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: MARCH 31, 2001
Commission File Number: 0-23413
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
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 ( )
Title of Each Class Outstanding at April 30, 2001
------------------- -----------------------------
Common stock, $.001 Par value 21,395,773
2
INTERLEUKIN GENETICS, INC.
Form 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1.
Condensed Consolidated Balance Sheets at
March 31, 2001 and December 31, 2000 ..................................... 1
Condensed Consolidated Statements of Operations for the three months ended
March 31, 2001 and March 31, 2000 ........................................ 2
Condensed Consolidated Statements of Cash Flows For the three months ended
March 31, 2001 and March 31, 2000 ........................................ 3
Notes to Condensed Consolidated Financial Statements ..................... 4
Item 2.
Management's Discussion and Analysis of Financial Condition
And Results of Operations ................................................ 8
Item 3.
Quantitative and Qualitative Disclosure about Market Risk ................ 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................................... 12
Item 2. Changes in Securities and Use of Proceeds ............................. 12
Item 3. Default Upon Senior Securities ........................................ 12
Item 4. Submission of Matters to a Vote of Security Holders ................... 13
Item 5. Other Information ..................................................... 13
Item 6. Exhibits and Reports on Form 8-K ...................................... 13
2
3
INTERLEUKIN GENETICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
As of
March 31, 2001 December 31, 2000
----------------------------------
Current assets:
Cash and cash equivalents $ 4,971,532 $ 2,391,561
Marketable securities 2,006,260 2,999,040
Accounts receivable, net of allowance for doubtful accounts 25,010 46,870
of $59,000 and $77,000 at March 31, 2001 and December
31, 2000, respectively
Prepaid expenses and other current assets 148,017 174,074
------------------------------
Total current assets 7,150,819 5,611,545
Fixed assets, net 71,616 68,853
Other assets 14,477 14,113
------------------------------
Total Assets $ 7,236,912 $ 5,694,511
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 72,121 $ 297,178
Accrued expenses 607,329 603,072
Deferred revenue 188,758 204,807
Current portion of capital lease obligations 24,915 48,660
------------------------------
Total current liabilities 893,123 1,153,717
Capital lease obligations, less current portion 39,211 46,989
------------------------------
Total liabilities 932,334 1,200,706
------------------------------
Stockholders' equity:
Preferred stock, no par value - 5,000,000 shares
authorized; none issued or outstanding -- --
Common stock, $0.001 par value - 50,000,000 shares
authorized; 20,525,156 and 19,067,427 shares issued
and 20,500,529 and 19,042,800 outstanding at March 31,
2001 and December 30, 2000, respectively 20,525 19,067
Treasury stock - 24,627 shares at cost (250,119) (250,119)
Additional paid-in capital 38,658,968 35,702,628
Accumulated deficit (32,131,058) (30,991,015)
Other comprehensive income 6,262 13,244
------------------------------
Total stockholders' equity 6,304,578 4,493,805
------------------------------
Total liabilities and stockholders' equity $ 7,236,912 $ 5,694,511
==============================
The accompanying notes are an integral part of these consolidated financial
statements
4
INTERLEUKIN GENETICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31,
------------------------------------
2001 2000
------------------------------------
(Unaudited)
Revenue $ 40,291 $ 85,830
Cost of revenue 15,100 64,068
------------------------------
Gross profit 25,191 21,762
------------------------------
Expenses:
Research and development 713,674 558,496
Selling, general and administrative 555,898 742,907
------------------------------
Total operating expenses 1,269,572 1,301,403
------------------------------
Loss from operations (1,244,381) (1,279,641)
------------------------------
Other income (expense):
Interest income 108,002 40,336
Interest expense (3,098) (7,359)
Other income (expense) (566) 628
------------------------------
Total other income 104,338 33,605
------------------------------
Net loss $ (1,140,043) $ (1,246,036)
===============================
Basic and diluted net loss per share $ (0.06) $ (0.07)
===============================
Weighted average common shares outstanding 20,079,407 17,889,045
===============================
The accompanying notes are an integral part of these consolidated financial
statements
5
