1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2000
Commission File Number: 333-37441
INTERLEUKIN GENETICS, INC.
(Name of Issuer in its Charter)
DELAWARE 94-3123681
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
135 BEAVER STREET, 2ND FLOOR
WALTHAM, MA 02452
(Address of principal executive offices)(Zip Code)
Issuer's Telephone Number: (781) 398-0700
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 ( )
The number of shares outstanding of the issuer's common stock as of October 31,
2000 is 18,487,765.
2
================================================================================
INTERLEUKIN GENETICS, INC.
Form 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets at
September 30, 2000 and December 31, 1999...........................1
Condensed Consolidated Statements of Operations for the
three and six months ended September 30, 2000 and
September 30, 1999.................................................2
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and September 30, 1999........3
Notes to Condensed Consolidated Financial Statements...............4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................7
Item 3. Quantitative and Qualitative Disclosure about Market Risk.........13
PART II. OTHER INFORMATION
Item 2. Changes in Securities.............................................14
Item 4. Submission of Matters to a Vote of Security Holders...............14
Item 5. Other Information.................................................14
Item 6. Exhibits and Reports on Form 8-K..................................14
i
3
PART I
FINANCIAL INFORMATION
INTERLEUKIN GENETICS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
Sept. 30, 2000 December 31, 1999
-------------- -----------------
ASSETS
Cash and cash equivalents $ 274,217 $ 668,616
Marketable securities 3,970,870 1,987,500
Accounts receivable, net of allowance for doubtful accounts of $66,090 at
Sept. 30, 2000 and $55,000 at December 31, 1999 134,692 103,002
Prepaid expenses 232,777 132,560
------------ ------------
Total current assets 4,612,556 2,891,678
Furniture and equipment, net 139,202 284,481
------------ ------------
TOTAL ASSETS $ 4,751,758 $ 3,176,159
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 95,905 $ 134,968
Notes payable -- 1,797
Accrued expenses 503,863 400,281
Deferred revenue 331,624 322,812
Current portion of capitalized lease obligations 54,609 63,877
------------ ------------
Total current liabilities 986,001 923,735
Capitalized lease obligations, net of current portion 56,896 99,246
------------ ------------
Total liabilities 1,042,897 1,022,981
Preferred Stock, $.001 par value
Authorized: 5,000,000 shares
Issued and outstanding: none -- --
Common stock, $.001 par value
Authorized: 50,000,000 shares; Issued and outstanding: 18,481,585
shares at Sept. 30, 2000 and 17,223,302 shares at December 31, 1999 28,385,492 23,177,865
Accumulated deficit (24,678,115) (21,012,188)
Other comprehensive income 1,484 (12,499)
------------ ------------
Total shareholders' equity 3,708,861 2,153,178
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,751,758 $ 3,176,159
============ ============
See accompanying notes to condensed consolidated financial statements.
1
4
INTERLEUKIN GENETICS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999
-------------- -------------- -------------- --------------
Revenues $ 38,141 $ 140,179 $ 206,091 $ 362,252
Cost of revenues 36,423 79,518 156,848 155,635
------------ ------------ ------------ ------------
Gross profit 1,718 60,661 49,243 206,617
Expenses:
Research & development 471,729 1,764,845 1,387,795 2,865,789
Selling, general & administrative 744,466 936,561 2,539,102 2,339,132
------------ ------------ ------------ ------------
Total expenses 1,216,195 2,701,406 3,926,897 5,204,921
------------ ------------ ------------ ------------
Loss from operations (1,214,477) (2,640,745) (3,877,654) (4,998,304)
Other income (expense):
Interest income 80,853 34,944 222,416 79,280
Interest expense (3,957) (9,997) (17,662) (50,544)
Other income 7,326 3,017 6,973 9,974
------------ ------------ ------------ ------------
Total other income (expense) 84,222 27,964 211,727 38,710
------------ ------------ ------------ ------------
NET LOSS $ (1,130,255) $ (2,612,781) $ (3,665,927) $ (4,959,594)
============ ============ ============ ============
Reconciliation of net loss to net
loss applicable to common stock:
Net Loss $ (1,130,255) $ (2,612,781) $ (3,665,927) $ (4,959,594)
Amortization of the value of the
beneficial conversion feature of the
preferred stock -- (3,765,146) -- (5,000,000)
------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (1,130,255) $ (6,377,927) $ (3,665,927) $ (9,959,594)
============ ============ ============ ============
Basic and diluted loss per share $ (0.06) $ (0.60) $ (0.20) $ (1.37)
============ ============ ============ ============
Weighted average common shares outstanding 18,409,643 10,587,245 18,206,780 7,251,550
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
2
5
INTERLEUKIN GENETICS, INC.
