepaid, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor on the signature page of this Warrant.
14. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company’s assets, and all of the obligations of the Company relating to the Shares issuable upon the exercise or conversion of this Warrant shall survive the exercise, conversion and termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof.
15. Lost Warrants or Stock Certificates. The Company covenants to the holder hereof that, upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant or any stock certificate and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company (including in the case of a lost stock certificate, posting of a bond as required by the Company’s transfer agent), or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate.
16. Descriptive Headings. The descriptive headings of the various Sections of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. The language in this Warrant shall be construed as to its fair meaning without regard to which party drafted this Warrant.
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17. Governing Law. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Delaware.
18. Survival of Representations, Warranties and Agreements. All representations and warranties of the Company and the holder hereof contained herein shall survive the Date of Grant, the exercise or conversion of this Warrant (or any part hereof) or the termination or expiration of rights hereunder. All agreements of the Company and the holder hereof contained herein shall survive indefinitely until, by their respective terms, they are no longer operative.
19. Remedies. In case any one or more of the covenants and agreements contained in this Warrant shall have been breached, the holders hereof (in the case of a breach by the Company), or the Company (in the case of a breach by a holder), may proceed to protect and enforce their or its rights either by suit in equity and/or by action at law, including, but not limited to, an action for damages as a result of any such breach and/or an action for specific performance of any such covenant or agreement contained in this Warrant.
20. No Impairment of Rights. The Company will not, by amendment of its Charter or through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment.
21. Severability. The invalidity or unenforceability of any provision of this Warrant in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction, or affect any other provision of this Warrant, which shall remain in full force and effect.
22. Recovery of Litigation Costs. If any legal action or other proceeding is brought for the enforcement of this Warrant, or because of an alleged dispute, breach, default, or misrepresentation in connection with any of the provisions of this Warrant, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys’ fees and other costs incurred in that action or proceeding, in addition to any other relief to which it or they may be entitled.
23. Entire Agreement; Modification. This Warrant constitutes the entire agreement between the parties pertaining to the subject matter contained in it and supersedes all prior and contemporaneous agreements, representations, and undertakings of the parties, whether oral or written, with respect to such subject matter.
[Remainder of page intentionally blank. Signature page follows.]
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The Company has caused this Warrant to be duly executed and delivered as of the Date of Grant specified above.
| INTERLEUKIN GENETICS, INC. | ||
| By: | ||
| Name: | ||
| Title: | ||
| Address: | ||
Signature Page to Warrant
EXHIBIT A-1
NOTICE OF EXERCISE
To: INTERLEUKIN GENETICS, INC. (the “Company”)
1. The undersigned hereby:
| ¨ | elects to purchase________ shares of Common Stock of the Company pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full, or |
| ¨ | elects to exercise its net issuance rights pursuant to Section 10.2 of the attached Warrant with respect to________shares of Common Stock. |
2. Please issue a certificate or certificates representing ________ shares in the name of the undersigned or in such other name or names as are specified below:
| (Name) |
| (Address) |
3. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares, all except as in compliance with applicable securities laws.
| (Signature) |
| (Date) |
EXHIBIT A-2
NOTICE OF EXERCISE
To: INTERLEUKIN GENETICS, INC. (the “Company”)
1. Contingent upon and effective immediately prior to the closing (the “Closing”) of the Company’s public offering contemplated by the Registration Statement on Form S___, filed________, 20__, the undersigned hereby:
¨ elects to purchase________shares of Common Stock of the Company (or such lesser number of shares as may be sold on behalf of the undersigned at the Closing) pursuant to the terms of the attached Warrant, or
¨ elects to exercise its net issuance rights pursuant to Section 10.2 of the attached Warrant with respect to________shares of Common Stock.
2. Please deliver to the custodian for the selling shareholders a stock certificate representing such________shares.
3. The undersigned has instructed the custodian for the selling shareholders to deliver to the Company $________or, if less, the net proceeds due the undersigned from the sale of shares in the aforesaid public offering. If such net proceeds are less than the purchase price for such shares, the undersigned agrees to deliver the difference to the Company prior to the Closing.
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Exhibit 4.11
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THIS WARRANT.
INTERLEUKIN GENETICS, INC.
WARRANT TO PURCHASE SHARES
OF COMMON STOCK
THIS CERTIFIES THAT, for value received, [_____] and its assignees are entitled to subscribe for and purchase the Shares (as defined below) at the Warrant Price (as defined below), subject to the provisions and upon the terms and conditions hereinafter set forth.
As used herein, the following terms shall have the meanings set forth below:
“Date of Grant” shall mean April 17, 2017.
“Other Warrants” shall mean any other warrants issued by the Company in connection with the transaction with respect to which this Warrant was issued, and any warrant issued upon transfer or partial exercise of or in lieu of this Warrant.
“Shares” shall mean up to that number of shares (as adjusted pursuant to Section 4 hereof) of the fully paid and nonassessable common stock, par value $0.001 per share (the “Common Stock”), of INTERLEUKIN GENETICS, INC., a Delaware corporation (the “Company”), equal to (a) the original principal amount of that certain Subordinated Convertible Promissory Note, dated as of April 17, 2017, originally issued by the Company to the original holder of this Warrant pursuant to that certain Subscription Agreement, dated as of April 17, 2017, by and among the Company and the other parties thereto (as amended and/or restated, the “Note”) divided by (b) the Warrant Price.
“Warrant” as used herein shall be deemed to include Other Warrants unless the context clearly requires otherwise.
“Warrant Price” shall mean $0.10438 (as adjusted pursuant to Section 4 hereof).
1. Term. The purchase right represented by this Warrant is exercisable, in whole or in part, at any time and from time to time following the Date of Grant through the fifth (5th) anniversary of the Date of Grant (the “Exercise Term”).
2. Method of Exercise; Payment; Issuance of New Warrant. Subject to Section 1 hereof, the purchase right represented by this Warrant may be exercised by the holder hereof, in whole or in part and from time to time, at the election of the holder hereof, by (a) the surrender of this Warrant (with the notice of exercise substantially in the form attached hereto as Exhibit A-1 duly completed and executed) at the principal office of the Company and by the payment to the Company, by certified or bank check, or by wire transfer to an account designated by the Company (a “Wire Transfer”) of an amount equal to the Warrant Price multiplied by the number of Shares then being purchased; (b) if in connection with a registered public offering of the Company’s securities, the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A-2 duly completed and executed) at the principal office of the Company together with notice of arrangements reasonably satisfactory to the Company for payment to the Company either by certified or bank check or by Wire Transfer from the proceeds of the sale of shares to be sold by the holder in such public offering of an amount equal to the Warrant Price per share multiplied by the number of Shares then being purchased; or (c) exercise of the “net issuance” right provided for in Section 10.2 hereof. The person or persons in whose name(s) any certificate(s) representing the Shares shall be issuable upon exercise of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the shares represented thereby (and such shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which this Warrant is exercised. In the event of any exercise of the rights represented by this Warrant, certificates for the shares of stock so purchased shall be delivered to the holder hereof as soon as possible and in any event within thirty (30) days after such exercise and, unless this Warrant has been fully exercised or expired, a new Warrant representing the portion of the Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof as soon as possible and in any event within such thirty-day period; provided, however, at such time as the Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, if requested by the holder of this Warrant, the Company shall cause its transfer agent to deliver the certificate representing Shares issued upon exercise of this Warrant to a broker or other person (as directed by the holder exercising this Warrant) within the time period required to settle any trade made by the holder after exercise of this Warrant.
3. Stock Fully Paid; Reservation of Shares. All Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance pursuant to the terms and conditions herein, be fully paid and nonassessable, and free from all preemptive rights and taxes, liens and charges with respect to the issue thereof. During the Exercise Term, the Company will at all times have authorized, and reserved for the purpose of the issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant.
4. Adjustment of Warrant Price and Number of Shares. The number and kind of Shares purchasable upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows during the Exercise Term:
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(a) Reclassification or Merger. In case of any reclassification or change of securities of the class issuable upon exercise of this Warrant (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in case of any merger of the Company with or into another corporation (other than a merger with another corporation in which the Company is the acquiring and the surviving corporation and which does not result in any reclassification or change of outstanding securities issuable upon exercise of this Warrant), or in case of any sale of all or substantially all of the assets of the Company, the Company, or such successor or purchasing corporation, as the case may be, shall duly execute and deliver to the holder of this Warrant a new Warrant (in form and substance satisfactory to the holder of this Warrant), so that the holder of this Warrant shall have the right to receive upon exercise of this Warrant, at a total purchase price not to exceed that payable upon the exercise of the unexercised portion of this Warrant, and in lieu of the shares of Common Stock theretofore issuable upon exercise of this Warrant, (i) the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, change, merger or sale by a holder of the number of shares of Common Stock then purchasable under this Warrant, or (ii) in the case of such a merger or sale in which the consideration paid consists all or in part of assets other than securities of the successor or purchasing corporation, at the option of the holder of this Warrant, the securities of the successor or purchasing corporation having a value at the time of the transaction equivalent to the value of the Common Stock purchasable upon exercise of this Warrant at the time of the transaction. Any new Warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4. The provisions of this Section 4(a) shall similarly apply to successive reclassifications, changes, mergers and sales.
(b) Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired during the Exercise Term shall subdivide or combine its outstanding shares of Common Stock, the Warrant Price shall be proportionately decreased and the number of Shares issuable hereunder shall be proportionately increased in the case of a subdivision and the Warrant Price shall be proportionately increased and the number of Shares issuable hereunder shall be proportionately decreased in the case of a combination.
(c) Stock Dividends and Other Distributions. If the Company at any time while this Warrant is outstanding and unexpired during the Exercise Term shall (i) pay a dividend with respect to its Common Stock payable in Common Stock, then the Warrant Price shall be adjusted, from and after the date of determination of shareholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Price in effect immediately prior to such date of determination by a fraction (A) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution, and (B) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such dividend or distribution; or (ii) make any other distribution with respect to Common Stock (except any distribution specifically provided for in Sections 4(a) and 4(b)), then, in each such case, provision shall be made by the Company such that the holder of this Warrant shall receive upon exercise of this Warrant a proportionate share of any such dividend or distribution as though it were the holder of the Shares as of the record date fixed for the determination of the shareholders of the Company entitled to receive such dividend or distribution.
(d) Adjustment of Number of Shares. Upon each adjustment in the Warrant Price, the number of Shares purchasable hereunder shall be adjusted, to the nearest whole share, to the product obtained by multiplying the number of Shares purchasable immediately prior to such adjustment in the Warrant Price by a fraction, the numerator of which shall be the Warrant Price immediately prior to such adjustment and the denominator of which shall be the Warrant Price immediately thereafter.
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5. Notice of Adjustments. Whenever the Warrant Price or the number of Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof, the Company shall make a certificate signed by its chief financial officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price and the number of Shares purchasable hereunder after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (without regard to Section 13 hereof, by first class mail, postage prepaid) to the holder of this Warrant.
6. Fractional Shares. No fractional shares of Common Stock will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor based on the fair market value of the Common Stock on the date of exercise as reasonably determined in good faith by the Company’s Board of Directors.
7. Compliance with Securities Act; Disposition of Warrant or Shares of Common Stock.
(a) Compliance with Securities Act. The holder of this Warrant, by acceptance hereof, agrees that this Warrant, and the Shares to be issued upon exercise hereof are being acquired for investment and that such holder will not offer, sell or otherwise dispose of this Warrant, or any Shares except under circumstances which will not result in a violation of the Securities Act of 1933, as amended (the “Act”) or any applicable state securities laws. Upon exercise of this Warrant, unless the Shares being acquired are registered under the Act and any applicable state securities laws or an exemption from such registration is available, the holder hereof shall confirm in writing that the Shares so purchased are being acquired for investment and not with a view toward distribution or resale in violation of the Act and shall confirm such other matters related thereto as may be reasonably requested by the Company. This Warrant and all Shares issued upon exercise of this Warrant (unless registered under the Act and any applicable state securities laws) shall be stamped or imprinted with a legend in substantially the following form:
“THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE SECURITIES WERE ISSUED, DIRECTLY OR INDIRECTLY.”
