<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________to _______________.
Commission File Number 0-23317
- --------------------------------------------------------------------------------
GENE LOGIC INC.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
Delaware 06-1411336
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
708 Quince Orchard Road
Gaithersburg, Maryland 20878
(Address of principal executive offices)
(301) 987-1700
(Registrant's phone number, including area code)
------------------------------------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 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 Registrant's Common Stock, $.01 par
value, was 14,175,207 as of April 30, 1998.
===============================================================================
<PAGE>
GENE LOGIC INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at March 31, 1998 and December 31, 1997 . . . . . 3
Statements of Operations for the three months ended
March 31, 1998 and 1997. . . . . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows for the three months ended
March 31, 1998 and 1997. . . . . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements. . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . . . . . . .8
Item 3. Quantitative and Qualitative Disclosure About Market Risk. . . . 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 11
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . . 11
Item 3. Defaults 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 . . . . . . . . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENE LOGIC INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . $ 37,455 $ 46,522
Marketable securities available for sale . . . . . . . . . . . . . . . . 4,362 99
Due from strategic partner . . . . . . . . . . . . . . . . . . . . . . . 353 1,000
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 472 481
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 1,137 890
---------- ----------
Total Current Assets. . . . . . . . . . . . . . . . . . . . . . . . . 43,779 48,992
Property and Equipment, net. . . . . . . . . . . . . . . . . . . . . . . . 7,620 4,211
Intangible and Other Assets, net . . . . . . . . . . . . . . . . . . . . . 903 769
---------- ----------
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,302 $ 53,972
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $627 $181
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,882 1,371
Current portion of capital lease obligation. . . . . . . . . . . . . . 117 115
Current portion of long-term debt. . . . . . . . . . . . . . . . . . . 443 434
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,476 4,436
---------- ----------
Total Current Liabilities. . . . . . . . . . . . . . . . . . . . . . 6,545 6,537
Deferred Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 --
Capital Lease Obligation . . . . . . . . . . . . . . . . . . . . . . . . . 195 225
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 663 777
Other Noncurrent Liabilities . . . . . . . . . . . . . . . . . . . . . . . 395 366
---------- ----------
Total Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 7,915 7,905
---------- ----------
Stockholders' Equity:
Common Stock, $.01 par value; 60,000,000 shares authorized;
13,900,333 and 13,899,250 shares issued and outstanding as of
March 31, 1998 and December 31, 1997, respectively . . . . . . . . . 139 139
Preferred Stock, $.01 par value; 10,000,000 shares authorized;
no shares issued and outstanding as of March 31, 1998 and
December 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . 64,882 64,882
Deferred compensation on stock options, net . . . . . . . . . . . . . (5,845) (6,278)
Unrealized loss on marketable securities. . . . . . . . . . . . . . . (4) (2)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (14,785) (12,674)
---------- ----------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . 44,387 46,067
---------- ----------
Total Liabilities and Stockholders' Equity . . . . . . . . . . . . $52,302 $53,972
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
3
<PAGE>
GENE LOGIC INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
-------- -------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,196 $ --
Expenses:
Research and development. . . . . . . . . . . . . . . . . . . . 3,237 915
General and administrative. . . . . . . . . . . . . . . . . . . 1,596 476
-------- -------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . 4,833 1,391
-------- -------
Loss from operations . . . . . . . . . . . . . . . . . . . . (2,637) (1,391)
Interest income, net . . . . . . . . . . . . . . . . . . . . . . 607 61
Other expense. . . . . . . . . . . . . . . . . . . . . . . . . . (81) --
-------- -------
Loss before income tax expense . . . . . . . . . . . . . . . (2,111) (1,330)
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . -- --
-------- -------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . (2,111) (1,330)
Accretion of mandatory redemption of Preferred Stock . . . . . . -- 186
-------- -------
Net loss attributable to common stockholders . . . . . . . . $(2,111) $(1,516)
-------- -------
Basic and Diluted Net Loss Per Common Share. . . . . . . . . . . $ (0.15) $ (2.38)
-------- -------
Shares Used In Computing Basic and Diluted Net Loss
Per Common Share . . . . . . . . . . . . . . . . . . . . . . . 13,900 638
-------- -------
Pro Forma Net Loss Per Common Share. . . . . . . . . . . . . . . $ (0.15) $ (0.24)
-------- -------
Shares Used in Computing Pro Forma Net Loss
Per Common Share . . . . . . . . . . . . . . . . . . . . . . . 13,900 5,474
-------- -------
-------- -------
</TABLE>
See accompanying notes.