AND SUBSIDIARIES
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
Sept. 30, 2000 Sept. 30, 1999
-------------- --------------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $(3,665,927) $(4,959,594)
Adjustments to reconcile net loss to net cash used in
operating activities:
Common stock issued in consideration for services 175,792 1,180,198
Depreciation and amortization 129,410 147,538
Loss on disposal of fixed assets 32,167 --
(Increase) decrease in:
Accounts receivable (31,691) (40,349)
Prepaid expenses (100,216) 16,474
Increase (decrease) in:
Accounts payable (39,063) 8,902
Accrued expenses 103,582 59,973
Deferred revenue 8,812 123,163
----------- -----------
Net cash used in operating activities (3,387,134) (3,463,695)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities (3,930,907) --
Proceeds from maturity of investments 1,961,519 --
Purchases of furniture and equipment (16,297) (7,565)
Decreases (Increases) in other assets -- 530,000
----------- -----------
Net cash (used in) provided by investing activities (1,985,685) 522,435
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from preferred stock issuance -- 4,713,279
Net proceeds from private placement of common stock 4,733,084 --
Net proceeds from option exercises and employee stock purchase plan 298,751 26,494
Principal payments of notes payable (1,797) (42,898)
Principal payments of long-term debt -- (529,288)
Principal payments of capital lease obligations (51,618) (73,609)
Loss on treasury note -- (40,481)
----------- -----------
Net cash provided by financing activities 4,978,420 4,053,497
----------- -----------
Net (decrease) increase in cash and equivalents (394,399) 1,112,237
Cash and equivalents, beginning of period 668,616 2,432,271
----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD $ 274,217 $ 3,544,508
=========== ===========
Cash paid for interest $ 17,662 $ 50,544
NON-CASH ITEMS
Stock issued to placement agent -- $ 500,000
Common stock warrants issued to placement agent -- $ 3,080,000
See accompanying notes to condensed consolidated financial statements.
3
6
NOTE 1 - PRESENTATION OF INTERIM INFORMATION
Interleukin Genetics, Inc., a Delaware corporation (the Company) is a
Functional Genomics company focused on Personalized Medicine. The Company
discovers, develops, and comercializes predictive tests based on genetic
factors that regulate control points in the inflammatory process and, through
collaboration with others, applies genetics in the development of therapeutics.
The Company has a growing portfolio of patents covering the genetics of
cardiovascular diseases, osteoporosis, complications of diabetes, asthma,
Alzheimer's disease, gastric cancer and premature birth. The Company markets
PST(R), a predictive test for periodontal disease.
The accompanying unaudited consolidated financial statements have been prepared
by the Company in accordance with generally accepted accounting standards for
interim financial reporting and with Securities Exchange Commission rules and
regulations for form 10-Q. It is recommended that these interim consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto included in our Annual Report on Form 10-KSB
for the year ended December 31, 1999. The interim financial data are unaudited;
however, in the opinion of management of Interleukin Genetics, Inc. and
subsidiaries, the accompanying unaudited consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to make the interim financial information not misleading. All
significant intercompany transactions and accounts have been eliminated in
consolidation. Results for interim periods are not necessarily indicative of
those to be expected for the full year.
The accompanying financial statements have been prepared on the basis of
accounting principles applicable to a going concern. Since its inception, we
have incurred cumulative net losses of approximately $24.6 million, including
losses of approximately $1.1 million during the third quarter of 2000 and $3.7
million during the nine months ended September 30, 2000. Additionally, for the
nine months ended September 30, 2000, we reported negative cash flows from
operating activities of approximately $3.4 million. During the nine months ended
September 30, 2000, we raised approximately $5.0 million from a common stock
private placement and shareholder stock option exercises. During 1999, we issued
approximately $5 million of preferred stock which generated approximately $4.7
million in net proceeds. As a result of the ongoing operating losses, available
cash resources are limited. We believe our existing cash resources are
sufficient to fund operations, as currently planned, through September 2001. Our
ability to fund operations beyond September 2001 is dependent upon achieving
significant revenue increases from our existing genetic products, developing new
products, successfully marketing these products to customers at profitable
prices, obtaining significant levels of new capital and entering into
collaborations with significant up-front payments. If we are not successful in
these efforts, we would likely be unable to continue operating as a going
concern. To address these future capital resources requirements, management is
currently in discussions with several potential strategic partners regarding the
up-front funding of certain of our research and development programs and with
several potential investors with the objective of raising additional capital.
