<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: MARCH 31, 2000
Commission File Number: 333-37441
INTERLEUKIN GENETICS, INC.
(Name of Issuer in its Charter)
TEXAS 94-3123681
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 N.E. LOOP 410, SUITE 820
SAN ANTONIO, TX 78216
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (210) 349-6400
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 ( )
<TABLE>
<CAPTION>
<S> <C>
Title of Each Class Outstanding at April 30, 2000
------------------- -----------------------------
Common stock, no par value 18,268,716
</TABLE>
<PAGE> 2
================================================================================
INTERLEUKIN GENETICS, INC.
Form 10-Q
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets at
March 31, 2000 (Unaudited) and December 31, 1999...................1
Condensed Consolidated Statements of Operations (Unaudited)
for the three months ended March 31, 2000 and March 31, 1999.......2
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the three months ended March 31, 2000 and March 31, 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.........11
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...............12
Item 5. Other Information.................................................12
Item 6. Exhibits and Reports on Form 8-K..................................12
</TABLE>
i
<PAGE> 3
PART I
FINANCIAL INFORMATION
INTERLEUKIN GENETICS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,605,710 $ 668,616
Marketable securities 1,987,500 1,987,500
Accounts receivable, net of allowance for doubtful
accounts of $54,225 at March 31, 2000 and $55,300
at December 31, 1999 86,563 103,002
Prepaid expenses 121,072 132,560
------------ ------------
Total current assets 6,800,845 2,891,678
Furniture and equipment, net 241,442 284,481
------------ ------------
TOTAL ASSETS $ 7,042,287 $ 3,176,159
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 106,827 $ 134,968
Notes payable -0- 1,797
Accrued expenses 401,868 400,281
Deferred revenue 318,674 322,812
Current portion of capitalized lease obligations 61,714 63,877
------------ ------------
Total current liabilities 889,083 923,735
Capitalized lease obligations, net 81,525 99,246
------------ ------------
Total liabilities 970,608 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 and outstanding;
18,307,245 shares at March 31, 2000 and
17,223,302 shares at December 31, 1999 28,342,402 23,177,865
Accumulated deficit (22,258,224) (21,012,188)
Other comprehensive income (12,499) (12,499)
------------ ------------
Total shareholders' equity 6,071,679 2,153,178
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,042,287 $ 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
<TABLE>
<CAPTION>
Three Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
Sales $ 85,830 $ 92,738
Cost of sales 64,068 32,911
------------ ------------
Gross profit 21,762 59,827
Expenses:
Research & development 558,496 555,125
Selling, general & administrative 742,907 709,152
------------ ------------
Total expenses 1,301,403 1,264,277
------------ ------------
Loss from operations (1,279,641) (1,204,450)
Other income (expense):
Interest income 40,336 17,592
Interest expense (7,359) (22,582)
Other income 628 4,315
------------ ------------
Total other income (expense) 33,605 (675)
------------ ------------
Loss before provision for income taxes (1,246,036) (1,205,125)
Provision for income taxes 0 0
------------ ------------
NET LOSS $ (1,246,036) $ (1,205,125)
============ ============
Basic and diluted loss per share $ (0.07) $ (0.22)
============ ============
Weighted average common shares outstanding 17,889,045 5,548,583
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
INTERLEUKIN GENETICS, INC.
AND SUBSIDIARIES
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $(1,246,036) $(1,205,125)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 43,039 50,586
Issuance of stock options for services rendered 241,566 -0-
(Increase) decrease in:
Accounts receivable 16,439 11,301
Prepaid expenses 11,488 (17,859)
Increase (decrease) in:
Accounts payable (28,141) (46,206)
Accrued expenses 1,587 16,691
Notes payable (1,797) (21,702)
Deferred income (4,138) (882)
----------- -----------
Net cash used in operating activities (965,993) (1,213,196)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture and equipment -0- (5,175)
----------- -----------
Net cash provided by investing activities -0- (5,175)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock 4,922,971 10,463
Principal payments of long-term debt -0- (20,358)
Principal payments of capitalized lease obligations (19,884) (20,218)
----------- -----------
Net cash provided by financing activities 4,903,087 (30,113)
----------- -----------
Net increase (decrease) in cash and equivalents 3,937,094 (1,248,484)
Cash and equivalents, beginning of period 668,616 2,432,271
----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD $ 4,605,710 $ 1,183,787
=========== ===========
Interest paid $ 7,359 $ 22,582
Income taxes paid $ -0- $ -0-
</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 $22.3
million, including losses of approximately $1.2 milling during the three months
ended March 31, 2000. For the three months ended March 31, 2000, the Company
reported negative cash flows from operating activities of approximately $1.0
million.
During the three months ended March 31, 2000, the Company raised approximately
$4.9 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 reimbursement for such tests by third-party payers.
If both third-party payers and
4
<PAGE> 7
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 months ended March
31, 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.
The following table presents information about the Company by geographic area.
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
2000 1999
----------- -----------
(Unaudited) (Unaudited)
Total Revenues:
<S> <C> <C>
United States $ 74,602 $ 74,335
France 4,983 10,784
Other foreign 6,245 7,619
----------- -----------
Total $ 85,830 $ 92,738
=========== ===========
Operating Loss:
United States $(1,113,288) $ (963,560)
France (76,778) (144,534)
Other foreign (89,575) (96,356)
----------- -----------
Total $(1,279,641) $(1,204,450)
=========== ===========
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
As of March 31,
2000 1999
----------- -----------
(Unaudited) (Unaudited)
Assets:
<S> <C> <C>
United States $ 7,042,287 $ 2,385,553
France -0- -0-
Other foreign -0- -0-
----------- -----------
Total $ 7,042,287 $ 2,385,553
=========== ===========
</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 Texas 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 April 1999, the Company entered into an agreement with Dumex, a subsidiary of
AlPharma, a pharmaceutical manufacturer, to market and sell PST in nine European
countries (Austria, Denmark, Finland, Germany, Ireland, Norway, Sweden,
Switzerland and the U.K.). Dumex is well-known in Europe as a manufacturer of
oral health care products used by periodontists.