Said legend shall be removed by the Company, upon the request of a holder, at such time as the restrictions on the transfer of the applicable security shall have terminated. In addition, in connection with the issuance of this Warrant, the holder specifically represents to the Company by acceptance of this Warrant as follows:
(1) The holder is aware of the Company’s business affairs and financial condition, and has acquired information about the Company sufficient to reach an informed and knowledgeable decision to acquire this Warrant. The holder is acquiring this Warrant for its own account for investment purposes only and not with a view to, or for the resale in connection with, any “distribution” thereof in violation of the Act.
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(2) The holder understands that this Warrant has not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the holder’s investment intent as expressed herein.
(3) The holder further understands that this Warrant must be held indefinitely unless subsequently registered under the Act and qualified under any applicable state securities laws, or unless exemptions from registration and qualification are otherwise available. The holder is aware of the provisions of Rule 144, promulgated under the Act.
(4) The holder is an “accredited investor” as such term is defined in Rule 501 of Regulation D promulgated under the Act.
(b) Disposition of Warrant or Shares. With respect to any offer, sale or other disposition of this Warrant or any Shares acquired pursuant to the exercise of this Warrant prior to registration of such Warrant or Shares, the holder hereof agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such holder’s counsel, or other evidence, if reasonably satisfactory to the Company, to the effect that such offer, sale or other disposition may be effected without registration or qualification (under the Act as then in effect or any federal or state securities law then in effect) of this Warrant or the Shares and indicating whether or not under the Act certificates for this Warrant or the Shares to be sold or otherwise disposed of require any restrictive legend as to applicable restrictions on transferability in order to ensure compliance with such law. Upon receiving such written notice and reasonably satisfactory opinion or other evidence, the Company, as promptly as practicable but no later than fifteen (15) days after receipt of the written notice, shall notify such holder that such holder may sell or otherwise dispose of this Warrant or such Shares, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this Section 7(b) that the opinion of counsel for the holder or other evidence is not reasonably satisfactory to the Company, the Company shall so notify the holder promptly with details thereof after such determination has been made. Notwithstanding the foregoing, this Warrant or such Shares may, as to such federal laws, be offered, sold or otherwise disposed of in accordance with Rule 144 or 144A under the Act, provided, however, that the Company shall have been furnished with such information as the Company may reasonably request to provide a reasonable assurance that the provisions of Rule 144 or 144A have been satisfied. Each certificate representing this Warrant or the Shares thus transferred (except a transfer pursuant to Rule 144 or 144A) shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with such laws, unless in the aforesaid opinion of counsel for the holder, such legend is not required in order to ensure compliance with such laws. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions.
(c) Applicability of Restrictions. Neither any restrictions of any legend described in this Warrant nor the requirements of Section 7(b) above shall apply to any transfer of, or grant of a security interest in, this Warrant (or the Common Stock obtainable upon exercise thereof) or any part hereof (i) to a partner of the holder if the holder is a partnership or to a member of the holder if the holder is a limited liability company, (ii) to a partnership of which the holder is a partner or to a limited liability company of which the holder is a member, (iii) to any affiliate of the holder if the holder is a corporation, (iv) notwithstanding the foregoing, to any corporation, company, limited liability company, limited partnership, partnership, or other person managed or sponsored by [Horizon Technology Finance Corporation (“HRZN”) or in which HRZN has an interest/Bay City Capital LLC (“Bay City”) or in which Bay City has an interest], (v) or to a lender to the holder or any of the foregoing; provided, however, in any such transfer, if applicable, the transferee shall on the Company’s request agree in writing to be bound by the terms of this Warrant as if an original holder hereof.
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8. Rights as Shareholders; Information. No holder of this Warrant, as such, shall be entitled to vote or receive dividends or be deemed the holder of Common Stock which may at any time be issuable upon the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised and the Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. Notwithstanding the foregoing, the Company will transmit to the holder of this Warrant such information, documents and reports as are generally distributed to the holders of any class or series of the securities of the Company concurrently with the distribution thereof to the shareholders; provided, however, that any such item which is available on the SEC’s EDGAR system (or successor thereto) or on the Company’s website need not be furnished in physical form.
9. Registration Rights. The Shares issuable hereunder initially shall be exempt from registration under the Securities Act. Following the beginning of the Exercise Term, and in any case within ninety (90) days thereof, the Company shall promptly prepare, file and use its reasonable efforts to cause to become effective as soon as practicable thereafter, a registration statement on Form S-1 or such other form as may be appropriate to be filed with the SEC by the Company under the Act (together with any amendments or supplements thereto, whether prior to or after the effective date thereof, the “Registration Statement”) covering the public resale in the United States of the Shares to be issued pursuant to this Warrant, and the Company shall use its reasonable efforts to keep the Registration Statement continuously effective during the Exercise Term. Any such registration shall be subject to the customary terms and conditions used in connection with resale prospectuses. The Company’s obligations under this Section 9 are contingent upon the holder hereof providing promptly all information concerning such holder and its proposed plan of distribution as the Company may reasonably request in connection with any of the foregoing. The Company may by written notice to the holder hereof immediately suspend the use of any resale prospectus for a period not to exceed sixty (60) consecutive days in any one instance and for a period not to exceed one hundred twenty (120) calendar days in any twelve (12) month period at any time that (i) the Company becomes engaged in a business activity or negotiation or any other event has occurred or is anticipated which is not disclosed in that prospectus which the Company reasonably believes should be disclosed therein under applicable law and which the Company desires to keep confidential for business purposes or (ii) the Company determines that a particular disclosure so determined to be required to be disclosed therein be premature or would adversely affect the Company or its business or prospects. The Company will use its commercially reasonable efforts to ensure that the use of the Registration Statement may be resumed as soon as practicable. The Company shall bear all costs and expenses associated with the registration of the Shares as specified in this Section and the preparation and filing of the Registration Statement, including, without limitation, all printing expenses, legal fees and disbursement of the Company’s outside counsel, commissions, NASDAQ and blue sky registration filing fees and transfer agents’ and registrars’ fees, but not including underwriting commissions or similar charges and legal fees and disbursements of counsel to the holder hereof. The Company shall keep the Registration Statement effective until the earlier of (a) all Shares have been disposed of in accordance with such effective Registration Statement, (b) all Shares have been previously sold in accordance with Rule 144, or (c) all Shares are eligible for resale without volume or manner-of-sale restrictions and without current public information pursuant to Rule 144 (assuming that this Warrant is exercised via the “net issuance” right provided for in Section 10.2 hereof), as reasonably determined by the Company, upon the advice of counsel to the Company.
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10. Additional Rights.
10.1 Acquisition Transactions. The Company shall provide the holder of this Warrant with at least twenty (20) days’ written notice prior to closing thereof of the terms and conditions of any of the following transactions (to the extent the Company has notice thereof): (i) the sale, lease, exchange, conveyance or other disposition of all or substantially all of the Company’s property or business, or (ii) the Company’s merger into or consolidation with any other corporation or entity (other than a wholly-owned subsidiary of the Company), or any transaction (including a merger or other reorganization) or series of related transactions, in which more than 50% of the voting power of the Company’s capital stock is disposed of.
10.2 Right to Convert Warrant into Stock: Net Issuance.
(a) Right to Convert. In addition to and without limiting the rights of the holder under the terms of this Warrant, the holder shall have the right to convert this Warrant or any portion thereof (the “Conversion Right”) into shares of Common Stock as provided in this Section 10.2 at any time or from time to time during the Exercise Term. Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant (the “Converted Warrant Shares”), the Company shall deliver to the holder (without payment by the holder of any exercise price or any cash or other consideration) that number of shares of fully paid and nonassessable Common Stock as is determined according to the following formula:
X = B - A
Y
| Where: | X = | the number of shares of Common Stock that shall be issued to holder |
| Y = | the fair market value of one share of Common Stock |
| A = | the aggregate Warrant Price of the specified number of Converted Warrant Shares immediately prior to the exercise of the Conversion Right (i.e., the number of Converted Warrant Shares multiplied by the Warrant Price) |
| B = | the aggregate fair market value of the specified number of Converted Warrant Shares (i.e., the number of Converted Warrant Shares multiplied by the fair market value of one Converted Warrant Share) |
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No fractional shares shall be issuable upon exercise of the Conversion Right, and, if the number of shares to be issued determined in accordance with the foregoing formula is other than a whole number, the Company shall pay to the holder an amount in cash equal to the fair market value of the resulting fractional share on the Conversion Date (as hereinafter defined). For purposes of Section 10 of this Warrant, shares issued pursuant to the Conversion Right shall be treated as if they were issued upon the exercise of this Warrant.
(b) Method of Exercise. The Conversion Right may be exercised by the holder by the surrender of this Warrant at the principal office of the Company together with a written statement (which may be in the form of Exhibit A-1 or Exhibit A-2 hereto) specifying that the holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to this Warrant which are being surrendered (referred to in Section 10.2(a) hereof as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the “Conversion Date”), and, at the election of the holder hereof, may be made contingent upon the closing of the sale of the Company’s Common Stock to the public in a public offering pursuant to a Registration Statement under the Act (a “Public Offering”). Certificates for the shares issuable upon exercise of the Conversion Right and, if applicable, a new warrant evidencing the balance of the shares remaining subject to this Warrant, shall be issued as of the Conversion Date and shall be delivered to the holder within thirty (30) days following the Conversion Date.
(c) Determination of Fair Market Value. For purposes of this Section 10.2, “fair market value” of a share of Common Stock as of a particular date (the “Determination Date”) shall mean:
(i) If the Conversion Right is exercised in connection with and contingent upon a Public Offering, and if the Company’s Registration Statement relating to such Public Offering has been declared effective by the Securities and Exchange Commission, then the initial “Price to Public” specified in the final prospectus with respect to such offering.
(ii) If the Conversion Right is not exercised in connection with and contingent upon a Public Offering, then as follows:
(A) If traded on a securities exchange, the fair market value of the Common Stock shall be deemed to be the average of the closing prices of the Common Stock on such exchange over the five trading days immediately prior to the Determination Date;
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(B) If traded on an over-the-counter system, the fair market value of the Common Stock shall be deemed to be the average of the closing prices of the Common Stock over the five trading days immediately prior to the Determination Date; and
(C) If there is no public market for the Common Stock, then fair market value shall be determined by mutual agreement of the holder of this Warrant and the Company.
If closing prices or closing bid prices are no longer reported by a securities exchange or other trading system, the closing price or closing bid price shall be that which is reported by such securities exchange or other trading system at 4:00 p.m. New York City time on the applicable trading day.
10.3 Exercise Prior to Expiration. To the extent this Warrant is not previously exercised as to all of the Shares subject hereto, and if the fair market value of one share of the Common Stock is greater than the Warrant Price then in effect, this Warrant shall be deemed automatically exercised pursuant to Section 10.2 above (even if not surrendered) immediately before its expiration. For purposes of such automatic exercise, the fair market value of one share of the Common Stock upon such expiration shall be determined pursuant to Section 10.2(c). To the extent this Warrant or any portion thereof is deemed automatically exercised pursuant to this Section 10.3, the Company agrees to promptly notify the holder hereof of the number of Shares, if any, the holder hereof is to receive by reason of such automatic exercise.
11. Representations and Warranties. The Company represents and warrants to the holder of this Warrant as follows:
(a) This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and the rules of law or principles at equity governing specific performance, injunctive relief and other equitable remedies.
(b) That upon the beginning of the Exercise Term, the Shares have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free from preemptive rights.
(c) A true and correct copy of the Company’s Restated Certificate of Incorporation, as amended through the Date of Grant has been provided to the holder hereof (the “Charter”). The rights, preferences, privileges and restrictions granted to or imposed upon the classes and series of the Company’s capital stock and the holders thereof are as set forth in the Charter.
