10-Q 1 e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2000 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: JUNE 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 July 31, 2000 is 18,356,439. 2 ================================================================================ INTERLEUKIN GENETICS, INC. FORM 10-Q INDEX PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Balance Sheets at June 30, 2000 (Unaudited) and December 31, 1999..........................................1 Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, 2000 and June 30, 1999.......................2 Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2000 and June 30, 1999.....................................3 Notes to Condensed Consolidated (Unaudited) Financial Statements.........................4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................................6 Item 3. Quantitative and Qualitative Disclosure about Market Risk...............................12 PART II. OTHER INFORMATION 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........................................................14
i 3 PART I FINANCIAL INFORMATION INTERLEUKIN GENETICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2000 December 31, 1999 ---------------- ----------------- ASSETS (unaudited) Cash and cash equivalents $ 586,965 $ 668,616 Marketable securities 4,930,800 1,987,500 Accounts receivable, net of allowance for doubtful accounts of $47,804 at June 30, 2000 and $55,300 at December 31, 1999 118,202 103,002 Prepaid expenses 177,693 132,560 ---------------- ---------------- Total current assets 5,813,660 2,891,678 Furniture and equipment, net 200,824 284,481 ---------------- ---------------- TOTAL ASSETS $ 6,014,484 $ 3,176,159 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $ 125,752 $ 134,968 Notes payable -0- 1,797 Accrued expenses 748,971 400,281 Deferred revenue 256,108 322,812 Current portion of capitalized lease obligations 58,953 63,877 ---------------- ---------------- Total current liabilities 1,189,784 923,735 Capitalized lease obligations, net 66,250 99,246 ---------------- ---------------- Total liabilities 1,256,034 1,022,981 Preferred Stock, no par value 5,000,000 shares authorized none issued and outstanding -0- -0- Common stock, no par value 50,000,000 shares authorized; 18,334,016 shares at June 30, 2000 and 17,223,302 shares at December 31, 1999 outstanding 28,302,588 23,177,865 Accumulated deficit (23,547,860) (21,012,188) Other comprehensive income 3,722 (12,499) ---------------- ---------------- Total shareholders' equity 4,758,450 2,153,178 ---------------- ---------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,014,484 $ 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 Six Months Ended June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999 ------------- ------------- ------------- ------------- Sales $ 82,119 $ 129,335 $ 167,950 $ 222,073 Cost of sales 56,357 43,206 120,425 76,117 ------------- ------------- ------------- ------------- Gross profit 25,762 86,129 47,525 145,956 Expenses: Research & development 357,570 545,819 916,066 1,100,944 Selling, general & administrative 1,051,729 693,418 1,794,636 1,402,571 ------------- ------------- ------------- ------------- Total expenses 1,409,299 1,239,237 2,710,702 2,503,515 ------------- ------------- ------------- ------------- Loss from operations (1,383,537) (1,153,108) (2,633,177) (2,357,559) Other income (expense): Interest income 101,227 26,744 141,563 44,336 Interest expense (6,346) (17,966) (13,705) (40,547) Other income (981) 2,642 (353) 6,957 ------------- ------------- ------------- ------------- Total other income (expense) 93,900 11,420 127,505 10,746 ------------- ------------- ------------- ------------- NET LOSS $ (1,289,637) $ (1,141,688) $ (2,535,672) $ (2,346,813) ============= ============= ============= ============= Reconciliation of net loss to net loss applicable to common stock: Net Loss $ (1,289,637) $ (1,141,688) $ (2,535,672) $ (2,346,813) Amortization of the value of the beneficial conversion feature of the preferred stock -0- (1,234,854) -0- (1,234,854) ------------- ------------- ------------- ------------- Net loss applicable to common stock $ (1,289,637) $ (2,376,542) $ (2,535,672) $ (3,581,667) ============= ============= ============= ============= Basic and diluted loss per share $ (0.07) $ (0.43) $ (0.14) $ (0.64) ============= ============= ============= ============= Weighted average common shares outstanding 18,321,651 5,558,668 18,105,348 5,553,569 ============= ============= ============= =============
See accompanying notes to condensed consolidated financial statements. 2 5 INTERLEUKIN GENETICS, INC. AND SUBSIDIARIES CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2000 June 30, 1999 ------------- ------------- (unaudited) (unaudited) CASH FLOW FROM OPERATING ACTIVITIES Net loss $ (2,535,672) $ (2,346,813) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 83,657 99,562 Issuance of stock options for services rendered 156,114 -0- (Increase) decrease in: Accounts receivable (15,200) 40,111 Prepaid expenses (45,133) 46,073 Increase (decrease) in: Accounts payable (9,216) (134,903) Accrued expenses 348,690 4,967 Notes payable (1,797) -0- Deferred revenue (66,704) 95,288 ------------- ------------- Net cash used in operating activities (2,085,261) (2,195,715) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of marketable securities (3,930,907) -0- Proceeds from maturity of investments 1,003,828 -0- Purchases of furniture and equipment -0- (5,175) Decreases (Increases) in other assets -0- 530,000 ------------- ------------- Net cash provided by (used in) investing activities (2,927,079) 524,825 ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of common stock 4,968,609 10,613 Sale of preferred stock -0- 5,000,000 Offering costs of preferred stock issuance -0- (251,580) Principal payments of notes payable -0- (30,976) Principal payments of long-term debt -0- (529,288) Principal payments of capitalized lease obligations (37,920) (47,272) ------------- ------------- Net cash provided by financing activities 4,930,689 4,151,497 ------------- ------------- Net increase (decrease) in cash and equivalents (81,651) 2,480,607 Cash and equivalents, beginning of period 668,616 2,432,271 ------------- ------------- CASH AND EQUIVALENTS, END OF PERIOD $ 586,965 $ 4,912,878 ============= ============= Interest paid $ 13,705 $ 40,547 NON-CASH ITEMS Stock issued to placement agent -0- $ 500,000 Common stock warrants issued to placement agent -0- $ 3,080,000