INTERLEUKIN GENETICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
For the three months ended March 31,
2001 2000
------------------------------------
(Unaudited)
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $(1,140,043) $(1,246,036)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 10,512 43,039
Change in value of stock options issued as compensation for services rendered (5,638) 241,566
Unrealized loss on securities (6,982)
Changes in assets and liabilities:
Account receivable, net 21,860 16,439
Prepaid expenses and other current assets 26,057 11,488
Accounts payable (225,057) (28,141)
Accrued expenses 4,257 (210)
Deferred revenue (16,048) (4,138)
---------------------------
Net cash used in operating activities (1,331,082) (965,993)
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets (13,275) --
Increase in other assets (364) --
Proceeds from maturity of investments 992,780 --
---------------------------
Net cash provided by investing activities 979,141 --
---------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Net proceeds from sales of common stock, net 2,963,436 4,922,971
Principal payments of capitalized lease obligations, net (31,524) (19,884)
---------------------------
Net cash provided by (used in) financing activities 2,931,912 4,903,087
---------------------------
Net increase (decrease) in cash and equivalents 2,579,971 3,937,094
Cash and cash equivalents, beginning of period 2,391,561 668,616
---------------------------
Cash and cash equivalents, end of period $ 4,971,532 $ 4,605,710
===========================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 3,098 $ 7,359
===========================
Cash paid for income taxes $ -- $ --
===========================
The accompanying notes are an integral part of these consolidated financial
statements
6
Note 1 - Presentation of Interim Information
Interleukin Genetics, Inc., a Delaware corporation ("ILGN" or the "Company") is
a Pharmacogenetics company focused on personalized medicine. We believe that by
identifying individuals at risk for certain diseases and combining it with
specific therapeutic interventions better healthcare decisions can be made
reducing costs and greatly improving patient health outcomes. We have a growing
portfolio of patents covering the genetics of many common diseases and
conditions, including cardiovascular diseases, osteoporosis, complications of
diabetes, restenosis, and periodontal disease.
We have prepared the accompanying unaudited consolidated financial statements 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 in
our Annual Report on Form 10-K for the year ended December 31, 2000. The interim
financial data are unaudited; however, in the opinion of our management 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 our inception, we
have incurred cumulative net losses of approximately $32.1 million, including
net losses of approximately $1.1 milling during the three months ended March 31,
2001. For the three months ended March 31, 2001, we are reporting negative cash
flows from operating activities of approximately $1.3 million.
During the three months ended March 31, 2001, we raised approximately $3.0
million from a common stock private placement. During 2000, we raised
approximately $6.7 million from two common stock private placements. We believe
that our current cash resources are more than adequate to fund operations
throughout the year 2001, however, without additional financing, we also believe
that these resources will be depleted by July 2002. We are currently pursuing
sources of capital and strategic partnerships in order to raise the capital
necessary to continue operations past July 2002. WE CAN GIVE NO ASSURANCE THAT
WE WILL BE ABLE TO RAISE ANY ADDITIONAL CAPITAL. IF ADDITIONAL AMOUNTS CANNOT BE
RAISED, WE WOULD SUFFER MATERIAL ADVERSE CONSEQUENCES TO OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AND WOULD LIKELY BE REQUIRED TO SEEK
PROTECTION UNDER THE UNITED STATES BANKRUPTCY LAWS.
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. We are not certain whether we will be successful in developing and
bringing to market our current or future tests based on the genetic discoveries
made by us and our collaborators.
Research in the field of disease predisposing genes and genetic markers is
intense and highly competitive. We have many competitors in the United States
4
7
and abroad that have considerably greater financial, technical, marketing, and
other resources available. If we do not discover disease predisposing genes or
genetic markers and develop susceptibility tests and launch such services or
products before our competitors, then revenues may be reduced or eliminated.
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, therefore resulting in a
reduction of revenues.