(d) The execution and delivery of this Warrant are not, and the issuance of the Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company’s Charter or by-laws, do not and will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company, and do not and will not conflict with or contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration or filing with or the taking of any action in respect of or by, any Federal, state or local government authority or agency or other person, except for the filing of notices pursuant to federal and state securities laws, which filings will be effected by the time required thereby.
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(e) There are no actions, suits, audits, investigations or proceedings pending or, to the knowledge of the Company, threatened against the Company in any court or before any governmental commission, board or authority which, if adversely determined, could have a material adverse effect on the ability of the Company to perform its obligations under this Warrant.
(f) The number of shares of Common Stock outstanding on the Date of Grant, on a fully diluted basis (assuming the conversion of all outstanding convertible securities and the exercise of all outstanding options and warrants, other than the Note, the other subordinated convertible promissory note(s) issued contemporaneously with the Note, the Warrant and the Other Warrants), does not exceed the authorized, but unissued, shares of Common Stock.
12. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought.
13. Notices. Any notice, request, communication or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered, or shall be sent by certified or registered mail, postage prepaid, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor on the signature page of this Warrant.
14. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company’s assets, and all of the obligations of the Company relating to the Shares issuable upon the exercise or conversion of this Warrant shall survive the exercise, conversion and termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof.
15. Lost Warrants or Stock Certificates. The Company covenants to the holder hereof that, upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant or any stock certificate and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company (including in the case of a lost stock certificate, posting of a bond as required by the Company’s transfer agent), or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate.
16. Descriptive Headings. The descriptive headings of the various Sections of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. The language in this Warrant shall be construed as to its fair meaning without regard to which party drafted this Warrant.
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17. Governing Law. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Delaware.
18. Survival of Representations, Warranties and Agreements. All representations and warranties of the Company and the holder hereof contained herein shall survive the Date of Grant, the exercise or conversion of this Warrant (or any part hereof) or the termination or expiration of rights hereunder. All agreements of the Company and the holder hereof contained herein shall survive indefinitely until, by their respective terms, they are no longer operative.
19. Remedies. In case any one or more of the covenants and agreements contained in this Warrant shall have been breached, the holders hereof (in the case of a breach by the Company), or the Company (in the case of a breach by a holder), may proceed to protect and enforce their or its rights either by suit in equity and/or by action at law, including, but not limited to, an action for damages as a result of any such breach and/or an action for specific performance of any such covenant or agreement contained in this Warrant.
20. No Impairment of Rights. The Company will not, by amendment of its Charter or through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment.
21. Severability. The invalidity or unenforceability of any provision of this Warrant in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction, or affect any other provision of this Warrant, which shall remain in full force and effect.
22. Recovery of Litigation Costs. If any legal action or other proceeding is brought for the enforcement of this Warrant, or because of an alleged dispute, breach, default, or misrepresentation in connection with any of the provisions of this Warrant, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys’ fees and other costs incurred in that action or proceeding, in addition to any other relief to which it or they may be entitled.
23. Entire Agreement; Modification. This Warrant constitutes the entire agreement between the parties pertaining to the subject matter contained in it and supersedes all prior and contemporaneous agreements, representations, and undertakings of the parties, whether oral or written, with respect to such subject matter.
[Remainder of page intentionally blank. Signature page follows.]
| -11- |
The Company has caused this Warrant to be duly executed and delivered as of the Date of Grant specified above.
| INTERLEUKIN GENETICS, INC. | ||
| By: | ||
| Name: | ||
| Title: | ||
| Address: | ||
Signature Page to Warrant
EXHIBIT A-1
NOTICE OF EXERCISE
| To: | INTERLEUKIN GENETICS, INC. (the “Company”) |
1. The undersigned hereby:
| ¨ | elects to purchase________ shares of Common Stock of the Company pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full, or |
| ¨ | elects to exercise its net issuance rights pursuant to Section 10.2 of the attached Warrant with respect to________shares of Common Stock. |
2. Please issue a certificate or certificates representing ________ shares in the name of the undersigned or in such other name or names as are specified below:
| (Name) | ||
| (Address) |
3. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares, all except as in compliance with applicable securities laws.
| (Signature) |
| (Date) |
EXHIBIT A-2
NOTICE OF EXERCISE
| To: | INTERLEUKIN GENETICS, INC. (the “Company”) |
1. Contingent upon and effective immediately prior to the closing (the “Closing”) of the Company’s public offering contemplated by the Registration Statement on Form S___, filed________, 20__, the undersigned hereby:
| ¨ | elects to purchase________shares of Common Stock of the Company (or such lesser number of shares as may be sold on behalf of the undersigned at the Closing) pursuant to the terms of the attached Warrant, or |
| ¨ | elects to exercise its net issuance rights pursuant to Section 10.2 of the attached Warrant with respect to________shares of Common Stock. |
2. Please deliver to the custodian for the selling shareholders a stock certificate representing such________shares.
3. The undersigned has instructed the custodian for the selling shareholders to deliver to the Company $________or, if less, the net proceeds due the undersigned from the sale of shares in the aforesaid public offering. If such net proceeds are less than the purchase price for such shares, the undersigned agrees to deliver the difference to the Company prior to the Closing.
| (Signature) |
| (Date) |
Exhibit 4.12
NEITHER THIS NOTE, NOR THE SHARES OF COMMON STOCK FOR WHICH IT IS CONVERTIBLE, HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES LAWS AND NEITHER MAY BE SOLD, TRANSFERRED, ASSIGNED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE ACT AND SUCH LAWS OR (1) REGISTRATION UNDER APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED AND (2) AN OPINION OF COUNSEL SATISFACTORY TO THE MAKER IS FURNISHED TO THE MAKER TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED.
Payment of this Subordinated CONVERTIBLE Promissory Note and the rights and remedies of the holder hereof are subject to the terms and conditions of a Subordination Agreement dated as of APRIL 17, 2017 between the Payee (as defined below) and HORIZON Credit II LLC (as the same may be amended and/or restated, the “Subordination Agreement”). Any successors and assigns of the holder of this Subordinated ONVERTIBLE Promissory Note shall be subject to and bound by the terms and conditions of such Subordination Agreement. A copy of such Subordination Agreement may be obtained, upon written request of any holder of this Subordinated CONVERTIBLE Promissory Note from THE MAKER.
Subordinated Convertible Promissory Note
| $[________.00] | Waltham, Massachusetts | April 17, 2017 |
1. For Value Received, the undersigned, Interleukin Genetics, Inc., a Delaware Corporation (the “Maker”), hereby promises to pay to [__________](the “Payee”), in lawful money of the United States of America, the principal amount of [___________] Dollars ($[_____].00)], together with interest on the unpaid balance of said principal amount from time to time remaining outstanding, from the date hereof until repayment thereof in full, in like money, at said office, or the conversion thereof in full, at a rate per annum equal to the Interest Rate (as defined below).
This subordinated convertible promissory note (the “Note”) is issued by the Maker pursuant to that certain Subscription Agreement dated as of April 17, 2017 (the “Subscription Agreement”) entered into among the Maker, the Payee and the other purchasers of the other subordinated convertible promissory note(s) of the Maker issued on or about April 17, 2017 (the “Issue Date”) pursuant to the Subscription Agreement (collectively with this Note, the “Notes”).
2. Maturity. If not sooner paid or converted according to the terms hereof, the outstanding principal amount plus all accrued and unpaid interest thereon shall be due and payable in full upon written demand to the Maker (received at least five (5) days before such payments shall be made by the Maker) by the holders of Notes representing at least fifty percent (50%) of the aggregate principal amount of the Notes then outstanding (the “Requisite Holders”) on or after January 1, 2022 (the “Maturity Date”). Notwithstanding the foregoing, if the Maker closes a Change of Control on or before the Maturity Date, and this Note is not converted under Section 5(c) in connection with such Change of Control, then the outstanding principal amount plus all accrued and unpaid interest thereon shall be due and payable in full upon the closing of such Change of Control.
| -1- |
3. Interest. This Note shall bear interest at the rate of 8% per annum, simple interest, from the date of issuance until paid or converted in full (the “Interest Rate”). Interest on this Note shall be computed on the basis of a 365-day year for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable. Interest shall be due and payable at the Maturity Date.
4. Prepayment. Subject to the terms and conditions of the Subordination Agreement, the Maker may prepay any of the principal amount of this Note upon at least ten (10) days advance written notice to the Payee (a “Notice of Prepayment”) by the Maker of the date of prepayment (the “Prepayment Date”). Any prepayment shall be accompanied by the interest accrued on the prepaid principal amount through and including the Prepayment Date.
5. Conversion.
(a) Mandatory Conversion. Upon the Closing of the Qualified Financing (as defined below) on or before the Maturity Date, and simultaneously with the Closing of the Qualified Financing, the unpaid principal amount and accrued interest outstanding under this Note shall automatically (without payment of any additional consideration and without action on the part of the Payee) convert in whole (but not in part) into fully paid and nonassessable shares of Common Stock, par value $0.001 per share, of the Maker (the “Common Stock”). The total number of shares of Common Stock issuable upon conversion of this Note pursuant to this Section 5(a) shall be determined by dividing (i) the then outstanding principal amount and accrued interest under this Note by (ii) a conversion price equal to (A) eighty percent (80%) multiplied by (B) the lowest price per share of the Common Stock paid by investors to the Company in such Qualified Financing. No fractional shares shall be issued and the value of any fractional share shall be paid by the Maker to the Payee in cash. In connection with the conversion of this Note under this Section 5(a), the Payee will be granted the same registration rights with respect to the shares of Common Stock issued upon such conversion as granted to the purchasers of Common Stock in the Qualified Financing, if any.
(b) Optional Conversion. During the period commencing on the Issue Date and expiring on the earlier of the Closing of the Qualified Financing and the Maturity Date, the holder of this Note shall have the right to convert the then outstanding principal amount of this Note (or any portion thereof), together with accrued interest thereon, into shares of Common Stock. If the Company provides a Notice of Prepayment to the holder of this Note, the holder of this Note shall have the right to convert the then outstanding principal amount of this Note (or any portion thereof), together with accrued interest thereon, into shares of Common Stock until 5:00 p.m., Eastern Time, on the day immediately preceding the Prepayment Date. The total number of shares of Common Stock issuable upon conversion of this Note pursuant to this Section 5(b) shall be determined by dividing (i) the then outstanding principal amount of this Note (or any portion thereof), together with accrued interest thereon by (ii) a conversion price equal to $0.125256. No fractional shares shall be issued and the value of any fractional share shall be paid by the Maker to the Payee in cash.
| -2- |
(c) Conversion Upon a Change of Control. If a Change of Control closes before the Closing of the Qualified Financing and on or before the Maturity Date, then upon the written election of the Requisite Holders, the unpaid principal amount and accrued interest outstanding under this Note shall automatically (without payment of any additional consideration and without action on the part of the Payee) convert in whole (but not in part) into fully paid and nonassessable shares of Common Stock immediately before the closing of the Change of Control The total number of shares of Common Stock issuable upon conversion of this Note pursuant to this Section 5(c) shall be determined by dividing (i) the then outstanding principal amount and accrued interest under this Note by (ii) a conversion price equal to (A) eighty percent (80%) multiplied by (B) the price per share of Common Stock in such Change of Control. No fractional shares shall be issued and the value of any fractional share shall be paid by the Maker to the Payee in cash. In connection with the conversion of this Note under this Section 5(c), the Payee will be granted the same registration rights with respect to the shares of Common Stock issued upon such conversion as granted to similarly situated holders of Common Stock in the Change of Control, if any.