See accompanying notes to condensed consolidated financial statements. 3 6 NOTE 1 - PRESENTATION OF INTERIM INFORMATION The accompanying unaudited consolidated financial statements have been prepared by Interleukin Genetics, Inc., 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 the Company's Annual Report on Form 10-K for the year ended December 31, 1999. The interim financial data are unaudited; however, in the opinion of the management of Interleukin Genetics, Inc. and subsidiaries (the "Company"), 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 of the Company have been prepared on the basis of accounting principles applicable to a going concern. Since its inception, the Company has incurred cumulative net losses of approximately $23.5 million, including losses of approximately $1.3 million during the second quarter of 2000 and $2.5 million during the six months ended June 30, 2000. For the six months ended June 30, 2000, the Company reported negative cash flows from operating activities of approximately $2.1 million. During the six months ended June 30, 2000, the Company raised approximately $5.0 million from a common stock private placement and shareholder stock option exercises. During 1999, the Company raised approximately $5.1 million from a preferred stock offering and shareholder stock option exercises. The Company believes that their current cash resources are more than adequate to fund operations throughout the year 2000, however, absent additional equity or debt financings, it also believes that those resources will be depleted in September 2001. To address these future capital resources requirements, management of the Company is currently in discussions with several potential strategic partners regarding the up-front funding of certain of the Company's research and development programs. While the Company continues to pursue sources of capital and strategic partnerships, there can be no assurance that they 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 the Company may develop will gain commercial acceptance on a timely basis. 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 which have considerably greater financial, technical, marketing, and other resources available. If the Company does not discover disease predisposing genes or genetic markers and develop susceptibility tests and launch such services or products before their competitors, then revenues may be reduced or eliminated. The Company's 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 4 7 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, the Company entered into an agreement with Sheffield University, whereby the Company 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 terminated the agreement, such termination could make the discovery and commercial introduction of new products more difficult or unlikely. NOTE 2 - 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 the Company had losses for the three and six months ended June 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. NOTE 3 - EQUITY Pursuant to a private placement which occurred in January 2000, the Company issued 832,667 shares of its Common Stock, no par value, for $5 million. After payment of offering costs, net proceeds to the Company amounted to $4.7 million. NOTE 4 - SEGMENT INFORMATION The Company has 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 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. NOTE 5 - TERMINATION OF DUMEX AGREEMENT In April 1999, the Company entered into an Exclusive Independent Representative and Derivation Agreement (the Representative Agreement) with Dumex-Alpharama A/S (Dumex), in which Dumex agreed to act as an independent representative of the Company for the marketing and promotion of the PST test in certain European countries. In connection with the Representative Agreement, Dumex paid the Company $150,000 in consideration for the territory rights granted therein. The Company had recorded $85,000 of such amount as revenue through June 30, 2000. In June 2000, the Company and Dumex entered into a termination and settlement agreement (the Termination Agreement) related to the Representative Agreement. Under the terms of the Termination Agreement, Dumex is required to pay the Company all amounts collected for PST tests and sample collection materials and provide the Company a list of the names and addresses of all customers to whom Dumex obtained orders or sold PST tests or sample collection materials. Under the terms of the Termination Agreement, the Company is required to pay Dumex $159,000 and reimburse Dumex for all PST Sample Collection Kits that Dumex has in stock at 50% of the original price paid. The Company recorded a $98,000 charge to selling, general and administrative expense in the quarter ended June 30, 2000. 5 8 The following table presents information about the Company by geographic area.