While we continue to pursue sources of capital and strategic partnerships, there
can be no assurance that we will be successful in these efforts.
Commercial success of genetic susceptibility tests will depend upon their
acceptance as medically useful and cost-effective by patients, physicians,
dentists, other members of the medical and dental community, and third-party
payers. It is uncertain whether current genetic susceptibility tests or others
that we may develop will gain commercial acceptance on a timely basis. Our
ability to successfully commercialize genetic susceptibility tests depends on
obtaining adequate reimbursement for such products and related treatment from
government and private health care insurers and other third-party payers.
Doctors' decisions to recommend genetic susceptibility tests will be influenced
by the scope and reimbursement for such tests by third-party payers. If both
third-party payers and individuals are unwilling to pay for the test, then the
number of tests performed will significantly decrease.
Research in the field of disease predisposing genes and genetic markers is
intense and highly competitive. We have many competitors in the United States
and abroad which have considerably greater financial, technical, marketing, and
other resources available. If we do not discover disease predisposing genes or
genetic markers and develop
4
7
susceptibility tests and launch such services or products before our
competitors, then revenues may be reduced or eliminated.
In July 1999, we entered into an agreement with Sheffield University, whereby we
will undertake the development and commercialization of certain discoveries
resulting from Sheffield University's research. The agreement is non-cancelable
for discoveries on which the parties have reached a specific agreement, but may
be terminated with or without cause by either party upon six-months notice with
respect to new discoveries on which the parties have not yet reached agreement.
If Sheffield University terminates the agreement, such termination could make
the discovery and commercial introduction of new products more difficult or
unlikely.
In September 1999, we entered into a five-year Consulting Agreement with the
University's key collaborator. In accordance with the Consulting Agreement, the
key collaborator received 200,000 shares of our common stock for past research
services, the value of which was expensed in the third quarter of 1999. The key
collaborator will also receive one percent of the first $4 million of net sales
under the PST Technology and two percent for sales above $4 million. Payments
are required 45 days after each quarter end. In July, 2000, in consideration of
future services, the key collaborator received 25,000 options to purchase our
common stock at the current market price. These options have a five-year
exercise period from the date of grant.
NOTE 2 - REVENUE RECOGNITION
Revenue from genetic susceptibility tests is recognized when the tests have been
completed and the results reported to the doctors, provided that the amount is
deemed to be collectable. To the extent test kits have been purchased but not
yet submitted for test results, revenue recognition is deferred. This amount is
presented as deferred revenue in the accompanying balance sheets. Contract
revenues are recognized ratably as services are provided based on a fixed
contract price or on negotiated hourly rates. In accordance with Staff
Accounting Bulletin No. 101, up-front non-refundable license fees are deferred
and recognized ratably over the license term. Provision for anticipated losses
on fixed-price contracts is made in the period such losses are identified.
NOTE 3 - USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reported
periods. Actual results could differ from those estimates.
5
8
NOTE 4 - EARNINGS PER SHARE
Statement of Financial Accounting Standards (SFAS) No. 128 (SFAS 128), "Earnings
per Share," outlines methods for computing and presenting earnings per share.
SFAS 128 requires a calculation of basic and diluted earnings per shares for all
periods presented. As we had losses for the three and nine months ended
September 30, 2000 and 1999, options and warrants have been excluded from the
calculation of the dilutive weighted average shares outstanding as they are
antidilutive in loss periods. The calculation of diluted net loss per share
excludes 1,895,399 and 1,277,786 stock options outstanding and 1,356,545 and
1,536,545 warrants to purchase common stock outstanding at September 30, 2000
and September 30, 1999, respectively.
NOTE 3 - EQUITY
Pursuant to a private placement which occurred in January 2000, we issued
832,667 shares of our Common Stock, no par value, for $5 million. After payment
of offering costs, net proceeds from this private placement amounted to $4.7
million.
NOTE 4 - SEGMENT INFORMATION
We have adopted SFAS No. 131 (SFAS 131), "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for
reporting information about operating segments in annual and interim financial
statements, requiring that public business enterprises report financial and
descriptive information about its reportable segments based on a management
approach. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas and major customers. In applying the
requirements of this statement, each of the geographic areas described below was
determined to be an operating segment as defined by the statement, but have been
aggregated as allowed by the statement for reporting purposes. As a result, we
continue to have one reportable segment, which is the development of genetic
susceptibility tests and therapeutic targets for common diseases.
All of the assets of the company are located within the United States. The
following table presents information about the Company by geographic area.