In July 1999, we entered into an agreement with Sheffield University
("Sheffield"), whereby we will undertake the development and commercialization
of certain discoveries resulting from Sheffield's research. We also entered into
a research and development services agreement with Sheffield that automatically
renews in one-year increments. 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
terminated 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
Professor Gordon Duff, Sheffield's key collaborator. In accordance with the
Consulting Agreement, Professor Duff received 200,000 shares of our common stock
for relinquishing interests in previous research agreements, the value of which
was $475,000 and was expensed in the third quarter of 1999. Dr. Duff 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. In July 2000 in
consideration of future services, Dr. Duff 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. Dr. Duff also received payments for his
ongoing consulting with us of approximately $22,500 for the three months ended
March 31, 2001 and approximately $93,000 for the year ended December 31, 2000.
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 collectible. To the extent test kits have been purchased but not
yet submitted for test results, revenue recognition is deferred. The 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 losses are identified.
5
8
The Company has entered into agreements for the distribution of genetic
susceptibility tests, both domestically and internationally. Distributor fees
are received based on the terms of each agreement and are recognized ratably
over the applicable agreement period. Distributor fees received in advance
totaled $70,000 and $74,000 at March 31, 2001 and December 30, 2000,
respectively.
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.
Note 4 - Basic and Diluted Net Loss per Common 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. We had losses for the three months ended March 31, 2001 and
2000 and accordingly, 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 1,877,943 and 1,420,916 stock options outstanding and 2,220,952 and
1,481,545 warrants to purchase common stock outstanding at March 31, 2001 and
March 31, 2000, respectively.
Note 5 - Equity
In January 2001, we sold in a private placement 1.2 million shares of Common
Stock for $2.50 per share. The purchasers of the common stock also received
warrants to purchase 600,000 shares of Common Stock exercisable at $3.00 per
share. We generated net proceeds of approximately $3.0 million from this
transaction.
In December 2000, we sold in a private placement 542,373 shares of Common Stock
for $3.69 per share. The purchasers of the Common Stock also received warrants
to purchase 135,593 shares of Common Stock exercisable at $4.83 per share. We
generated net proceeds of approximately $2.0 million from this transaction.
Under the terms of this private placement we were required to adjust downward
the price per share paid in the offering, by issuing additional shares, to match
any lower price per share paid in subsequent offerings during the following 24
months. Following the January 2001 offering, described above, we issued an
additional 257,627 shares of common stock to the purchasers in the December 2000
offering, and new warrants to purchase 264,407 shares of Common Stock
exercisable at a price of $3.13 per share to replace the previously issued
warrants to purchase 135,593 shares of Common Stock at a price of $4.83
Note 6 - 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
6
9
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 Company's geographic areas
described below were 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, the Company continues to have one reportable segment,
which is the development of genetic susceptibility tests and therapeutic targets
for common diseases.
During 2000, we closed our foreign operations. Therefore, we no longer have any
assets outside of the United States. Since March 31, 2000 substantially all of
the assets of the Company have been located in the United States.
The following table presents information about the Company by geographic area.
For the Three Months Ended March 31,
2001 2000
------------------------------------
Total Revenue:
United States $ 40,291 $ 74,602
France -- 4,983
Other foreign -- 6,245
----------- -----------
Total $ 40,291 $ 85,830
=========== ===========
Operating loss:
United States $(1,244,381) $(1,113,288)
France -- (76,778)
Other foreign -- (89,575)
----------- -----------
Total $(1,244,381) $(1,279,641)
=========== ===========
7
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
This report and the documents incorporated by reference contain certain
forward-looking statements including all statements concerning our expectations
of future sales, gross profits, research and development expenses, selling,
general and administrative expenses, genomics, product introductions and cash
requirements. Forward-looking statements often, although not always include
words or phrases such as "will likely result", "expect", "will continue",
"anticipate", "estimate", "intend", "plan", "project", "outlook", or similar
expressions. Actual results may vary materially from those expressed in forward
looking statements. Factors that could cause actual results to differ from
expectations include but are not limited to; risks related to market acceptance
of genetic risk assessment tests in general and the Company's products in
particular, risk related to technology and products obsolescence, delays in
development of products, dependence on third parties, our ability to obtain
adequate capital, competitive risks and those risks set forth within the section
titles "Factors affecting future performance" within the Company's Annual Report
on Form 10-K for the year ended December 31, 2000 and within the section titled
"Risk Factors" within the Company's Registration Statement of Form S-3, filed
January 11, 2001 (File No. 333-53558). We cannot be certain that our results
will not be adversely affected by one or more of those factors or by other
factors not currently anticipated. We do not intend to update these
forward-looking statements.