The Company shall provide the Payee with not less than twenty (20) days prior written notice of a Change of Control (including the material terms of the proposed Change of Control) (to the extent the Maker has notice of such Change of Control) and the Requisite Holders may elect in writing at any time before the fifth (5th) day before the closing of such Change of Control to convert the indebtedness represented by this Note into shares of Common Stock pursuant to this Section 5(c) immediately prior, and subject to, the closing of the Change of Control.
(d) Mechanics and Effect of Conversion. Upon conversion of this Note pursuant to this Section 5, the Payee shall surrender this Note, duly endorsed, to the Maker; provided, however, that failure by the Payee to so surrender this Note shall not prevent the conversion of, and cancellation of, this Note in accordance with this Section 5. At its expense, the Maker shall, as soon as practicable after surrender of the duly endorsed Note in accordance with this Section 5, issue and deliver to the Payee a certificate or certificates for the number of shares of Common Stock to which the Payee shall be entitled upon such conversion (bearing such legends as are required by applicable state and federal securities laws in the opinion of counsel to the Maker), together with a check payable to the Payee for any cash amounts payable for fractional shares, if applicable. Upon conversion of this Note, the Maker shall be released from all its obligations and liabilities under this Note.
6. Events of Default. The occurrence of any of the following events shall constitute an “Event of Default” hereunder:
(a) the Maker shall fail to pay timely when due, the principal of, or accrued unpaid interest on, the Notes or any other of the obligations hereunder or thereunder; or
| -3- |
(b) the Maker shall violate, or be in material breach of, any of the representations or warranties under the Subscription Agreement or the Notes, or shall violate, or be in material breach of, the Subscription Agreement or the Notes and such violation or breach continues for thirty (30) days after the Maker receives written notice of such violation or breach from the Payee; or
(c) the Maker shall (i) voluntarily terminate operations or apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of the Maker or of all or a substantial part of the assets of the Maker, (ii) admit in writing its inability to pay debts as the debts become due, (iii) make a general assignment for the benefit of its creditors, (iv) commence a voluntary case under the Federal Bankruptcy Code (as now or hereafter in effect), (v) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, (vi) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Federal Bankruptcy Code or applicable state bankruptcy laws or (vii) take any corporate action for the purpose of effecting any of the foregoing; or
(d) without the Maker’s application, approval or consent, a proceeding shall be commenced, in any court of competent jurisdiction, seeking in respect of the Maker: the liquidation, reorganization, dissolution, winding-up, or composition or readjustment of debt, the appointment of a trustee, receiver, liquidator or the like relief in respect of the Maker or all or any substantial part of the assets of the Maker, or other like relief in respect of the Maker under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts; and, if the proceeding is being contested in good faith by the Maker, the same shall continue undismissed, or unstayed and in effect for any period of ninety (90) consecutive days, or an order for relief against the Maker shall be entered in any case under the Federal Bankruptcy Code or applicable bankruptcy laws.
Upon the occurrence of an Event of Default, the Requisite Holders, at their option, upon written notice to the Maker, may declare the unpaid principal portion of this Note (and the other Notes) to be forthwith due and payable, whereupon the said portion of this Note (and the other Notes) and all accrued, earned and unpaid interest hereon (and thereon) shall become immediately due and payable by the Maker without demand, presentment for payment, notice of non-payment, protest, notice of protest, notice of intent to accelerate maturity, or any other notice of any kind (other than notice of acceleration of maturity) to the Maker, or any other person liable hereon or with respect hereto, all of which are hereby expressly waived by the Maker and each other person liable hereon or with respect hereto, anything contained herein or in any other documents or instruments to the contrary notwithstanding.
7. Limitation on Interest. The Maker and the Payee and the holder of this Note specifically intend and agree to limit contractually the amount of interest payable under this Note to the maximum amount of interest lawfully permitted to be charged under applicable law. Therefore, none of the terms of this Note shall ever be construed to create a contract to pay interest at a rate in excess of the maximum rate of permitted to be charged under applicable law, and neither the Maker nor any other party liable or to become liable hereunder shall ever be liable for interest in excess of the amount determined at such maximum rate, and the provisions of this Section 7 shall control over any contrary provision of this Note.
| -4- |
8. Certain Waivers. The Maker waives demand, presentment for payment, notice of non-payment, protest, notice of protest, notice of intent to accelerate maturity, notice of acceleration of maturity and all other notice, filing of suit and diligence in collecting this Note and further agrees that it will not be necessary for any holder hereof, to enforce payment of this Note, to consent to any one or more extensions or postponements of time of payment of this Note on any terms or any other indulgences with respect hereto, without notice thereof to any of them.
9. Replacement of Note. Upon receipt of the Maker of evidence reasonably satisfactory to it of ownership of and the loss, theft, destruction or mutilation of this Note, and (a) in the case of loss, theft or destruction of indemnity reasonably satisfactory to it; provided, however, that if the holder of this Note is, or is a nominee for, the Payee or any other institutional investor, such person’s own unsecured agreement of indemnity shall be deemed to be satisfactory, or (b) in the case of mutilation, upon surrender and cancellation this Note, the Maker, at its own expense, shall execute and deliver a new Note, dated and bearing interest from the date to which interest shall have been paid on this lost, stolen, destroyed or mutilated Note or dated the date of this lost, stolen, destroyed or mutilated Note if no interest shall have been paid hereon.
10. Governing Law. This Note and all rights and obligations of the parties hereunder shall be governed by and be construed and enforced in accordance with the laws of the Commonwealth of Massachusetts without regard to Massachusetts or federal principles of conflict of laws.
11. Defined Terms. The terms set forth below shall have the meanings assigned to such terms as used in this Note:
“Change of Control” means (a) the sale, lease, exchange, conveyance or other disposition of all or substantially all of the Maker’s property or business, or (b) the Maker’s merger into or consolidation with any other corporation or entity (other than a wholly-owned subsidiary of the Maker), or any transaction (including a merger or other reorganization) or series of related transactions, in which more than 50% of the voting power of the Maker’s capital stock is disposed of.
“Closing of the Qualified Financing” means the closing of the particular round of the Qualified Financing that results in the Proceeds (as defined below) to the Maker of all rounds of the Qualified Financing closed to that date being at least $5.0 million.
“Qualified Financing” means the Maker’s next Common Stock financing, whether in a single transaction or series of related transactions, whether a public or private financing, yielding aggregate cash proceeds to the Maker (inclusive of amounts converted under the Notes or other outstanding indebtedness of the Maker) (such amount, the “Proceeds”) of at least $5.0 million.
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12. Amendments and Waivers. This Note may be amended only with the written consent of the Maker and the Requisite Holders. Any amendment or waiver effected in accordance with this Section 12 shall be binding upon the Maker and all holders of the Notes.
13. Stockholders, Officers and Directors Not Liable. In no event shall any stockholder, officer or director of the Maker be liable for any amounts due or payable pursuant to this Note.
14. Subordination. This Note shall be subordinated to all amounts payable under that certain Venture Loan and Security Agreement dated as of December 23, 2014 between the Maker and Horizon Technology Finance Corporation (as the same may be amended and/or restated) pursuant to the terms of the Subordination Agreement.
[END OF TEXT]
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Executed and delivered as an instrument under seal in Waltham, Massachusetts, on and as of the date first above written.
| THE MAKER: | ||
| INTERLEUKIN GENETICS, INC. | ||
| By: | ||
| Name: | ||
| Title: | ||
| THE PAYEE: | ||
| [________________________] | ||
| By: | ||
| Name: | ||
| Title: | ||
Exhibit 10.18.3
SECOND amendment of VENTURE LOAN AND SECURITY AGREEMENT
This SECOND AMENDMENT OF VENTURE LOAN AND SECURITY AGREEMENT (this “Agreement”), dated as of April 17, 2017, is entered into by and among INTERLEUKIN GENETICS, INC. (“Borrower”) and HORIZON CREDIT II LLC, as assignee of Horizon Technology Finance Corporation (“Lender”).
RECITALS
A. Borrower and Lender are parties to a certain Venture Loan and Security Agreement dated as of December 23, 2014, as amended to date (as so amended, the “Loan Agreement”) pursuant to which Lender, among other things, has provided a loan to Borrower (“Loan A”) as evidenced by a certain Secured Promissory Note (Loan A) executed by Borrower in favor of Lender, amended and restated as of August 1, 2016, in the original principal amount of Five Million Dollars ($5,000,000.00) (“Loan A Note”).
B. Borrower has now requested that Lender agree to amend the Loan Agreement to revise the repayment schedule of Loan A.
C. Lender is willing to grant such request, but only to the extent, and in accordance with the terms, and subject to the conditions, set forth herein.
agreement
NOW, THEREFORE, in consideration of the above recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Borrower and Lender hereby agree as follows:
1. Definitions; Interpretation. Unless otherwise defined herein, all capitalized terms used herein and defined in the Loan Agreement shall have the respective meanings given to those terms in the Loan Agreement. Other rules of construction set forth in the Loan Agreement, to the extent not inconsistent with this Agreement, apply to this Agreement and are hereby incorporated by reference.
2. Confirmation. Borrower hereby acknowledges and agrees that: (i) the Loan Agreement sets forth the legal, valid, binding and continuing obligations of Borrower to Lender, (ii) the Obligations to Lender under the Loan Agreement are secured by validly perfected security interests in all assets of Borrower, including Borrower’s Intellectual Property, and (iii) Borrower has no cause of action, claim, defense or set-off against the Lender in any way regarding or relating to the Loan Agreement or Lender’s actions thereunder and to the extent any such cause of action, claim, defense or set-off ever existed, it is waived and Lender is released from any claims of Borrower. Borrower represents and warrants that no Default or Event of Default has occurred under the Loan Agreement.
3. Amended and Restated Note. The Loan A Note is hereby amended and restated in its entirety as set forth in Exhibit A annexed hereto and made a part hereof (the “Second Amended and Restated Note”).
| 1 |
4. Conditions to Effectiveness. Lender consents and agreement herein is expressly conditioned on each of the following:
| (a) | Borrower executing and delivering to Lender an executed copy of this Agreement; |
| (b) | Borrower executing and delivering to Lender an executed copy of the Second Amended and Restated Note; |
| (c) | Borrower executing and delivering to Lender a warrant to purchase Borrower’s Equity Securities in the form attached hereto as Exhibit B; |
| (d) | Borrower providing Lender with evidence reasonably satisfactory to Lender that Borrower has received cash proceeds of not less than One Million Dollars ($1,000,000) from the issuance of subordinated promissory notes, which notes shall be subordinated to the Note pursuant to the terms of a subordination agreement in form and substance acceptable to Lender; |
| (e) | Lender’s receipt of a fully executed subordination agreement with respect to the subordinated promissory notes issued by Borrower in satisfaction of the condition set forth in Section 4(d) above; and |
| (f) | Borrower’s payment of Lender’s in-house legal expenses in the amount of Five Thousand Dollars ($5,000) incurred in connection with the drafting, negotiation and execution of this Agreement. |
5. Effect of Agreement. On and after the date hereof, each reference to the Loan Agreement in the Loan Agreement or in any other document shall mean the Loan Agreement as amended by this Agreement. Except as expressly provided hereunder, the execution, delivery and effectiveness of this Agreement shall not operate as a waiver of any right, power, or remedy of Lender, nor constitute a waiver of any provision of the Loan Agreement. Except to the limited extent expressly provided herein, nothing contained herein shall, or shall be construed to (nor shall Borrower ever argue to the contrary) (i) modify the Loan Agreement or any other Loan Document (ii) modify, waive, impair, or affect any of the covenants, agreements, terms, and conditions thereof, or (iii) waive the due keeping, observance and/or performance thereof, each of which is hereby ratified and confirmed by Borrower. Except as amended above, the Loan Agreement remains in full force and effect.