For the Nine Months Ended Sept. 30,
2000 1999
----------- -----------
Total Revenues: (unaudited) (unaudited)
United States $ 206,091 $ 284,384
France 27,982
Other foreign 49,886
----------- -----------
Total $ 206,091 $ 362,252
=========== ===========
Operating Loss:
United States $(3,877,654) $(3,948,660)
France -- (399,864)
Other foreign -- (649,780)
----------- -----------
Total $(3,877,654) $(4,998,304)
=========== ===========
6
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this Form 10-Q are "forward-looking statements"
within the meaning of the Section 27A of the Securities Act and Section 21E of
the Exchange Act. Specifically, all statements other than statements of
historical fact included in this Form 10-Q regarding our financial position,
business strategy and plans and objectives of management for future operations
are forward-looking statements. These forward-looking statements are based on
the beliefs of our management, as well as assumptions made by and information
currently available to management. When used in this report, the words
"anticipate," "believe," "estimate," "expect" and "intend" and words or phrases
of similar import, as they relate to the Company or its subsidiaries or Company
management, are intended to identify forward-looking statements. Such statements
reflect our current view with respect to future events and are subject to
certain risks, uncertainties and assumptions related to certain factors
including, without limitation, risks inherent to developing genetic tests once
genes have been discovered, our limited sales and marketing experience, risk of
market acceptance of our products, risk of technology and products obsolescence,
delays in development of products, reliance on partners, risks related to
third-party reimbursement, risks regarding government regulation, competitive
risks and those risks and uncertainties described in our Registration Statement
on Form S-3 filed July 23, 1999 (File No. 333-83631), as amended on July 25,
1999, and in other filings made by us with the Securities and Exchange
Commission (collectively, "cautionary statements"). Although we believe that our
expectations are reasonable, we can give no assurance that such expectations
will prove to be correct. Based upon changing conditions, should any one or more
of these risks or uncertainties materialize, or should any underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected, or intended. All
subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
applicable cautionary statements. We do not intend to update these
forward-looking statements.
The following comments should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this Quarterly
Report on Form 10-Q, as well as our consolidated financial statements and
related notes included in our Annual Report on Form 10-K filed with the
Securities and Exchange Commission on April 14, 2000.
GENERAL OVERVIEW
Interleukin Genetics, Inc., a Delaware corporation ("ILGN" or the "Company"),
develops and commercializes genetic diagnostic tests and medical research tools.
Our efforts are focused on genetic factors that regulate control points in the
inflammatory process of various diseases . Our first genetic test, PST(R), a
test predictive of risk for periodontal disease, is currently marketed in the
United States, Europe and Israel. Products under development include tests
predictive of risk for osteoporosis, coronary artery disease, diabetic
retinopathy, asthma, pulmonary fibrosis, and meningitis/sepsis.
7
10
We believe by combining genetic risk assessment with specific therapeutic
strategies, improved clinical outcomes and more cost-effective management of
these common diseases are achieved. We also develop and license our medical
research tools, including BioFusion(R), to pharmaceutical and biotech companies.
BioFusion, a proprietary enabling system for diagnostic and drug discovery and
development, is a computer modeling system that integrates genetic and other
sub-cellular behavior, system functions, and clinical symptoms to simulate
complex diseases. This system allows useful information to be derived from
rapidly increasing databases of gene expression being generated in companies and
academic centers worldwide.
Pursuant to a private placement which occurred in January 2000, we issued
832,667 shares of our common stock, par value $.001, for $5 million. After
payment of offering costs, net proceeds amounted to $4.7 million. Additionally,
we are in discussions with a number of potential strategic partners and, if such
discussions are successfully completed, we believe this will result in the
up-front funding of some of our programs. There can be no assurance that any of
these discussions will be completed, or if such discussions are completed, that
there will be up-front funding of our programs.
We have followed a strategy of working with strategic partners at the
fundamental discovery stage. This strategy has given us access to discoveries
while reducing up-front research expenses. Since 1994, we have had a strategic
alliance with the Department of Molecular and Genetic Medicine at Sheffield
University in the United Kingdom (Sheffield). Under this alliance, Sheffield has
provided us with the fundamental discovery and genetic analysis from Sheffield's
research laboratories, and we have focused on product development, including
clinical trials, and the commercialization of these discoveries.
During the third quarter of 1999, we entered into a new arrangement with
Sheffield. This new arrangement replaced the research and development agreement
that had been in place with Sheffield since 1996. Pursuant to the new
arrangement, we issued an aggregate of 475,000 shares of our common stock to
Sheffield and certain of its investigators in exchange for the relinquishment by
Sheffield of its net proceeds interests under certain agreements with us.