GENERAL OVERVIEW
Interleukin Genetics, Inc., a Delaware corporation is a Pharmacogenetics
company focused on personalized medicine. We believe that by identifying
individuals at risk for certain diseases and combining it with specific
therapeutic interventions, better healthcare decisions can be made, reducing
costs and greatly improving patient health outcomes. We have a growing portfolio
of patents covering the genetics of many common diseases and conditions,
including cardiovascular diseases, osteoporosis, complications of diabetes,
restenosis, and periodontal disease.
We believe that one of the great challenges confronting medicine today is to
find the key to understanding why some people are more prone than others to
developing serious chronic diseases and why some people respond to medicine for
those diseases better than others. Until doctors are able to understand the
underlying causes for such variability in chronic diseases, the practice of
medicine will remain largely constrained to our current approach of prescribing
therapies based on broad, sweeping recommendations in which very large groups of
people with the same stage of disease all receive the same treatment. This
approach to medicine is, in many ways, quite impersonal and it is often
ineffective.
Until now, scientific study of chronic diseases has largely focused on
identifying factors that initiate or "cause" a disease. Common examples of such
factors include cholesterol in the case of heart disease, bacteria of the mouth
in the case of periodontal disease and reduced estrogen levels in
8
11
the case of osteoporosis. However, the mere presence of these initiating factors
does not mean a person will develop a disease. For example, everyone with a
cholesterol level considered high does not develop heart disease nor does
everyone with a normal cholesterol level avoid heart disease. Rather, the common
diseases as we know them only develop when our bodies respond to the initiating
factors in a way that results in a problem.
We believe that the recent expansions in understanding of human genetic
information coming from programs like the Human Genome Project will likely
change forever the impersonal way medicine is practiced. This is because our
responses to common disease initiating factors are largely determined by our
specific genes. By using the new tools of the genomic era, scientists will be
able to study how differences in specific individuals' genetic information
direct their bodies to respond to these disease initiating factors in different
ways. This is likely to be true both for identifying who is most likely to
develop one disease or another and who is most likely to respond to one or
another medicine. Since it is our genes that make us unique, at least in the
biologic sense, we believe that tailoring medical therapy based on knowledge of
our genetic tendencies will enable doctors to move beyond the one size fits all
approach to prescribing medicines which are more "personalized" to each of us
based upon our unique genetic make-up.
Our first genetic test, PST(R), a test predictive of risk for periodontal
disease, is currently marketed in the United States and Europe. Other products
under development include tests predictive of risk for osteoporosis, coronary
artery disease, complications of diabetes and restenosis.
We have also developed and licensed medical research tools, including
BioFusion(R), to pharmaceutical and biotech companies. BioFusion is a computer
modeling system that integrates genetic and other sub-cellular behavior,
biological 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.
In August 2000, we entered into an agreement with Kenna Technologies, Inc.
("Kenna") whereby we granted Kenna a perpetual, non-exclusive license to certain
disease information system technology and to certain biological modeling
technology, including the Biofusion system mentioned above. In consideration for
these license rights, Kenna paid us a non-refundable initial licensing fee of
$80,000 and has agreed to pay royalties based upon 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 as revenue ratably over the
term of the agreement.
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 ("Sheffield") in the United Kingdom. Under this alliance, Sheffield
has provided us with the fundamental discovery and genetic analysis from their
research laboratories, and we have focused on product development, including
clinical trials, and the commercialization of these discoveries.