6. Representations and Warranties. Borrower represents and warrants to Lender as follows:
| (a) | All representations and warranties of Borrower in this Agreement and the Loan Agreement are true and correct in all material respects as of the date hereof, and shall survive the execution of this Agreement (except to the extent such representations and warranties are made as of an earlier date in which case such representations and warranties are true and correct in all material respects as of such earlier date). |
| 2 |
| (b) | No event has occurred and is continuing that constitutes a Default or an Event of Default. |
| (c) | Borrower has all necessary power and authority to execute, deliver, and perform in accordance with the terms thereof, this Agreement. |
7. Default. Borrower’s failure to perform any covenant or other agreement contained in this Agreement or any other document entered into pursuant hereto shall constitute an Event of Default under the Loan Agreement.
8. Headings. Headings in this Agreement are for convenience of reference only and are not part of the substance hereof.
9. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut without reference to conflicts of law rules.
10. Counterparts. This Agreement may be executed in any number of counterparts, including by electronic or facsimile transmission, each of which when so delivered shall be deemed an original, but all such counterparts taken together shall constitute but one and the same instrument.
11. Integration. This Agreement and the Loan Documents constitute and contain the entire agreement of Borrower and Lender with respect to their respective subject matters, and supersede any and all prior agreements, correspondence and communications.
[Remainder of page intentionally blank. Signature page follows.]
| 3 |
IN WITNESS WHEREOF, Borrower and Lender have caused this SECOND AMENDMENT OF VENTURE LOAN AND SECURITY AGREEMENT to be executed as of the day and year first above written.
| BORROWER: | ||
| INTERLEUKIN GENETICS, INC. | ||
| By: | /s/ March Carbeau | |
| Name: Mark Carbeau | ||
| Title: Chief Executive Officer | ||
| LENDER: | ||
| HORIZON CREDIT II LLC | ||
| By: | /s/ Robert D. Pomeroy | |
| Robert D. Pomeroy, Jr. | ||
| Chief Executive Officer | ||
[Signature page to Second Amendment of Venture Loan and Security Agreement]
EXHIBIT A
Second Amended and Restated Secured Promissory Note
(See attached)
SECOND AMENDED AND RESTATED SECURED PROMISSORY NOTE
(Loan A)
| $5,000,000.00 | Originally Dated: December 23, 2014 |
Amended and Restated as of August 1, 2016
Second Amended and Restated as of April 1, 2017
FOR VALUE RECEIVED, the undersigned, INTERLEUKIN GENETICS, INC., a Delaware corporation (“Borrower”), HEREBY PROMISES TO PAY to HORIZON CREDIT II LLC, a Delaware limited liability company, as assignee of HORIZON TECHNOLOGY FINANCE CORPORATION, a Delaware corporation (“Lender”) the principal amount of Five Million Dollars and 00/100 ($5,000,000.00) or such lesser amount as shall equal the outstanding principal balance of Loan A (the “Loan”) made to Borrower by Lender pursuant to the Loan Agreement (as defined below), and to pay all other amounts due with respect to the Loan on the dates and in the amounts set forth in the Loan Agreement. This Note amends, replaces and supersedes, in its entirety, that certain Amended and Restated Secured Promissory Note issued by Borrower to Horizon Credit II LLC on August 1, 2016 (the “Original Note”). Nothing contained herein shall be deemed to be a repayment or a novation of the Original Note.
Interest on the principal amount of this Note from the date of this Note shall accrue at the Loan Rate or, if applicable, the Default Rate, each as established in accordance with the Loan Agreement (as defined below). Interest shall be computed on the basis of a 360-day year for the actual number of days elapsed. If the Funding Date is not the first day of the month, interim interest accruing from the Funding Date through the last day of that month shall be paid on the first calendar day of the next calendar month. Commencing February 1, 2015 through and including April 1, 2016, on the first day of each month (each an “Initial Interest Payment Date”) Borrower shall make payments of accrued interest only on the outstanding principal amount of the Loan.
Commencing on May 1, 2016, and continuing through July 1, 2016, on the first day of each month (each an “Initial Principal and Interest Payment Date”), Borrower shall make to Lender an equal payment of principal in the amount of One Hundred Sixty-Six Thousand Six Hundred Sixty-Six and 67/100 Dollars ($166,666.67) plus accrued interest on the then outstanding principal amount due hereunder.
Commencing August 1, 2016 through and including December 1, 2016, on the first day of each month (each a “One-Third Principal and Interest Payment Date”) Borrower shall make to Lender an equal payment of principal in the amount of Fifty-Five Thousand and 00/100 Dollars ($55,000.00) plus accrued interest on the then outstanding principal amount due hereunder.
Commencing January 1, 2017 through and including March 1, 2017, on the first day of each month (each a “Full Principal and Interest Payment Date”) Borrower shall make to Lender an equal payment of principal in the amount of One Hundred Ninety-Two Thousand Forty-Five and 45/100 Dollars ($192,045.45) plus accrued interest on the then outstanding principal amount due hereunder.
Commencing April 1, 2017 through and including June 1, 2017, on the first day of each month (each an “Additional Interest Payment Date”), Borrower shall make payments of accrued interest only on the outstanding principal amount of the Loan.
If Borrower meets the Extended Additional Interest Only Milestone (as defined below), commencing July 1, 2017 through and including the earlier of (i) September 1, 2017 and (ii) the first day of the month following the Cash Infusion Date (as defined below), on the first day of each month (each an “Additional Interest Payment Date”), Borrower shall make payments of accrued interest only on the outstanding principal amount of the Loan.
Commencing on the earlier of (i) July 1, 2017, if Borrower does not satisfy the Extended Additional Interest Only Milestone, or (ii) the first day of the month following the Cash Infusion Date and continuing on the first day of each month thereafter, Borrower shall make six (6) monthly payments of principal in the amount of Two Hundred Thousand and 00/100 Dollars ($200,000.00) plus accrued interest on the then outstanding principal amount due hereunder (each a “$200,000 Principal Payment Date”).
“Extended Additional Interest Only Milestone” means, Borrower, on or before June 15, 2017, provides Lender with evidence reasonably satisfactory to Lender that Borrower is negotiating the terms of a clinical services agreement with an entity that is not an Affiliate (as defined in the Loan Agreement) of Borrower, which clinical services agreement (i) is on terms acceptable to Horizon, and (ii) will be, in the good faith judgment of Borrower, executed on or prior to September 1, 2017.
“Cash Infusion Date” means the first day of the month immediately following Borrower’s receipt of cash proceeds in an aggregate amount of not less than One Million Five Hundred Thousand Dollars ($1,500,000) from any source, including, without limitation, revenue, up-front payments, the sale of Equity Securities, or the issuance of subordinated promissory notes.
Commencing on the first day of the month immediately following the last $200,000 Principal Payment Date, and continuing on the first day of each month through October 1, 2018 (each, a “Subsequent Principal and Interest Payment Date”, and together with each Initial Interest Payment Date, each Initial Principal and Interest Payment Date, each One-Third Principal and Interest Payment Date, each Full Principal and Interest Payment Date, each Additional Interest Payment Date, each Extended Additional Interest Only Payment Date, and each $200,000 Principal Payment Date, each, a “Payment Date”), Borrower shall make to Lender equal payments of principal in an amount sufficient to fully repay the Loan on or prior to October 1, 2018, plus accrued interest on the then outstanding principal amount due hereunder.
On the earliest to occur of (i) October 1, 2018, (ii) payment in full of the principal balance of the Loan, or (iii) an Event of Default and demand by Lender of payment in full of the Loan, Borrower shall make a payment of Three Hundred Twenty-Five Thousand and 00/100 Dollars ($325,000.00) to Lender (the “Final Payment”). If not sooner paid, all outstanding amounts hereunder and under the Loan Agreement shall become due and payable on October 1, 2018.
Principal, interest and all other amounts due with respect to the Loan, are payable in lawful money of the United States of America to Lender as set forth in the Loan Agreement. The principal amount of this Note and the interest rate applicable thereto, and all payments made with respect thereto, shall be recorded by Lender and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Note.
This Note is referred to in, and is entitled to the benefits of, the Venture Loan and Security Agreement dated as of the date hereof (the “Loan Agreement”), among Borrower and Lender. The Loan Agreement, among other things, (a) provides for the making of a secured Loan to Borrower, and (b) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events.
This Note may not be prepaid, except as set forth in Section 2.3 of the Loan Agreement.
This Note and the obligation of Borrower to repay the unpaid principal amount of the Loan, interest on the Loan and all other amounts due Lender under the Loan Agreement is secured under the Loan Agreement.
Presentment for payment, demand, notice of protest and all other demands and notices of any kind in connection with the execution, delivery, performance and enforcement of this Note are hereby waived.
Borrower shall pay all reasonable fees and expenses, including reasonable attorneys’ fees and costs, incurred by Lender in the enforcement or attempt to enforce any of Borrower’s obligations hereunder not performed when due.
Any reference herein to Lender shall be deemed to include and apply to every subsequent holder of this Note. Reference is made to the Loan Agreement for provisions concerning optional and mandatory prepayments, Collateral, acceleration and other material terms affecting this Note.
This Note shall be governed by and construed under the laws of the State of Connecticut. Borrower agrees that any action or proceeding brought to enforce or arising out of this Note may be commenced in the state or federal courts located within the State of Connecticut.
[Remainder of page intentionally blank. Signature page follows.]
IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed by one of its officers thereunto duly authorized on the date hereof.
| BORROWER: | ||
| INTERLEUKIN GENETICS, INC. | ||
| By: | ||
| Name: | ||
| Title: | ||
EXHIBIT B
Form of Warrant
(See attached)
Exhibit 10.21
EXECUTION VERSION
SUBSCRIPTION AGREEMENT
Subject to the terms and conditions set forth in this Subscription Agreement, dated as of April 17, 2017 (this “Agreement”), each of the undersigned (each, a “Subscriber” and collectively, the “Subscribers”) hereby offers to purchase from Interleukin Genetics, a Delaware corporation (the “Company”), a subordinated convertible promissory note in an original principal amount equal to the “Note Principal Amount” set forth with its signature on the signature page hereto, the form of which is attached as Exhibit A hereto, (the “Note” and, collectively, the “Notes”) and a warrant, substantially in the form of Exhibit B hereto (the “Warrant” and, collectively, the “Warrants”), representing the right to purchase shares of the Company’s common stock, par value $0.001 per share (“Common Stock”), exercisable as set forth therein. The Note is convertible into shares of Common Stock (the “Conversion Shares,” and together with the Notes, the Warrants and the Warrant Shares (as defined below), the “Securities”) at a conversion price and on the other terms set forth therein. The Notes shall be issued in the aggregate principal amount of not more than $1,000,000.00.
The Securities being subscribed for pursuant to this Agreement have not been registered under the Securities Act of 1933, as amended (the “Securities Act”). The offering of the Notes and the Warrants is being made to “accredited investors,” as defined in Regulation D under the Securities Act in reliance upon the exemption from securities registration afforded by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D.