In August 2000, we entered into an agreement with Kenna Technologies, Inc.
whereby we granted Kenna a perpetual, non-exclusive license to certain disease
information system technology and to certain biological modeling technology. In
consideration for these license rights, Kenna paid us a non-refundable initial
licensing fee of $80,000 and has agreed to pay royalties ranging from 4% to 5%
of net sales from certain of the licensed technology, as defined, for periods
ranging from five to ten years. We are recognizing the initial licensing fee of
$80,000 ratably over the term of the agreement.
In June 2000, we terminated our arrangement with Dumex under which Dumex had
agreed to market and sell PST in nine European countries. We are currently in
discussions to enter into a similar marketing arrangement for PST with another
European distributor of oral health care products. However, there can be no
assurance that we will be able to reach a marketing arrangement for PST in
Europe.
In March 1999, we entered into an exclusive agreement with the Straumann
Company, a leading supplier of dental implants, to market and sell PST in the
United States and Puerto Rico. Straumann launched its PST promotional activities
in April 1999. In September 2000, we amended the Straumann agreement to be
non-exclusive and entered into an agreement with Kimball Genetics, Inc., who has
expertise in the processing and analysis of genetic tests and their results.
Under the terms of this
8
11
agreement, Kimball has a co-marketing right with Straumann and will process and
analyze all PST tests in the United States and Puerto Rico.
In December 1998, we signed an agreement with Washington Dental Service, a
member of the Delta Dental Plans Association, for the purchase of 1,200 PST
tests. The tests will be used in a study, sponsored by Washington Dental
Service, in collaboration with the University of Washington School of Dentistry
and Interleukin Genetics. This study is expected to provide scientific and
financial data regarding the use of PST as a treatment-planning tool to assess
risk before actual damage occurs. The data from the study may be available for
analysis in early 2001.
In December 1997, we entered into an agreement with Medicadent, a French
corporation ("Medicadent"), to market and sell PST in France. In August 1998, we
entered into an agreement with H.A. Systems, Ltd. to market and sell PST in
Israel. Medicadent commenced offering PST in France in June 1998, and H.A.
Systems commenced offering PST in Israel in April 1999. No assurances can be
made regarding the commercial acceptance of PST.
We have been awarded five U.S. patents, and have fifteen U.S. patent
applications pending. The U.S. Patent & Trademark Office awarded patents to us
for our osteoporosis, asthma and periodontal disease susceptibility tests and
two patent awards for our biologic modeling technology called BioFusion(R).
BioFusion is used by us in the discovery, development and commercialization
process. Our disease susceptibility patents seek to protect the use of its
various genetic markers as an indicator of risk for the specific disease
covered, as well as protecting various therapeutic applications which these
markers may have.
We have been granted a number of corresponding foreign patents and have filed
foreign counterparts of our U.S. applications. Where we have originally filed in
another country, we have filed and plan to continue to file U.S. and other
foreign counterparts.
CURRENT FINANCIAL CONDITION
Since our inception, we have incurred cumulative net losses of $24.6 million
including losses of approximately $1.1 million during the third quarter of 2000
and $3.7 million for the nine months ended September 30, 2000. As a result of
these losses, available cash resources are limited and will be depleted in
September 2001 absent additional debt or equity funding or a strategic alliance
which provides operating capital. Our ability to continue as a going concern is
dependent on achieving significant revenue increases from our existing genetic
products, developing new products, successfully marketing our products to
customers at profitable prices and obtaining significant levels of new capital.
If we are not successful in these efforts, we would likely be unable to continue
operating as a going concern.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2000 TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue for the three months ended September 30, 2000 was $38,141 compared to
$140,179 for the three months ended September 30, 1999, a decrease of 73%. In
June 1999, we received an up-front payment of $150,000 from Dumex-Alpharma A/S
for the rights to distribute our genetic susceptibility test for periodontal
disease, PST(R), in nine European countries. We recognized $50,000 of this
payment as revenue during the
9
12
three months ended June 30, 1999 to offset direct expenses associated with the
agreement. There has been no revenue recognized from this source during 2000. In
the three months ended September 30, 2000, we conducted 323 PST tests compared
to 429 tests in the same period in 1999. The reduction in the number of tests
reflects the termination of the Dumex Agreement in June 2000 and a lower volume
of tests sold by Straumann. For the three months ended September 30, 1999 Dumex
accounted for 49 tests and Straumann for 293 as compared to 7 tests and 234
tests respectively for the same period in 2000. We expect Revenue to continue to
decline in future quarters as we reduce the end-user selling price from $210 to
approximately $120 and as we change our revenue base from end-user sales to
royalties.