For the Six Months Ended June 30, 2000 1999 ------------- ------------- (unaudited) (unaudited) Total Revenues: United States $ 141,187 $ 169,427 France 15,912 20,910 Other foreign 10,851 31,736 ------------- ------------- Total $ 167,950 $ 222,073 ============= ============= Operating Loss: United States $ (2,238,797) $ (1,791,745) France (252,316) (212,180) Other foreign (172,064) (353,634) ------------- ------------- Total $ (2,663,177) $ (2,357,559) ============= =============
As of June 30, 2000 1999 ---------------- ---------------- (unaudited) (unaudited) Assets: United States $ 6,014,484 $ 5,442,925 France -0- -0- Other foreign -0- -0- ---------------- ---------------- Total $ 6,014,484 $ 5,442,925 ================ ================
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 the Company's financial position, business strategy and plans and objectives of management of the Company for future operations are forward-looking statements. These forward-looking statements are based on the beliefs of the Company's management, as well as assumptions made by and information currently available to the Company's 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 the current view of the Company 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, the Company's limited sales and marketing experience, risk of market acceptance of the Company's 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 the Company's 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 the Company with the Securities and Exchange Commission (collectively, "cautionary statements"). Although the Company believes that its expectations are reasonable, it 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 the Company or persons acting on its behalf are expressly qualified in their entirety by the applicable cautionary statements. The Company does not intend to update these forward-looking statements. The following comments should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. 6 9 GENERAL OVERVIEW Interleukin Genetics, Inc., a Delaware corporation ("ILGN" or the "Company"), develops and commercializes genetic diagnostic tests and medical research tools. The Company's efforts are focused on genetic factors that affect the rate of progression of clinical disease through their influence on common host systems. The Company's 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. The Company believes by combining genetic risk assessment with specific therapeutic strategies, improved clinical outcomes and more cost-effective management of these common diseases are achieved. ILGN also develops and licenses its medical research tools, including BioFusion(R), to pharmaceutical 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, the Company issued 832,667 shares of its Common Stock, no par value, for $5 million. After payment of offering costs, net proceeds to the Company amounted to $4.7 million. Additionally, the Company is in discussions with a number of potential strategic partners and, if such discussions are successfully completed, the Company believes this will result in the up-front funding of some of its 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 the Company's programs. The Company has followed a strategy of working with strategic partners at the fundamental discovery stage. This strategy has given the Company access to discoveries while reducing up-front research expenses. Since 1994, the Company has 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 to the Company the fundamental discovery and genetic analysis from Sheffield's research laboratories, and the Company has focused on product development, including clinical trials, and the commercialization of these discoveries. During the third quarter of 1999, the Company 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, the Company issued an aggregate of 475,000 shares of its 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 the Company. In June 2000, the Company terminated its arrangement with Dumex under which Dumex had agreed to market and sell PST in nine European countries. The Company is 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 the Company will be able to reach a marketing arrangement for PST in Europe. 7 10 In March 1999, the Company entered into an 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 December 1998, the Company 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, the Company entered into an agreement with Medicadent, a French corporation ("Medicadent"), to market and sell PST in France. In August 1998, the Company 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. The Company has been awarded four U.S. patents, and has sixteen U.S. patent applications pending. The U.S. Patent & Trademark Office awarded patents to the Company for its osteoporosis and periodontal disease susceptibility tests and two patent awards for its biologic modeling technology called BioFusion(R). BioFusion is used by the Company in the discovery, development and commercialization process. The Company's 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. The Company has been granted a number of corresponding foreign patents and has filed foreign counterparts of its U.S. applications. Where the Company has originally filed in another country, it has filed and plans to continue to file U.S. and other foreign counterparts. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 TO THREE MONTHS ENDED JUNE 30, 1999 Gross revenue for the three months ended June 30, 2000 was $82,119 compared to $129,335 for the three months ended June 30, 1999, a decrease of 37%. In June 1999, the Company received an up-front payment of $150,000 from Dumex-Alpharma A/S for the rights to distribute the Company's genetic susceptibility test for periodontal disease, PST(R), in nine European countries. The Company recognized $50,000 of this payment as revenue during the 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 June 30, 2000, the Company conducted 588 PST tests compared to 586 tests in the same period in 1999. Cost of sales was $56,357 for the three months ended June 30, 2000 compared to $43,206 for 1999. Gross profit margin was 31% in the three months ended June 30, 2000 compared to 67% for the year earlier period. The decrease in gross profit is primarily caused by the decreased distribution fees discussed above and increased lab charges. For the three months ended June 30, 2000, the Company had research and development expenses of $357,570 as compared to $545,819 for the second quarter of 8 11 1999. During the second quarter of 2000, the Company incurred $79,454 in expense for clinical trials as compared to $146,391 in 1999. Also, research and development expense was reduced by a non-cash credit of $105,132 in the quarter ended June 30, 2000 for stock issued for services rendered. The Company has issued options to purchase common stock to Sheffield as a component of its research and development agreements. The Company follows variable plan accounting for such options and has recorded a credit in the quarter ended June 30, 2000 for the decrease in the value of the options. Selling, general and administrative expenses were $1,051,729 in the second quarter of 2000 compared to $693,418 in the second quarter of 1999, an increase of 52%. Effective June 23, 2000, the Company terminated its relationship with Dumex. The Company accrued expenses of $98,200 associated with this termination in the period. The remainder of the increase is primarily due to the non-recurring costs of relocating the corporate offices and personnel to Waltham. Interest income in the second quarter of 2000 was $101,227 compared to $26,744 in the second quarter of 1999. This increase reflects higher balances of cash in the second quarter of 2000 compared to the year earlier period. Interest expense of $6,346 was incurred during the quarter ended June 30, 2000, compared to $17,966 in the same period in 1999. Net loss increased to $1,289,637 for the second quarter of 2000 compared to a net loss of $1,141,688 for the second quarter of 1999, an increase of $147,949, due to the reasons set forth above. The Company anticipates that it will continue to experience losses unless its genetic testing revenues grow substantially from current levels and its efforts to develop revenue from licensing its biologic modeling research tools are successful. In addition, if the Company is successful in reaching agreements with strategic partners on developing additional genetic tests, milestone payments, if any, from these strategic partners will help cover the Company's research and development expense and could also reduce the net loss. No assurances can be made that the Company will be able to increase its revenues, either from genetic tests or licensing revenue, or that it will be able to reach collaborative partnering agreements. COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 TO SIX MONTHS ENDED JUNE 30, 1999 Gross revenue for the six months ended June 30, 2000 was $167,950 compared to $222,073 for the same period ended June 30, 1999, a decrease of 24%. In June 1999, the Company received an up-front payment of $150,000 from Dumex-Alpharma A/S for the rights to distribute the Company's genetic susceptibility test for periodontal disease, PST(R), in nine European countries. The Company recognized $50,000 of this payment as revenue during the six 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 six months ended June 30, 2000, the Company conducted 1,036 PST tests compared to 1,096 tests in the same period in 1999. Cost of sales was $120,425 for the six months ended June 30, 2000 compared to $76,117 for 1999. Gross profit margin was 28% in the six months ended June 30, 2000 compared to 66% for the year earlier period. The decrease in gross profit margin was a result of the decrease in distributor fee revenue and the start of distributor fees being paid during the six months ended June 30, 2000. There were no distributor fees paid during the first six months of 1999. For the six months ended June 30, 2000, the Company had research and development expenses of $916,066 as compared to $1,100,944 for the first half of 1999. The year-earlier expense included $324,462 for conducting several large clinical trials, compared