<PAGE> 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.
<PAGE> 2
================================================================================
INTERLEUKIN GENETICS, INC.
FORM 10-Q
INDEX
<TABLE>
<S> <C>
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
</TABLE>
i
<PAGE> 3
PART I
FINANCIAL INFORMATION
INTERLEUKIN GENETICS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
---------------- -----------------
ASSETS (unaudited)
<S> <C> <C>
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
================ ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 4
INTERLEUKIN GENETICS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
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
============= ============= ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
INTERLEUKIN GENETICS, INC.
AND SUBSIDIARIES
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30, 2000 June 30, 1999
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
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
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 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
<PAGE> 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
<PAGE> 8
The following table presents information about the Company by geographic area.
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
2000 1999
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
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)
============= =============
</TABLE>
<TABLE>
<CAPTION>
As of June 30,
2000 1999
---------------- ----------------
(unaudited) (unaudited)
<S> <C> <C>
Assets:
United States $ 6,014,484 $ 5,442,925
France -0- -0-
Other foreign -0- -0-
---------------- ----------------
Total $ 6,014,484 $ 5,442,925
================ ================
</TABLE>
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
<PAGE> 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
<PAGE> 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
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<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
NAME FOR WITHHELD
<S> <C> <C>
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
</TABLE>
(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
<PAGE> 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
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
</TABLE>
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