Cost of revenues was $36,423 for the three months ended September 30, 2000
compared to $79,518 for the same period of 1999. Gross profit was 5% for the
three months ended September 30, 2000 compared to 43% for the same period of
1999. The decrease in gross profit is primarily caused by the decreased
distribution fees discussed above and increased lab charges.
For the three months ended September 30, 2000, we had research and development
expenses of $471,729 as compared to $1,764,845 for the third quarter of 1999.
During the third quarter of 2000, we incurred $35,825 in expense for clinical
trials as compared to $129,260 in 1999. Research and Development expenses for
the three months ended September 30, 1999 also included $1,128,125 in non-cash
expense for the market value of 475,000 shares of common stock issued to
Sheffield University and a consultant for research and development services. The
reduction in expenses for the three months ended September 30, 2000 reflects
temporary lower salary expenses associated with the relocation of the company
from Texas to Massachusetts. We expect research and development expenses to
increase in future quarters as we resume our clinical studies.
Selling, general and administrative expenses were $744,466 in the third quarter
of 2000 compared to $936,561 in the third quarter of 1999, a decrease of 21%.
The reduction reflects lower consulting fees and reduced marketing and selling
infrastructure as we reorganized the PST business.
Interest income for the third quarter of 2000 was $80,854 compared to $34,944 in
the third quarter of 1999. This increase reflects higher balances of cash in the
third quarter of 2000 compared to the comparable period in 1999. Interest
expense was $3,957 for the quarter ended September 30, 2000, compared to $9,997
in the same period in 1999.
Net loss was $1,130,254 or $.06 cents per share for the third quarter of 2000
compared to a net loss of $2,612,781 or $.25 cents per share for the third
quarter of 1999, a decrease of $1,482,527.
We anticipate that we will continue to experience losses unless our genetic
testing revenues grow substantially from current levels and our efforts to
develop revenue from licensing its biologic modeling research tools are
successful. In addition, if we are successful in reaching agreements with
strategic partners on developing additional genetic tests, milestone payments,
if any, from these strategic partners will help cover our research and
development expense and could also reduce the net loss. No assurances can be
made that we will be able to increase our revenues, either from genetic tests or
licensing revenue, or that we will be able to reach collaborative partnering
agreements.
10
13
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue for the nine months ended September 30, 2000 was $206,091 compared to
$362,252 for the same period ended September 30, 1999, a decrease of 43%. In
June 1999, we received an up-front payment of $150,000 from Dumex-Alpharma A/S
for the rights to distribute our genetic susceptibility test for periodontal
disease, PST(R), in nine European countries. We recognized $85,000 of this
payment as revenue during the nine months ended September 30, 1999. There has
been no revenue recognized from this source during 2000. In the nine months
ended September 30, 2000, we conducted 1,309 PST tests compared to 1,343 tests
in the same period in 1999.
Cost of revenues was $156,848 for the nine months ended September 30, 2000
compared to $155,635 for the same period of 1999. Gross profit was 24% for the
nine months ended June 30, 2000 compared to 57% for the same period of 1999. The
decrease in gross profit margin was a result of the decrease in distributor fee
revenue during the nine months ended September 30, 2000.
For the nine months ended September 30, 2000, we had research and development
expenses of $1,387,795 as compared to $2,865,789 for the first nine months of
1999. The 1999 expense included $486,911 for conducting several large clinical
trials, compared to $116,243 in expense for clinical trials in the first nine
months of 2000. Research and Development expenses for the nine months ended
September 30, 1999 also included a non-cash charge of $1,128,125 as compared to
$175,792 in the nine months ended September 30, 2000 for the cost of stock
issued for services rendered. We expect research and development expenses to
increase in future periods as we increase the number of clinical studies.
Selling, general and administrative expenses were $2,539,102 for the first nine
months of 2000 compared to $2,339,132 for the first nine months of 1999, an
increase of 9%. The increase in General and Administrative expenses for the nine
months ended September 30, 2000 reflects a non-recurring charge of $198,965
associated with the company's relocation to Waltham, MA.
Interest income in the first nine months of 2000 was $222,416 compared to
$79,280 in the first nine months of 1999. This increase reflects higher balances
of cash in the first nine months of 2000 compared to the same period in 1999.
Interest expense of $17,662 was incurred during the nine months ended September
30, 2000, compared to $50,544 in the same period in 1999.
Net loss was $3,665,927 or $.20 cents per share for the first nine months of
2000 compared to a net loss of $4,959,594 or $.68 cents per share for the first
nine months of 1999, an increase of $1,293,668, due to the reasons set forth
above.