9
12
During 2000, we changed our strategy for marketing, distributing and
processing PST. We no longer market, distribute or process PST ourselves. We now
use third party marketers and distributors from whom we earn royalties. This
change in strategy has reduced revenues, cost of revenue and operating expenses.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2001 TO THREE MONTHS ENDED MARCH 31,
2000
Revenue for the three months ended March 31, 2001 was $40,291 compared to
$85,830 for the same period ended March 31, 2000, a decrease of 53%. In the
three months ended March 31, 2001, the Company conducted 783 PST tests compared
to 448 tests in the same period in 2000. Cost of revenue was $15,100 for the
three months ended March 31, 2001 compared to $64,068 for 2000. Gross profit
margin was 63% in the three months ended March 31, 2001 compared to 25% for the
year earlier period.
The decrease in revenue was the result of a change in our strategy for
marketing, distributing and processing PST. We no longer market, distribute or
process PST ourselves. We now use third party marketers and distributors from
whom we earn royalties. This has reduced revenue, cost of revenue and operating
expenses. It has also led to an improvement in our gross margins.
For the three months ended March 31, 2001, the Company had research and
development expenses of $713,674 as compared to $558,496 for the first quarter
of 2000. The 2001 expense includes approximately $311,000 for outside research
projects compared to approximately $32,000 for outside research projects during
the first three months of 2000. Included in the research and development expense
during the three months ended March 31, 2000 was a non-cash charge of
approximately $222,000 for the cost of stock issued to Sheffield and Gordon Duff
for services rendered. There was no such charge during the three months ended
March 31, 2001.
Currently, we are conducting two major research projects: The first is a project
in conjunction with Genome Therapeutics, Inc. to provide us with DNA sequencing
information, including identifying SNP (Single Nucleotide Polymorphism)
variations in the region of the IL-1 genes. The program is focusing on those key
genes in this very specific chromosomal region that we and others have shown to
be associated with risk for inflammatory diseases, including Alzheimer's
disease, asthma, cardiovascular disease, diabetes, gastric cancer and
osteoporosis. We expect the contract to be completed during the second quarter
of 2001.
Our second major project is a clinical trial Brigham and Women's Hospital
("BWH") is conducting on our behalf to investigate the genetic control of
inflammation. The proprietary screening platform being used in the BWH study,
the Inflammation Response Induction System ("IRIS"), allows the rapid evaluation
of inflammatory responses in humans with specific IL-1 genetic variations. We
believe the BWH studies will improve understanding of how IL-1 genetic
variations affect their risk for several chronic diseases and will help identify
preventive and therapeutic compounds for patients who are at
10
13
increased risk. We anticipate the BWH studies to be completed near the end of
2001.
We anticipate that before the end of 2001, we will conduct additional studies on
PST, complications from diabetes, Osteoporosis and Inflammatory responses.
We expect the total research and development costs to be approximately $3.1
million for the calender year 2001. Actual costs may vary significantly from
these estimates as a result of changes in technology, the success of current
and future research projects, the actions of potential competitors and
potential competitive products, the success or failure of our current or future
strategic alliances and collaborations, the identification of new business
opportunities and our ability to raise additional new capital.
We have not made an attempt to finalize an estimate of our research and
development expenses for future years due to the factors listed above.
Selling, general and administrative expenses were $555,898 in the first quarter
of 2001 compared to $742,907 in the first quarter of 2000, a decrease of 25%.
The decrease was primarily the result of a reduction in administrative, sales
and marketing expense related to the sale and distribution of PST. As mentioned
above, we no longer market, sell or distribute PST directly. We now use third
party marketers and distributors. This has significantly reduced our operating
expenses as they relate to PST.
Interest income in the first quarter of 2001 was $108,002 compared to $40,336 in
the first quarter of 2000. This increase reflects higher balances of cash in the
first quarter of 2001 compared to the year earlier period. Interest expense of
$3,098 was incurred during the period ended March 31, 2000, compared to $7,359
in the same period in 2000.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have funded our operations primarily through public and private
sales of equity. During the three months ended March 31, 2001, the Company
raised approximately $3.0 million from a common stock private placement. During
2000, the Company raised approximately $6.7 million from two common stock
private placements. We believe that our current cash resources are more than
adequate to fund operations throughout the year 2001, however, without
additional financing, we also believe that these resources will be depleted by
July 2002. We are currently pursuing sources of capital and strategic
partnerships in order to raise the capital necessary to continue operations past
July 2002. However, we can not assure that we will be successful in these
efforts.