to $111,815 in expense for clinical trials in the first half of 2000. Offsetting the 9 12 decreased cost of clinical trials was a non-cash charge of $116,754 in the six months ended June 30, 2000 for the cost of stock issued for services rendered. The Company has issued options to purchase common stock to Sheffield as a component of its research and development's agreements. The Company follows variable plan accounting for such options and has recorded a credit in the quarter ended June 30, 2000 for the decrease in the value of the options. There was no charge in the six months ended June 30, 1999 for stock issued. Selling, general and administrative expenses were $1,794,636 in the first six months of 2000 compared to $1,402,571 in the first six months of 1999, an increase of 21%. Effective June 23, 2000, the Company terminated its relationship with Dumex. The Company accrued expenses of $98,200 associated with this termination in the period. The remainder of the increase is primarily due to the non-recurring costs of relocating the corporate offices and personnel to Waltham. Interest income in the first six months of 2000 was $141,563 compared to $44,336 in the first six months of 1999. This increase reflects higher balances of cash in the first six months of 2000 compared to the year earlier period. Interest expense of $13,705 was incurred during the six months ended June 30, 2000, compared to $40,547 in the same period in 1999. Net loss increased to $2,535,672 for the first half of 2000 compared to a net loss of $2,346,813 for the first half of 1999, an increase of $188,859, due to the reasons set forth above. The Company anticipates that it will continue to experience losses unless its genetic testing revenues grow substantially from current levels and its efforts to develop revenue from licensing its biologic modeling research tools are successful. In addition, if the Company is successful in reaching agreements with strategic partners on developing additional genetic tests, milestone payments, if any, from these strategic partners will help cover the Company's research and development expense and could also reduce the net loss. No assurances can be made that the Company will be able to increase its revenues, either from genetic tests or licensing revenue, or that it will be able to reach collaborative partnering agreements. LIQUIDITY AND CAPITAL RESOURCES Pursuant to a $5 million private placement in January 2000, the Company issued 832,667 shares of Common Stock, no par value, which generated net proceeds of approximately $4.7 million. Additionally, shareholder stock option exercises generated approximately $0.2 million during the first quarter of 2000. During 1999, the Company raised approximately $5.1 million from preferred stock offering and shareholder stock option exercises. Since its inception, the Company has incurred cumulative net losses of approximately $23.4 million, including losses of approximately $1.2 million during the six months ended June 30, 2000. Net cash used in operating activities was $2,085,261 during the three months ended June 30, 2000 and $2,195,715 during the same period of the prior fiscal year. As of June 30, 2000, the Company had cash, cash equivalents and marketable securities of $5,517,765. The Company currently does not have any commitments for material capital expenditures. The Company's obligation at June 30, 2000 for capitalized lease obligations totaled $125,203, of which $66,250 is classified as long-term and $58,953 is classified as current. The Company anticipates that its existing cash and cash equivalents, together with anticipated interest income and revenue, will be sufficient to conduct its operations as 10 13 planned until September 30, 2001. However, the Company's future capital requirements are anticipated to be substantial, and the Company does 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 Company's 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 THE COMPANY WILL BE ABLE TO RAISE ANY ADDITIONAL NECESSARY CAPITAL. IF ADDITIONAL AMOUNTS CANNOT BE RAISED, THE COMPANY WOULD SUFFER MATERIAL ADVERSE CONSEQUENCES TO ITS BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND WOULD LIKELY BE REQUIRED TO SEEK PROTECTION UNDER THE UNITED STATES BANKRUPTCY LAWS. SEE Note 1 of the Financial Statements included herein. The Company's Common Stock is currently listed on the NASDAQ SmallCap Market and the Boston Stock Exchange. If the Company fails to maintain the qualification for its Common Stock to trade on the NASDAQ SmallCap Market or the Boston Stock Exchange, its Common Stock could be subject to delisting. During 1999, the Company 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. The Company believes that it currently complies with the continued listing requirements of the NASDAQ SmallCap Market. However, there can be no assurance that the Company will maintain the qualifications for continued listing on the NASDAQ SmallCap Market. If the Company's 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 the OTC Bulletin Board, which was established for securities that do not meet the NASDAQ SmallCap