We anticipate that we will continue to experience losses unless our genetic
testing revenues grow substantially from current levels and our efforts to
develop revenue from licensing its biologic modeling research tools are
successful. In addition, if we are successful in reaching agreements with
strategic partners on developing additional genetic tests, milestone payments,
if any, from these strategic partners will help cover our research and
development expense and could also reduce the net loss. No assurances can be
made that we will be able to increase our revenues, either from genetic tests or
licensing revenue, or that we will be able to reach collaborative partnering
agreements.
11
14
LIQUIDITY AND CAPITAL RESOURCES
To date, we have funded our operations principally through public and private
sales of equity securities and, to a lesser extent, through capital lease
financing. Pursuant to a $5 million private placement in January 2000, we issued
832,667 shares of our common stock, no par value, which generated net proceeds
of approximately $4.7 million. Additionally, during the nine months ended
September 30, 2000, we generated proceeds of approximately $300,000 from the
exercise of employee stock options and purchases of common stock under our
employee stock purchase plan. During 1999, we raised approximately $4.7 million
from a preferred stock offering.
Since inception, we have incurred cumulative net losses of approximately $24.6
million, including losses of approximately $3.7 million during the nine months
ended September 30, 2000. Net cash used in operating activities was $3.4 million
during the nine months ended September 30, 2000 and $3.5 million during the same
period of the prior fiscal year. As of September 30, 2000, we had cash, cash
equivalents and marketable securities of $4.2 million.
We currently do not have any commitments for material capital expenditures. The
obligation at September 30, 2000 for capital lease obligations totaled $112,000,
of which $57,000 is classified as long-term and $55,000 is classified as
current. In July, 2000, we relocated our corporate headquarters from San
Antonio, Texas, to Waltham, Massachusetts.
We anticipate that our existing cash and cash equivalents, together with
anticipated interest income and revenue, will be sufficient to conduct
operations as planned until September 30, 2001. However, our future capital
requirements are anticipated to be substantial, and we do not have commitments
for additional capital at this time. Such capital requirements are expected to
arise from the commercial launch of additional genetic tests, continued
marketing and sales efforts for PST, continued research and development efforts,
the protection of the our intellectual property rights (including preparing and
filing of patent applications), as well as operational, administrative, legal
and accounting expenses. THERE CAN BE NO ASSURANCE THAT WE WILL BE ABLE TO RAISE
ANY ADDITIONAL NECESSARY CAPITAL. IF ADDITIONAL AMOUNTS CANNOT BE RAISED AND WE
ARE UNABLE TO SUBSTANTIALLY REDUCE OUR EXPENSES, WE WOULD SUFFER MATERIAL
ADVERSE CONSEQUENCES TO OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND WOULD LIKELY BE REQUIRED TO SEEK OTHER ALTERNATIVES UP TO AND
INCLUDING PROTECTION UNDER THE UNITED STATES BANKRUPTCY LAWS. SEE Note 1 of the
Financial Statements included herein.
Our common stock is currently listed on the NASDAQ SmallCap Market and the
Boston Stock Exchange. If we fail to maintain the qualification for our common
stock to trade on the NASDAQ SmallCap Market or the Boston Stock Exchange, our
common Stock could be subject to delisting. During 1999, we received several
notices from The Nasdaq Stock Market, Inc. ("NASDAQ") stating that the Company
was not in compliance with certain of the continued listing requirements of the
NASDAQ SmallCap Market. We believe that we currently comply with the continued
listing requirements of the NASDAQ SmallCap Market. However, there can be no
assurance that we will maintain the qualifications for continued listing on the
NASDAQ SmallCap Market.
If our shares are not listed on the NASDAQ SmallCap Market as intended, trading,
if any, would be conducted in the over-the-counter market in the so-called "pink
sheets" or
12
15
the OTC Bulletin Board, which was established for securities that do not meet
the NASDAQ SmallCap Market's listing requirements. Consequently, selling our
common stock would be more difficult because smaller quantities of shares could
be bought and sold, transactions could be delayed, and security analysts' and
news media's coverage of the Company may be reduced. These factors could result
in lower prices and larger spreads in the bid and ask prices for shares of
common stock. Such NASDAQ delisting would also greatly impair our ability to
raise additional necessary capital through equity or debt financing.
If our common stock is not listed on the NASDAQ SmallCap Market and/or the
Boston Stock Exchange, we may become subject to Rule 15g-9 under the Exchange
Act. That rule imposes additional sales practice requirements on broker-dealers
that sell low-priced securities to persons other than established customers and
institutional accredited investors. For transactions covered by this rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, the rule may affect the ability of broker-dealers to sell
the common stock and affect the ability of holders to sell their shares of our
common stock in the secondary market.