The closing of the transactions contemplated by this Agreement (the “Closing”) shall take place at the offices of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. at One Financial Center, Boston, Massachusetts, (or via electronic transmission) at 9:00 a.m., Boston time, on the date hereof (the “Closing Date”). The Closing will not occur unless the conditions set forth in Sections 6 and 7 shall have been satisfied.
| 1. | Subscription. Each Subscriber hereby subscribes to purchase the Note and the Warrants, for the aggregate “Note Principal Amount” set forth with its signature on the signature page hereto, subject to the terms and conditions of this Agreement and on the basis of the representations, warranties, covenants and agreements contained herein. |
| 2. | Representations and Warranties of the Company. The Company hereby represents and warrants to the Subscribers, as of the Closing Date (unless otherwise specified), the following: |
| a. | Organization and Qualification. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, and has the requisite corporate power to own its properties and to carry on its business as now being conducted. The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the assets, business, financial condition or results of operations of the Company (a “Material Adverse Effect”). |
| b. | Authorization, Enforcement, Compliance with Other Instruments. (i) The Company has the requisite corporate power and authority to enter into and perform its obligations under this Agreement, the Notes, and the Warrants and each of the other agreements and documents that are exhibits hereto or thereto or are contemplated hereby or thereby or necessary or desirable to effect the transactions contemplated hereby or thereby (the “Transaction Documents”) and to issue the Notes and the Warrants, and the Conversion Shares and the shares of Common Stock issuable upon exercise of the Warrants (the “Warrant Shares”), in accordance with the terms hereof and thereof, (ii) the execution and delivery by the Company of each of the Transaction Documents and the consummation by it of the transactions contemplated hereby and thereby, including, without limitation, the issuance of the Notes, the Conversion Shares, the Warrants and the Warrant Shares, have been, or will be at the time of execution of such Transaction Document, duly authorized by the Company’s Board of Directors, and no further consent or authorization is, or will be at the time of execution of such Transaction Document, required by the Company, its respective Board of Directors or its stockholders, (iii) each of the Transaction Documents will be duly executed and delivered by the Company, (iv) the Transaction Documents when executed and delivered by the Company and each other party thereto will constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as may be limited by: (A) judicial principles limiting the availability of specific performance, injunctive relief, and other equitable remedies or (B) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect generally relating to or affecting creditors’ rights. |
| c. | Capitalization. The authorized capital stock of the Company consists of 450,000,000 shares of Common Stock and 6,000,000 shares of convertible preferred stock, par value of $0.001 per share (the “Preferred Stock”). As of the date hereof, the Company has 229,471,392 shares of Common Stock and no shares of Preferred Stock issued and outstanding. Except as set forth in the reports, schedules, forms, statements and other documents filed by the Company with the Securities and Exchange Commission (the “SEC”) on or prior to the date hereof (the “SEC Reports”), no shares of capital stock of the Company will be subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company, (ii) except as set forth in the SEC Reports there will be no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company, or contracts, commitments, understandings or arrangements by which the Company is or may become bound to issue additional shares of capital stock of the Company, (iii) there will be no outstanding debt securities of the Company other than the Notes and the indebtedness as set forth in the SEC Reports, (iv) other than as set forth in the SEC Reports, there will be no agreements or arrangements under which the Company is obligated to register the sale of any of their securities under the Securities Act, (v) there will be no outstanding registration statements of the Company, and there will be no outstanding comment letters from the SEC or any other regulatory agency and (vi) except as may be provided in the Transaction Documents, no co-sale right, right of first refusal or other similar right will exist with respect to the Notes or the Warrants (or will exist with respect to the Conversion Shares or the Warrant Shares) or the issuance and sale thereof. Upon request, the Company will make available to the Subscribers true and correct copies of the Company’s Certificate of Incorporation, as amended and in effect on the date hereof (the “Certificate of Incorporation”), and the Company’s By-laws, as amended and in effect on the date hereof (the “By-laws”). |
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| d. | Issuance of Conversion Shares and Warrant Shares. Upon issuance of the Conversion Shares, in accordance with the terms of the Notes, the Conversion Shares will be duly issued, fully paid and nonassessable, and will be free from all taxes, liens and charges with respect to the issue thereof. Upon issuance of the Warrant Shares upon exercise of the Warrants, against payment therefor and in accordance with the terms of the Warrants, the Warrant Shares will be duly issued, fully paid and nonassessable, and will be free from all taxes, liens and charges with respect to the issue thereof. |
| e. | No Conflicts. The execution, delivery and performance of each of the Transaction Documents by the Company, and the consummation by the Company of the transactions contemplated hereby and thereby will not (i) result in a violation of the Certificate of Incorporation or the By-laws or (ii) violate or conflict with, or result in a breach of any provision of, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company is a party, except for those which would not reasonably be expected to have a Material Adverse Effect, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including U.S. federal and state securities laws and regulations) applicable to the Company or by which any property or asset of the Company is bound or affected except for those which could not reasonably be expected to have a Material Adverse Effect. Except those which could not reasonably be expected to have a Material Adverse Effect, the Company is not in violation of any term of or in default under its Certificate of Incorporation or By-laws. Except those which could not reasonably be expected to have a Material Adverse Effect, the Company is not in violation of any term of or in default under any material contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company. Except as specifically contemplated by this Agreement and as required under the Securities Act and any applicable state securities laws, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under or contemplated by this Agreement or the other Transaction Documents in accordance with the terms hereof or thereof. Neither the execution and delivery by the Company of the Transaction Documents, nor the consummation by the Company of the transactions contemplated hereby or thereby, will require any notice, consent or waiver under any contract or instrument to which the Company is a party or by which the Company is bound or to which any of its assets is subject, except for any notice, consent or waiver the absence of which would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect and would not adversely affect the consummation of the transactions contemplated hereby or thereby, other than any such notice, consent or waiver that has been properly made or obtained prior to the date of this Agreement. |
| f. | Absence of Litigation. Except as set forth in the SEC Reports, there is no action, suit, claim, inquiry, notice of violation, proceeding (including any partial proceeding such as a deposition) or investigation before or by any court, public board, governmental or administrative agency, self-regulatory organization, arbitrator, regulatory authority, stock market, stock exchange or trading facility (an “Action”) now pending or, to the knowledge of the Company, threatened, against or affecting the Company, wherein an unfavorable decision, ruling or finding would (i) adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement or any of the other Transaction Documents, or (ii) have a Material Adverse Effect. |
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| g. | No General Solicitation. Neither the Company, nor any of its “affiliates” as defined in Rule 144 under the Securities Act), nor, to the knowledge of the Company, any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Notes and Warrants. |
| h. | Permits. The Company has all authorizations, approvals, clearances, licenses, permits, certificates or exemptions (including manufacturing approvals and authorizations, pricing and reimbursement approvals, labeling approvals, registration notifications or their foreign equivalent) issued by any regulatory authority or governmental agency (collectively, “Permits”) required to conduct their respective businesses as currently conducted except to the extent that the failure to have such Permits would not have a Material Adverse Effect. |
| i. | Title. Except as set forth in the SEC Reports, the Company has good and marketable title to all of its real and personal property and assets, free and clear of any material restriction, mortgage, deed of trust, pledge, lien, security interest or other charge, claim or encumbrance which would have a Material Adverse Effect. |
| j. | Financial Statements. The financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the SEC with respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with GAAP applied on a consistent basis during the periods involved, except as may be otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all footnotes required by GAAP, and fairly present in all material respects the financial position of the Company as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, year-end audit adjustments. The pro forma financial information and the related notes, if any, included in the SEC Reports have been properly compiled and prepared in accordance with the applicable requirements of the Securities Act and the regulations promulgated thereunder and fairly present in all material respects the information shown therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. |
| k. | SEC Reports. The Company has filed all reports, schedules, forms, statements and other documents required to be filed by the Company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including pursuant to Section 13(a) or 15(d) thereof, for the two (2) years preceding the date hereof (or such shorter period as the Company was required by law or regulation to file such material). The SEC Reports taken as a whole do not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein (in the case of SEC Reports) or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. |
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| l. | Brokers’ Fees. The Company does not have any liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement. |
| m. | Off-Balance Sheet Arrangements. There is no transaction, arrangement, or other relationship between the Company and an unconsolidated or other off-balance sheet entity that is required to be disclosed by the Company in its SEC Reports and is not so disclosed or that otherwise would have a Material Adverse Effect. |
| n. | Investment Company. The Company is not required to be registered as, and is not an affiliate of, and immediately following the Closing will not be required to register as, an “investment company” within the meaning of the Investment Company Act of 1940, as amended. |
| 3. | Representations, Warranties and Agreements of the Subscribers. Each Subscriber represents and warrants to, and agrees with, the Company as follows: |
| a. | Such Subscriber, its advisers, if any, and its designated representatives, if any, have the knowledge and experience in financial and business matters necessary to evaluate the merits and risks of its prospective investment in the Company, and have carefully reviewed and understand the risks of, and other considerations relating to, the purchase of the Securities and the tax consequences of the investment, and have the ability to bear the economic risks of the investment. |
| b. | Such Subscriber is acquiring the Notes and the Warrants, and upon conversion of the Notes, the Conversion Shares, and upon exercise of the Warrants, the Warrant Shares, for investment for its own account and not with the view to, or for resale in connection with, any distribution thereof. Such Subscriber understands and acknowledges that sale of the Notes and the Warrants have not been, and the Conversion Shares and the Warrant Shares will not be, registered under the Securities Act or any state securities laws, by reason of a specific exemption from the registration provisions of the Securities Act and applicable state securities laws, which depends upon, among other things, the bona fide nature of the investment intent as expressed herein. Such Subscriber further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to any third person with respect to any of the Notes, the Conversion Shares, the Warrants or the Warrant Shares. Such Subscriber understands and acknowledges that the sale of the Securities pursuant to this Agreement will not be registered under the Securities Act nor under the state securities laws on the ground that the sale provided for in this Agreement and the issuance of securities hereunder is exempt from the registration requirements of the Securities Act and any applicable state securities laws. |
| c. | Such Subscriber is an “accredited investor” as defined in Rule 501 of Regulation D as promulgated by the SEC under the Securities Act, and such Subscriber shall submit to the Company such further assurances of such status as may be reasonably requested by the Company. Such Subscriber further acknowledges and understands that it is required to be an “accredited investor” at the time it exercises the Warrants. Such Subscriber resides in the jurisdiction set forth on the signature page affixed hereto. Such Subscriber has not taken any of the actions set forth in, and is not subject to, the disqualification provisions of Rule 506(d)(1) of the Securities Act. |
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| d. | Such Subscriber represents that it was not formed for the specific purpose of acquiring the Securities, is duly organized, validly existing and in good standing under the laws of the state or jurisdiction of its organization, the consummation of the transactions contemplated hereby is authorized by, and will not result in a violation of state law or its charter or other organizational documents, it has full power and authority to execute and deliver this Agreement, the other Transaction Documents to which it is a party, and all other related agreements or certificates and to carry out the provisions hereof and thereof and to purchase and hold the Securities, the execution and delivery of this Agreement and each other Transaction Document to which it is a party has been duly authorized by all necessary action, this Agreement and each other Transaction Document to which it is a party has been duly executed and delivered on behalf of such Subscriber and is a legal, valid and binding obligation of such Subscriber. The execution and delivery of this Agreement and each other Transaction Document to which it is a party will not violate or be in conflict with any order, judgment, injunction, agreement or controlling document to which such Subscriber is a party or by which it is bound. |
| e. | Such Subscriber understands that the Securities are being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying in part upon the truth and accuracy of, and such Subscriber’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of such Subscriber set forth herein in order to determine the availability of such exemptions and the eligibility of such Subscriber to acquire such securities. Such Subscriber further acknowledges and understands that the Company is relying on the representations and warranties made by it hereunder and that such representations and warranties are a material inducement to the Company to sell the Securities to such Subscriber. |
| f. | Such Subscriber understands that no public market now exists, and there never will be a public market for, the Notes or the Warrants, that only a limited public market for the Common Stock exists and that there can be no assurance that a more active public market for the Common Stock will exist or continue to exist. |
| g. | Such Subscriber, its advisers, if any, and its designated representatives, if any, have received and reviewed information about the Company, and have had an opportunity to discuss the Company’s business, management and financial affairs with the Company’s management. Such Subscriber understands that such discussions, as well as any materials provided by the Company, were intended to describe the aspects of the Company’s business and prospects which the Company believes to be material, but were not necessarily a thorough or exhaustive description, and except as expressly set forth in this Agreement. Some of such information may include projections as to the future performance of the Company, which projections may not be realized, may be based on assumptions which may not be correct and may be subject to numerous factors beyond the Company’s control. Such Subscriber has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Securities. |
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| h. | As of the Closing, all actions on the part of such Subscriber, and its officers, directors and partners, if applicable, necessary for the authorization, execution and delivery of this Agreement and the other Transaction Documents to which it is a party and the performance of all obligations of such Subscriber hereunder and thereunder shall have been taken, and this Agreement and such other Transaction Documents, assuming due execution by the parties hereto and thereto, constitute valid and legally binding obligations of such Subscriber, enforceable in accordance with their respective terms, except as may be limited by: (i) judicial principles limiting the availability of specific performance, injunctive relief, and other equitable remedies or (ii) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect generally relating to or affecting creditors’ rights. |
| i. | Such Subscriber agrees to be bound by all of the terms and conditions of the Notes and the Warrants and to perform all obligations thereby imposed upon it. |
| 4. | Transfer Restrictions. Each Subscriber acknowledges and agrees as follows: |
| a. | The Notes, the Conversion Shares, the Warrants and the Warrant Shares have not been registered for sale under the Securities Act, in reliance on the private offering exemption in Section 4(a)(2) thereof; the Company does not currently intend to register the Notes, the Conversion Shares, the Warrants or the Warrant Shares under the Securities Act at any time in the future unless otherwise contractually obligated to do so under this Agreement or any of the other Transaction Documents; and such Subscriber will not immediately be entitled to the benefits of Rule 144 with respect to the Notes, the Conversion Shares, the Warrants and the Warrant Shares. |
| b. | Such Subscriber understands that there are substantial restrictions on the transferability of the Securities that the notes, agreement or certificates representing the Securities shall bear a restrictive legend in substantially the following form (or in the case of the Warrants, as shown on the form of Warrant attached hereto) (and a stop-transfer order may be placed against transfer of such certificates or other instruments): |
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES LAWS AND NEITHER MAY BE SOLD, TRANSFERRED, ASSIGNED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE ACT AND SUCH LAWS OR (1) REGISTRATION UNDER APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED AND (2) AN OPINION OF COUNSEL SATISFACTORY TO THE MAKER IS FURNISHED TO THE MAKER TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED.