Market's listing requirements. Consequently, selling the Common Stock of the Company 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 the Company's ability to raise additional necessary capital through equity or debt financing. If the Common Stock of the Company is not listed on the NASDAQ SmallCap Market and/or the Boston Stock Exchange, it 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 Common Stock of the Company 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 11 14 from these restrictions. If such shares were subject to the penny stock rules, the market liquidity for the shares could be adversely affected. Historically, the Common Stock of the Company has experienced low trading volumes. The market price of the 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 the Company or its 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 the Company's securities. Changes in the market price of the Common Stock may bear no relation to the Company's actual operational or financial results. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company maintains an investment portfolio consisting of securities of U.S. Treasury Notes. The securities held in the Company's 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 June 30, 2000, the Company has determined that in the event of a hypothetical 100 basis point increase in interest rates, the resulting decrease in fair market value of the Company's marketable investment securities would be insignificant to the financial statements as a whole. 12 15 PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The following matters were voted upon at the Annual Meeting of Shareholders held on June 5, 2000, and received the votes set forth below: (a) All of the following persons nominated were elected to serve as directors and received the number of votes set forth opposite their respective names:
NAME FOR WITHHELD Philip R. Reilly 14,309,459 0 Kenneth S. Kornman 14,309,459 0 Thomas A. Moore 14,309,459 0 Edward M. Blair, Jr. 14,309,459 0 Gary L. Crocker 14,309,459 0
(b) A proposal to effect a change in the state of incorporation of the Company from Texas to Delaware by approving a Plan of Reorganization and Merger providing for the Company to merge into a wholly owned Delaware subsidiary received 11,389,349 votes FOR and 34,374 votes AGAINST, with 5,050 abstentions. (c) A proposal to approve the establishment of a classified Board of Directors of the Company received 11,377,849 votes FOR and 45,379 votes AGAINST, with 5,550 abstentions. (d) A proposal to ratify the adoption of the Company's 2000 Employee Stock Compensation Plan received 11,260,005 votes FOR and 53,529 votes AGAINST, with 115,239 abstentions. (e) A proposal to ratify the appointment of Arthur Andersen LLP as independent public accountants of the Company for the fiscal year ending December 31, 2000, received 14,312,164 votes FOR and 15,875 votes AGAINST, with 900 abstentions. 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. 13 16 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. 2.1* Plan of Reorganization and Merger dated July 12, 2000 by and between Interleukin Genetics, Inc., a Texas Corporation, and Interleukin Genetics, Inc., a Delaware Corporation 3.1* Certificate of Incorporation of the Company 3.2* Bylaws of the Company, as adopted on June 5, 2000 4.1* Form of Stock Certificate representing Common Stock, $.001 par value, of the Company 10.1* Lease Agreement between the Company and Clematis LLC 10.2* First Amendment to a Commercial Lease between the Company and Clematis LLC 10.3* 2000 Employee Stock Compensation Plan for the Company 10.4* Form of Nonqualified Stock Option Agreement 10.5* Form of Incentive Stock Option Agreement 10.6* Employment Agreement dated June 18, 2000 between the Company and Fenel Eloi 27* Financial Data Schedule ---------- *filed herewith (b) Reports on Form 8-K None 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: August 14, 2000 By: /s/ PHILIP R. REILLY -------------------------------- Philip R. Reilly Chairman of the Board and Chief Executive Officer (Principle Executive Officer) By: /s/ FENEL M. ELOI --------------------------------- Fenel M. Eloi Chief Financial Officer, Secretary & Treasurer (Principle Financial and Accounting Officer) 14 17 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ -----------
2.1* Plan of Reorganization and Merger dated July 12, 2000 by and between Interleukin Genetics, Inc., a Texas Corporation, and Interleukin Genetics, Inc., a Delaware Corporation 3.1* Certificate of Incorporation of the Company 3.2* Bylaws of the Company, as adopted on June 5, 2000 4.1* Form of Stock Certificate representing Common Stock, $.001 par value, of the Company 10.1* Lease Agreement between the Company and Clematis LLC 10.2* First Amendment to a Commercial Lease between the Company and Clematis LLC 10.3* 2000 Employee Stock Compensation Plan for the Company 10.4* Form of Nonqualified Stock Option Agreement 10.5* Form of Incentive Stock Option Agreement 10.6* Employment Agreement dated June 18, 2000 between the Company and Fenel Eloi 27* Financial Data Schedule ---------- *filed herewith