The SEC's regulations define a "penny stock" to be any equity security that has
a market price less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. The penny stock restrictions
will not apply to our shares if they are listed on the NASDAQ SmallCap Market or
the Boston Stock Exchange and we provide certain price and volume information on
a current and continuing basis, or meet required minimum net tangible assets or
average revenue criteria. There can be no assurance that the shares of common
stock of the Company will qualify for exemption from these restrictions. If such
shares were subject to the penny stock rules, the market liquidity for the
shares could be adversely affected.
Historically, our common stock has experienced low trading volumes. The market
price of our common stock also has been highly volatile and it may continue to
be highly volatile as has been the case with the securities of other public
biotechnology companies. Factors such as announcements by us or by our
competitors concerning technological innovations, new commercial products or
procedures, proposed government regulations and developments or disputes
relating to patents or proprietary rights may substantially affect the market
price of our securities. Changes in the market price of our common stock may
bear no relation to our actual operational or financial results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We maintain an investment portfolio consisting of securities of U.S. Treasury
Notes. The securities held in our investment portfolio are subject to interest
rate risk. Changes in interest rates affect the fair market value of these
securities. After a review of our marketable securities as of September 30,
2000, we have determined that in the event of a hypothetical 100 basis point
increase in interest rates, the resulting decrease in fair market value of our
marketable securities would be insignificant to the financial statements as a
whole.
13
16
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable
(b) Not applicable
(c) On July 1, 2000, the Company issued an option to purchase 35,000
shares of common stock, $.001 par value (the "Sheffield Option"), at a per share
exercise price of $4.4721 to the University of Sheffield, U.K. ("Sheffield") and
an option to purchase 25,000 shares of common stock, $.001 par value (the "Duff
Option"), at a per share exercise price of $4.4721 to Sheffield's key
investigator, Dr. Gordon Duff ("Duff"). The Sheffield Option was issued pursuant
to the Company's collaborative arrangement with Sheffield, and the Duff Option
was issued pursuant to a consulting agreement between the Company and Duff.
Under the terms of the arrangement with Sheffield, the Company is obligated to
grant to Sheffield on each July 1 (with the first options granted on July 1,
2000) during the term of the arrangement options to purchase 25,000 shares of
common stock of the Company and options to purchase an additional 10,000 shares
of common stock of the Company for each patent application filed during the
preceding 12 months. Under the terms of the consulting agreement with Duff, the
Company is obligated to grant to Duff on each July 1 (with the first options
granted on July 1, 2000) during the term of the agreement options to purchase
25,000 shares of common stock of the Company. The Sheffield Option and the Duff
Option are exercisable for a period of five years from the date of grant. The
Sheffield Option and the Duff Option were not registered under the Securities
Act of 1933, as amended (the "Securities Act"), pursuant to Section 4(2) of the
Securities Act and Regulation D promulgated thereunder, and pursuant to Rule 903
and Rule 904 of Regulation S. The Company relied on certain representations and
warranties of Sheffield and Duff, including, among other things, their ability
to evaluate the merits and risks of an investment in the Company's securities,
their status as "accredited investors" (as that term is defined in Rule 501(a)
of Regulation D), that their residence, domicile and/or principal corporate
office is Sheffield, England and that the securities were acquired solely for
their own account for investment and not with a view to distribution.
(d) Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Effective July 14, 2000, (the "Effective Date"), the Company changed its state
of incorporation from Texas to Delaware. This change in its state of
incorporation was approved by the holders of a majority of the Company's
outstanding shares of Common Stock at the Company's annual meeting of
shareholders on June 5, 2000. At the time of reincorporation in the State of
Delaware, the Company merged into and is continuing its business as a Delaware
corporation. The reincorporation will not result in any change in the Company's
business, assets or liabilities. Shareholders of the Company are not required to
undertake an exchange of the Company's shares. As of the Effective Date,
certificates for the Company's shares automatically represent an equal number of
shares in the Delaware company.
In addition, the Company relocated its corporate headquarters from San Antonio,
Texas to Waltham, Massachusetts. The address of the Company's new corporate
headquarters is 135 Beaver Street, 2nd Floor, Waltham, Massachusetts 02452.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27* Financial Data Schedule
--------------
*(filed herewith)
(b) Reports on Form 8-K
None
14
17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTERLEUKIN GENETICS, INC.
Date: November 14, 2000 By: /s/ Philip R. Reilly
------------------------------------
Philip R. Reilly
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Fenel M. Eloi
------------------------------------
Fenel M. Eloi
Chief Financial Officer,
Secretary & Treasurer
(Principal Financial and Accounting
Officer)
15