In addition, if any Subscriber is an affiliate of the Company notes, agreements or certificates evidencing the Securities issued to such Subscriber may bear a customary “Affiliates” legend.
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The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of the Securities upon which it is stamped, if (a) such Securities are sold pursuant to a registration statement under the Securities Act, or (b) such holder delivers to the Company an opinion of counsel, reasonably acceptable to the Company, that a disposition of the Securities is being made pursuant to an exemption from such registration and that the Securities, after such transfer, shall no longer be “restricted securities” within the meaning of Rule 144.
| 5. | Creation of Security Interest. |
| a. | Grant of Security Interests. The Company grants to each Subscriber a valid, continuing security interest in all presently existing and hereafter acquired or arising Collateral (as defined below) in order to secure prompt, full and complete payment of any and all Obligations (as defined below) and in order to secure prompt, full and complete performance by the Company of each of its covenants and duties under each of the Transaction Documents (other than the Warrants). The “Collateral” shall mean and include all right, title, interest, claims and demands of the Company in the following: |
| i. | All goods (and embedded computer programs and supporting information included within the definition of “goods” under the Code (as defined below)) and equipment now owned or hereafter acquired, including all laboratory equipment, computer equipment, office equipment, machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; |
| ii. | All inventory now owned or hereafter acquired, including all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of the Company’s custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and the Company’s books relating to any of the foregoing; |
| iii. | All contract rights and general intangibles (including Intellectual Property (as defined below)), now owned or hereafter acquired, including goodwill, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, software, computer programs, computer disks, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payment intangibles, commercial tort claims, payments of insurance and rights to payment of any kind; |
| iv. | All now existing and hereafter arising accounts, contract rights, royalties, license rights, license fees and all other forms of obligations owing to the Company arising out of the sale or lease of goods, the licensing of technology or the rendering of services by the Company (subject, in each case, to the contractual rights of third parties to require funds received by the Company to be expended in a particular manner), whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by the Company and the Company’s books relating to any of the foregoing; |
| v. | All documents, cash, deposit accounts, letters of credit and letters of credit rights (whether or not the letter of credit is evidenced by a writing) and other supporting obligations, certificates of deposit, instruments, promissory notes, chattel paper (whether tangible or electronic) and investment property, including all securities, whether certificated or uncertificated, security entitlements, securities accounts, commodity contracts and commodity accounts, and all financial assets held in any securities account or otherwise, wherever located, now owned or hereafter acquired and the Company’s books relating to the foregoing; and |
| vi. | To the extent not covered by the foregoing clauses (i) through (v), all other personal property of the Company, whether tangible or intangible, and any and all rights and interests in any of the above and the foregoing and, any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof, including insurance, condemnation, requisition or similar payments and proceeds of the sale or licensing of Intellectual Property. |
Notwithstanding the foregoing, the Collateral shall not include any equipment that now or hereafter is subject to a Lien (as defined below) that constitute purchase money Liens (i) on equipment acquired or held by the Company incurred for financing the acquisition of the equipment securing no more than Seven Hundred Fifty Thousand Dollars ($750,000.00) in the aggregate amount outstanding, or (ii) existing on equipment when acquired, if the Lien is confined to the property and improvements and the proceeds of the equipment.
| b. | After-Acquired Property. If the Company shall at any time acquire a commercial tort claim having a value in excess of Fifty Thousand Dollars ($50,000), as defined in the Code, the Company shall immediately notify each Subscriber in writing signed by the Company of the brief details thereof and grant to each Subscriber in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance satisfactory to each Subscriber. |
| c. | Duration of Security Interest. Each Subscriber’s security interest in the Collateral shall continue until the payment in full and the satisfaction of all Obligations (other than inchoate indemnification and similar obligations), whereupon such security interest shall automatically terminate. Each Subscriber shall, at the Company’s sole cost and expense, execute such further documents and take such further actions as may be reasonably necessary to make effective the release contemplated by this Section 5(c), including duly authorizing and delivering termination statements for filing in all relevant jurisdictions under the Code. |
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| d. | Location and Possession of Collateral. The Collateral is and shall remain in the possession of the Company at its corporate headquarters or at such other location specified in writing by the Company to each Subscriber. The Company shall remain in full possession, enjoyment and control of the Collateral (except only as may be otherwise required by each Subscriber for perfection of the security interests therein created hereunder) and so long as no Event of Default (as defined in the Notes) has occurred and is continuing, shall be entitled to manage, operate and use the same and each part thereof with the rights and franchises appertaining thereto; provided that the possession, enjoyment, control and use of the Collateral shall at all time be subject to the Company’s observance and performance of the terms of this Agreement. |
| e. | Delivery of Additional Documentation Required. The Company shall from time to time execute and deliver to each Subscriber, at the request of such Subscriber, all financing statements and other documents such Subscriber may reasonably request, in form satisfactory to such Subscriber, to perfect and continue such Subscriber’s perfected security interests in the Collateral and in order to consummate fully all of the transactions contemplated under the Transaction Documents. |
| f. | Right to Inspect. Each Subscriber (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during the Company’s usual business hours, to inspect the books and records of the Company and to make copies thereof and to inspect, test, and appraise the Collateral in order to verify the Company’s financial condition or the amount, condition of, or any other matter relating to, the Collateral. Notwithstanding the foregoing, so long as no Event of Default (as defined in the Note) shall be continuing, the inspection rights shall be exercised no more frequently than one (1) per year. |
| g. | Protection of Intellectual Property. The Company shall: |
| i. | protect, defend and maintain the validity and enforceability of its Intellectual Property and promptly advise each Subscriber in writing of material infringements; |
| ii. | not allow any Intellectual Property material to the Company’s business to be abandoned, forfeited or dedicated to the public without each Subscriber’s written consent; |
| iii. | provide written notice to each Subscriber within ten (10) days of entering or becoming bound by any Restricted License (as defined below) (other than over-the-counter software that is commercially available to the public); and |
| iv. | take such commercially reasonable steps as each Subscriber reasonably requests to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for (i) any Restricted License to be deemed “Collateral” and for each Subscriber to have a security interest in it that might otherwise be restricted or prohibited by law or by the terms of any such Restricted License, whether now existing or entered into in the future, and (ii) each Subscriber to have the ability in the event of a liquidation of any Collateral to dispose of such Collateral in accordance with or such Subscriber’s rights and remedies under this Agreement and the other Transaction Documents. |
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| h. | Intellectual Property. |
| i. | At each Subscriber’s request, the Company shall register or cause to be registered with the United States Copyright Office (i) any software (material to the business of the Company) developed or acquired by the Company in connection with any product developed or acquired for sale or licensing, (ii) any software (material to the business of the Company) developed or acquired by the Company hereafter from time to time in connection with any product developed or acquired for sale or licensing, and (iii) any major revisions or upgrades to any software that has previously been registered by or on behalf of the Company with the United States Copyright Office. |
| ii. | The Company shall promptly notify each Subscriber on a quarterly basis of the federal registration or filing by the Company of any patent or patent application, or trademark or trademark application, or copyright or copyright application and shall promptly execute and deliver to each Subscriber any grants of security interests in same, in form acceptable to such Subscriber, to file with the United States Patent and Trademark Office or the United States Copyright Office, as applicable. |
| i. | Certain Definitions. |
| i. | “Code” means the Uniform Commercial Code as adopted and in effect in the Commonwealth of Massachusetts, as amended from time to time; provided, however, that if by reason of mandatory provisions of law, the creation and/or perfection or the effect of perfection or non-perfection of the security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the Commonwealth of Massachusetts, the term “Code” shall also mean the Uniform Commercial Code as in effect from time to time in such jurisdiction for purposes of the provisions hereof relating to such creation, perfection or effect of perfection or non-perfection. |
| ii. | “Intellectual Property” means, with respect to any person, all of such person’s right, title and interest in and to patents, patent rights (and applications and registrations therefor and divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same), trademarks and service marks (and applications and registrations therefor and the goodwill associated therewith), whether registered or not, inventions, copyrights (including applications and registrations therefor and like protections in each work or authorship and derivative work thereof), whether published or unpublished, mask works (and applications and registrations therefor), trade names, trade styles, software and computer programs, source code, object code, trade secrets, licenses, methods, processes, know how, drawings, specifications, descriptions, and all memoranda, notes, and records with respect to any research and development, all whether now owned or subsequently acquired or developed by such person and whether in tangible or intangible form or contained on magnetic media readable by machine together with all such magnetic media (but not including embedded computer programs and supporting information included within the definition of “goods” under the Code). |
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| iii. | “Lien” means any voluntary or involuntary security interest, pledge, bailment, lease, mortgage, hypothecation, conditional sales and title retention agreement, encumbrance or other lien with respect to any Property (as defined below) in favor of any person. |
| iv. | “Obligations” means all debt, principal, interest, fees, charges, and other amounts, obligations, covenants, and duties owing by the Company to the applicable Subscriber of any kind and description arising under by the Transaction Documents (other than the Warrants) and whether or not for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising. |
| v. | “Property” means any interest in any kind of property or asset, whether real, personal or mixed, whether tangible or intangible. |
| vi. | “Restricted License” means any license or other agreement with respect to which the Company is the licensee and such license or agreement is material to the Company’s business and (a) that prohibits or otherwise restricts the Company from granting a security interest in the Company’s interest in such license or agreement or any other property or (b) for which a default under or termination of could interfere with the Subscribers’ right to sell any Collateral. |
| 6. | Conditions to Company’s Obligations at Closing. The Company’s obligation to complete the sale and issuance of the Notes and Warrants and deliver the Notes and the Warrants to each Subscriber, individually, at the Closing shall be subject to the following conditions to the extent not waived by the Company: |
| a. | Receipt of Payment. The Company shall have received payment, by certified or other bank check or by wire transfer of immediately available funds, in the full amount of the “Note Principal Amount” set forth with such Subscriber’s signature on the signature page hereto. |
| b. | Representations and Warranties. The representations and warranties made by such Subscriber in Section 3 hereof shall be true and correct in all material respects as of the Closing Date (except to the extent any such representation and warranty is qualified by materiality or reference to Material Adverse Effect, in which case, such representation and warranty shall be true and correct in all respects as so qualified), except to the extent any such representation or warranty expressly speaks as of an earlier date, in which case such representation or warranty shall be true and in all material respects correct as of such earlier date (except in each case to the extent any such representation and warranty is qualified by materiality or reference to Material Adverse Effect, in which case, such representation and warranty shall be true and correct in all respects as so qualified). Such Subscriber shall have performed in all material respects all obligations and covenants herein required to be performed by it on or prior to the Closing Date. |