Since inception, we have incurred cumulative net losses of approximately $32.1
million, including losses of approximately $1.1 million during the three months
ended March 31, 2001. Net cash used in operating activities was $1.3 million
during the three months ended March 31, 2001 and $1.0 million during the same
period last year. As of March 31, 2001 we had cash, cash equivalents and
marketable securities of approximately $7.0 million.
We anticipate that we will continue to experience losses unless our genetic
testing revenues grow substantially from current levels. 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 our net loss. We cannot give any assurances 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.
We currently do not have any commitments for material capital expenditures. The
Company's obligation at March 31, 2001 for capitalized lease obligations totaled
approximately $64,000, of which $25,000 is classified as long-term and $39,000
is classified as current.
11
14
We anticipate that existing cash and cash equivalents, together with anticipated
interest income and revenue, will be sufficient to conduct operations as planned
through July 2002. However, future capital requirements are anticipated to be
substantial, and we do not have commitments for additional capital at this time.
Capital requirements are expected to arise from the commercial launch of
additional genetic tests, continued research and development efforts, the
protection of intellectual property rights (including preparing and filing of
patent applications), as well as operational, administrative, legal and
accounting expenses. WE CAN GIVE NO ASSURANCE THAT WE WILL BE ABLE TO RAISE ANY
ADDITIONAL CAPITAL. IF ADDITIONAL AMOUNTS CANNOT BE RAISED, WE WOULD SUFFER
MATERIAL ADVERSE CONSEQUENCES TO OUR BUSINESS, FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND WOULD LIKELY BE REQUIRED TO SEEK PROTECTION UNDER THE UNITED
STATES BANKRUPTCY LAWS.
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 the Company's marketable securities as of March
31, 2001, the Company has determined that in the event of a hypothetical ten
percent increase in interest rates; the resulting decrease in fair market value
of our marketable investment securities would be insignificant to the financial
statements as a whole.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to, nor is its property the subject of, any pending
legal proceeding.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable
(b) Not applicable
(c) On January 26, 2001, the Company completed a private placement whereby the
Company sold 1,200,000 shares of common stock, $.001 par value at a per share
purchase price of $2.50 for a total offering price of $3,000,000. The shares of
common stock issued pursuant to the private placement were not registered under
the Securities Act of 1933, as amended pursuant to the exemptions of such
registration provided under Regulation D of the rules and regulations
promulgated under the Securities Act by the Securities and Exchange Commission
and Section 4(2) of the Securities Act. On March 5, 2001, the Company filed an
S-3 with the SEC to register the shares issued pursuant to that private
placement. The Company relied on certain representations and warranties of the
private placement investors, including, among other things, each of the
investors' ability to evaluate the merits and risks of an investment in the
shares, each of the investors' status as an "accredited investor" (as that term
is defined in Rule 501(a) of Regulation D) and that the shares were acquired
solely for each of the investors' own account for
12
15
investment and not with a view to distribution. The purchasers of the common
stock also received warrants to purchase 600,000 shares of common stock
exercisable at $3.00 per share.
Following the January 2001 offering, described above, the Company issued an
additional 257,627 shares of common stock to the purchasers in a December 2000
offering, and new warrants to purchase 264,407 shares of common stock
exercisable at a price of $3.13 per share to replace the previously issued
warrants to purchase 135,593 shares of common stock at a price of $4.83. The
shares of common stock issued pursuant to the private placement were not
registered under the Securities Act of 1933, as amended pursuant to the
exemptions of such registration provided under Regulation D of the rules and
regulations promulgated under the Securities Act by the Securities and Exchange
Commission and Section 4(2) of the Securities Act. On March 5, 2001, the Company
filed an S-3 with the SEC to register the shares issued pursuant to that private
placement.
(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
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company filed a report on Form 8-K March 5, 2001 to report the completion of
two Private Placements of Common Stock completed on December 5, 2000 and January
26, 2001.
13
16
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: May 8, 2001 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)
14