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 MARCH 31, 2000 TO THREE MONTHS ENDED MARCH 31,
1999
Gross revenue for the three months ended March 31, 2000 was $85,830 compared to
$92,738 for the same period ended March 31, 1999, a decrease of 7%. In the three
months ended March 31, 2000, the Company conducted 448 PST tests compared to 510
tests in the same period in 1999. Cost of sales was $64,068 for the three months
ended March 31, 2000 compared to $32,911 for 1999. Gross profit margin was 25%
in the three months ended March 31, 2000 compared to 65% for the year earlier
period. This decrease in gross profit margin reflected fees paid to distributors
in the quarter ending March 31, 2000. The Company entered into distributor
agreements in the U.S. and Europe during the second quarter of 1999, and there
were no fees paid to distributors in the first quarter of 1999.
For the three months ended March 31, 2000, the Company had research and
development expenses of $558,496 as compared to $555,125 for the first quarter
of 1999. The year-earlier expense included $178,072 for conducting several large
clinical trials, compared to $32,361 in expense for clinical trials in the first
quarter of 2000. Offsetting the decreased cost of clinical trials was a non-cash
charge of $221,886 in the
8
<PAGE> 11
quarter ended March 31, 2000 for the cost of stock issued for services rendered.
There was no charge in the quarter ended March 31, 1999 for stock issued.
Selling, general and administrative expenses were $742,907 in the first quarter
of 2000 compared to $709,152 in the first quarter of 1999, an increase of 4.8%.
Interest income in the first quarter of 2000 was $40,336 compared to $17,592 in
the first quarter of 1999. This increase reflects higher balances of cash in the
first quarter of 2000 compared to the year earlier period. Interest expense of
$7,359 was incurred during the period ended March 31, 2000, compared to $22,582
in the same period in 1999.
Net loss increased to 1,246,036 for the first quarter of 2000 compared to a net
loss of $1,205,125 for the third quarter of 1999, an increase of $40,911, 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 $22.3 million, including losses of approximately $1.2 milling
during the three months ended March 31, 2000. Net cash used in operating
activities was $985,673 during the three months ended March 31, 2000 and
$1,213,196 during the same period of the prior fiscal year. As of March 31,
2000, the Company had cash and cash equivalents and marketable securities of
$6,593,210.
The Company currently does not have any commitments for material capital
expenditures. The Company's obligation at March 31, 2000 for capitalized lease
obligations totaled $143,239, of which $81,525 is classified as long-term and
$61,714 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 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
9
<PAGE> 12
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 and questioning whether the
Company had violated certain shareholder approval provisions of NASDAQ's
Marketplace Rules in connection with the Company's private placement in June
1999. The Company believes that it currently complies with the continued
listing requirements of the NASDAQ SmallCap Market and that it did not violate
the shareholder approval provisions of NASDAQ's Marketplace Rules. However,
there can be no assurance that the Company has addressed these matters in a
manner satisfactory to NASDAQ, or that the Company will maintain the
qualifications for continued listing on the NASDAQ SmallCap Market.
If the Company's shares are not listed 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
10
<PAGE> 13
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 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 March 31, 2000, 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 the Company's marketable investment securities would be
insignificant to the financial statements as a whole.
11
<PAGE> 14
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 28, 2000, the Company completed a private placement (the
"Private Placement") whereby the Company sold 832,667 shares of Common Stock, no
par value ("Common Stock"), at a per share purchase price of $6.00 for a total
offering price of $5,000,000. The shares of Common Stock (the "Shares") issued
pursuant to the Private Placement were not registered under the Securities Act
of 1933, as amended (the "Securities Act"), pursuant to the exemptions of such
registration provided under Regulation D ("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. The Company relied on certain
representations and warranties of the Private Placement investors, including,
among other things, each of such investors' ability to evaluate the merits and
risks of an investment in the Shares, each of such 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 such investors' own account
for investment and not with a view to distribution.
(d) Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
None
12
<PAGE> 15
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 15, 2000 By: /s/ PHILIP R. REILLY
-----------------------------------
Philip R. Reilly
Chairman of the Board and
Chief Executive Officer
(Principle Executive Officer)
By: /s/ U. SPENCER ALLEN
-----------------------------------
U. Spencer Allen
Chief Financial Officer,
Secretary & Treasurer
(Principle Financial and
Accounting Officer)
13
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule (filed herewith)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE MARCH 31, 2000 BALANCE SHEET AND THE INCOME STATEMENT FOR THE THREE
MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 4,605,710
<SECURITIES> 1,987,500
<RECEIVABLES> 140,788
<ALLOWANCES> 54,225
<INVENTORY> 0
<CURRENT-ASSETS> 6,800,845
<PP&E> 813,592
<DEPRECIATION> 572,150
<TOTAL-ASSETS> 7,042,287
<CURRENT-LIABILITIES> 889,083
<BONDS> 0
0
0
<COMMON> 28,342,402
<OTHER-SE> (22,258,224)
<TOTAL-LIABILITY-AND-EQUITY> 7,042,287
<SALES> 85,830
<TOTAL-REVENUES> 85,830
<CGS> 64,068
<TOTAL-COSTS> 1,301,403
<OTHER-EXPENSES> (40,964)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,359
<INCOME-PRETAX> (1,246,036)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,246,036)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