| c. | Receipt of Executed Transaction Documents. Such Subscriber shall have executed and delivered to the Company the applicable Transaction Documents. |
| 11 |
| d. | Judgments. No judgment, writ, order, injunction, award or decree of or by any court, or judge, justice or magistrate, including any bankruptcy court or judge, or any order of or by any governmental authority, shall have been issued, and no action or proceeding shall have been instituted by any governmental authority, enjoining or preventing the consummation of the transactions contemplated hereby. |
| e. | Consents. All necessary consents of any third parties with respect to the execution, delivery and performance of the Transaction Documents shall have been received. |
| 7. | Conditions to Subscribers’ Obligations at Closing. Each Subscriber’s obligation to purchase and pay for the Notes and Warrants at the Closing shall be subject to the following conditions to the extent not waived by the applicable Subscriber: |
| a. | Representations and Warranties Correct. The representations and warranties made by the Company in Section 2 hereof shall be true and correct in all material respects as of the Closing Date (except to the extent any such representation and warranty is qualified by materiality or reference to Material Adverse Effect, in which case, such representation and warranty shall be true and correct in all respects as so qualified), except to the extent any such representation or warranty expressly speaks as of an earlier date, in which case such representation or warranty shall be true and in all material respects correct as of such earlier date (except in each case to the extent any such representation and warranty is qualified by materiality or reference to Material Adverse Effect, in which case, such representation and warranty shall be true and correct in all respects as so qualified). The Company shall have performed in all material respects all obligations and covenants herein required to be performed by it on or prior to the Closing Date. |
| b. | Receipt of Executed Transaction Documents. The Company shall have executed and delivered to each Subscriber the applicable Transaction Documents. |
| c. | Judgments. No judgment, writ, order, injunction, award or decree of or by any court, or judge, justice or magistrate, including any bankruptcy court or judge, or any order of or by any governmental authority, shall have been issued, and no action or proceeding shall have been instituted by any governmental authority, enjoining or preventing the consummation of the transactions contemplated hereby. |
| d. | Consents. All necessary consents of any third parties with respect to the execution, delivery and performance of the Transaction Documents shall have been received. |
| 8. | Binding Effect. Each Subscriber hereby acknowledges and agrees that this Agreement shall be binding upon and inure to the benefit of the parties and their successors, legal representatives and permitted assigns. |
| 9. | Modification. This Agreement shall not be modified or waived except by an instrument in writing signed by the Company and the majority by the holders of Notes representing at least fifty percent (50%) of the aggregate principal amount of the Notes then outstanding; provided, however, that this Agreement may not be amended, and no provision hereof may be waived, in each case, in any way which would adversely affect the rights of a Subscriber in a manner disproportionate to any adverse effect such amendment or waiver would have on the rights of the other Subscribers, without the consent of such Subscriber. |
| 12 |
| 10. | Third-Party Beneficiary. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person or entity. |
| 11. | Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given (a) if to the Company, to Interleukin Genetics, Inc., 135 Beaver Street, Waltham, Massachusetts 02452, Attention: Chief Executive Officer, with a copy to Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., One Financial Center, Boston, Massachusetts, 02111, Attention: Daniel T. Kajunski, e-mail: DTKajunski@mintz.com, or (b) if to a Subscriber, at the applicable address set forth on the signature page hereof (or, in either case, to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 11). Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party’s address which shall be deemed given at the time of receipt thereof. |
| 12. | Assignability. This Agreement and the rights, interests and obligations hereunder are not transferable or assignable by the Subscribers, and the transfer or assignment of the Notes, the Conversion Shares, the Warrants or the Warrant Shares shall be made only in accordance with all applicable laws and the terms of the Notes and the Warrants. |
| 13. | Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without reference to the principles thereof relating to the conflict of laws. |
| 14. | Blue Sky Qualification. The purchase of the Securities under this Agreement is expressly conditioned upon the exemption from qualification of the offer and sale of the Notes and Warrants from applicable federal and state securities laws. The Company shall not be required to qualify this transaction under the securities laws of any jurisdiction and, should qualification be necessary, the Company shall be released from any and all obligations to maintain its offer, and may rescind any sale contracted, in the jurisdiction. |
| 15. | Use of Pronouns. All pronouns and any variations thereof used herein shall be deemed to refer to the masculine, feminine, neuter, singular or plural as the identity of the person or persons referred to may require. |
| 16. | No Short Selling. Each Subscriber agrees that during the period of twelve (12) months following the Closing Date, such Subscriber will not, directly or indirectly, effect or agree to effect any Short Sale (as defined in rule 200 of Regulation SHO under the Exchange Act) with respect to any shares of Common Stock, whether or not against the box, establish any “put equivalent position” (as defined in Rule 16a-1(h) under the Exchange Act) with respect to any shares of Common Stock, borrow or pre-borrow any shares of Common Stock, or grant any other right (including, without limitation, any put or call option) with respect to shares of the Common Stock, or, in each case, with respect to any security that includes, is convertible into or exercisable for or derives any significant part of its value from shares of the Common Stock or otherwise seek to hedge such Subscriber’s position in the Common Stock. |
| 13 |
| 17. | Miscellaneous. |
| a. | This Agreement, together with the Note and Warrant and any confidentiality agreement between each Subscriber and the Company, constitute the entire agreement between such Subscriber and the Company with respect to the offering and issuance of the Notes and Warrants and supersedes all prior oral or written agreements and understandings, if any, relating to the subject matter hereof. |
| b. | The representations and warranties of the Company and the Subscribers made in this Agreement shall survive the execution and delivery hereof and delivery of the Notes and the Warrants for a period of twelve (12) months following the Closing Date. |
| c. | Each of the parties hereto shall pay its own fees and expenses (including the fees of any attorneys, accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby, whether or not the transactions contemplated hereby are consummated. |
| d. | This Agreement may be executed in one or more original or facsimile or by an e-mail which contains a portable document format (.pdf) file of an executed signature page counterparts, each of which shall be deemed an original, but all of which shall together constitute one and the same instrument and which shall be enforceable against the parties actually executing such counterparts. The exchange of copies of this Agreement and of signature pages by facsimile transmission or in .pdf format shall constitute effective execution and delivery of this Agreement as to the parties and may be used in lieu of the original Agreement for all purposes. Signatures of the parties transmitted by facsimile or by e-mail of a document in pdf format shall be deemed to be their original signatures for all purposes. |
| e. | Each provision of this Agreement shall be considered separable and, if for any reason any provision or provisions hereof are determined to be invalid or contrary to applicable law, such invalidity or illegality shall not impair the operation of or affect the remaining portions of this Agreement. |
| f. | Paragraph titles are for descriptive purposes only and shall not control or alter the meaning of this Agreement as set forth in the text. |
| g. | Each Subscriber hereby agrees to furnish the Company such other information as the Company may reasonably request with respect to its subscription hereunder and the transactions contemplated by then Transaction Documents. |
| 18. | Public Disclosure. None of the Subscribers, nor any officer, manager, director, member, partner, stockholder, employee, affiliate, affiliated person or entity of any Subscriber shall make or issue any press releases or otherwise make any public statements or make any disclosures to any third person or entity with respect to the transactions contemplated herein and will not make or issue any press releases or otherwise make any public statements of any nature whatsoever with respect to the Company without the Company’s express prior approval. The Company has the right to withhold such approval in its sole discretion. |
| 14 |
| 19. | Independent Nature of Each Subscriber’s Obligations and Rights. For avoidance of doubt, the obligations of each Subscriber under this Agreement are several and not joint with the obligations of any other Subscriber hereunder. |
| 20. | Increase in Authorized Shares of Common Stock. If the Company does not have a sufficient number of authorized, but unissued, shares of Common Stock to cover the full conversion of the Notes under Section 5(b) thereof and the full exercise of the Warrants at Closing, following the Closing, the Company shall file the Certificate of Amendment to the Certificate of Incorporation approved by the stockholders of the Company at the 2016 annual meeting of stockholders held on October 20, 2016 to increase the authorized shares of Common Stock to 650,000,000 shares. |
[SIGNATURE PAGE FOLLOWS.]
IN WITNESS WHEREOF, this Subscription Agreement has been duly executed and delivered by each Party as of the date first above written.
The Company
| Interleukin Genetics, Inc. | |||
| By: | /s/ Mark Carbeau | ||
| Name: | Mark Carbeau | ||
| Title: | CEO | ||
THE Subscribers
Bay City Capital Fund V, L.P. |
|||
| By: Bay City Capital Management V LLC, its general partner | |||
| By: Bay City Capital LLC, its manager | |||
| By: | /s/ Fred Craves | ||
| Name: | |||
| Title: | Manager and Managing Director | ||
| Address: |
|
||
| Note Principal Amount: | $490,650.00 | ||
Bay City Capital Fund V Co-Investment, L.P. |
|||
| By: Bay City Capital Management V LLC, its general partner | |||
| By: Bay City Capital LLC, its manager | |||
| By: | /s/ Fred Craves | ||
| Name: | |||
| Title: | Manager and Managing Director | ||
| Address: | |||
|
|||
| Note Principal Amount: | $9,350.00 | ||
In each case, with a copy (which shall not constitute notice) to;
Stradling Yocca Carlson & Rauth, P.C.
660 Newport Center Drive, Suite 1600
Newport Beach, CA 92660
| Attn: | Michael Lawhead |
| Email: | mlawhead@sycr.com |
[Signature Page to Subscription Agreement]
THE Subscribers
|
Horizon Technology Finance Corporation |
|||
| By: | /s/ Robert D. Pomeroy, Jr. | ||
| Name: | Robert D. Pomeroy, Jr. | ||
| Title: | Chief Executive Officer | ||
| Address: | 312 Farmington Avenue | ||
|
Farmington, CT 05032 |
|||
|
Attn: Legal Department |
|||
| Note Principal Amount: | $500,000.00 | ||
[Signature Page to Subscription Agreement]
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated April 17, 2017, with respect to the financial statements included in the Annual Report of Interleukin Genetics, Inc. on Form 10-K for the year ended December 31, 2016. We hereby consent to the incorporation by reference of said report in the Registration Statements of Interleukin Genetics, Inc. on Form S-3 (Nos. 333-163987, 333-83631, 333-53558, 333-56558, 333-101088 and 333-107782) and on Form S-8 (Nos. 333-47343, 333-67147, 333-32538, 333-62638, 333-118551, 333-176270, 333-184946, 333-190627 and 333-208094).
| /s/ Grant Thornton LLP | |
| Boston, Massachusetts | |
| April 17, 2017 |
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF
SARBANES-OXLEY ACT OF 2002
I, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Interleukin Genetics, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: April 17, 2017 | /s/ Mark B. Carbeau |
| Mark B. Carbeau Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF
SARBANES-OXLEY ACT OF 2002
I, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Interleukin Genetics, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: April 17, 2017 | /s/ Stephen J. DiPalma |
| Stephen J. DiPalma | |
| Principal Financial and Accounting Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (A) AND (B) OF SECTION 1350, CHAPTER 63 OF TITLE 18,
UNITED STATES CODE)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18 United States Code), each of the undersigned officers of Interleukin Genetics, Inc., a Delaware corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:
The Annual Report on Form 10-K for the year ended December 31, 2016 (the “Form 10-K”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: April 17, 2017 | /s/ Mark B. Carbeau |
| Mark B. Carbeau | |
| Chief Executive Officer | |
| Date: April 17, 2017 | /s/ Stephen J. DiPalma |
| Stephen J. DiPalma | |
| Interim Chief Financial Officer (Principal Financial and Accounting Officer) |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.