4
<PAGE>
GENE LOGIC INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,111) $ (1,330)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 292 102
Cancellation of note receivable. . . . . . . . . . . . . . . . -- 43
Amortization of deferred compensation . . . . . . . . . . . . 433 --
Loss on disposal of property and equipment . . . . . . . . . . 81 --
Changes in operating assets and liabilities:
Due from strategic partner . . . . . . . . . . . . . . . . . . 647 --
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . 10 (78)
Other current assets . . . . . . . . . . . . . . . . . . . . . (247) 32
Intangibles and other assets . . . . . . . . . . . . . . . . . (156) (65)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 445 39
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 1,511 (777)
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . (1,843) --
Other noncurrent liabilities . . . . . . . . . . . . . . . . . 30 --
--------- ---------
Net Cash Flows From Operating Activities . . . . . . . . . . (908) (2,034)
--------- ---------
Cash Flows From Investing Activities:
Purchases of property and equipment . . . . . . . . . . . . . (3,760) (353)
Increase in notes receivable from employees. . . . . . . . . . -- (20)
Purchase of marketable securities for sale . . . . . . . . . . (4,266) --
Proceeds from sale and maturity of marketable securities
available for sale. . . . . . . . . . . . . . . . . . . . . . -- 1,394
--------- ---------
Net Cash Flows From Investing Activities . . . . . . . . . . (8,026) 1,021
--------- ---------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock . . . . . . . . . . . . -- --
Repayments of financing agreement. . . . . . . . . . . . . . . (44) --
Repayments of capital lease obligation and equipment loan. . . (89) (26)
--------- ---------
Net Cash Flows From Financing Activities . . . . . . . . . . (133) (26)
--------- ---------
Net Decrease in Cash and Cash Equivalents. . . . . . . . . . . . . (9,067) (1,039)
Cash and Cash Equivalents, beginning of period . . . . . . . . . . 46,522 1,137
--------- ---------
Cash and Cash Equivalents, end of period . . . . . . . . . . . . . $ 37,455 $ 98
--------- ---------
--------- ---------
Supplemental Disclosure:
Interest expense paid. . . . . . . . . . . . . . . . . . . . . $ 34 $ 9
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
5
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. The balance sheet as of March 31, 1998, statements of
operations for the three months ended March 31, 1998 and 1997 and the
statements of cash flows for the three months ended March 31, 1998 and 1997
are unaudited, but include all adjustments (consisting of normal recurring
adjustments) which the Company considers necessary for a fair presentation of
the financial position, operating results and cash flows for the periods
presented. Although the Company believes that the disclosures in these
financial statements are adequate to make the information presented not
misleading, certain information and footnote information normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission.
Results for any interim period are not necessarily indicative of
results for any future interim period or for the entire year. The
accompanying financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 filed with the
Securities and Exchange Commission.
NEW PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). SFAS No. 128 simplifies the standards for computing
earnings per share previously found in Accounting Principles Board Opinion
No. 15, "Earnings Per Share" ("APB Opinion No. 15"). It replaces the
presentation of primary and fully diluted EPS with a presentation of basic
and diluted EPS and requires a reconciliation of the numerator and
denominator of the basic EPS calculation to the numerator and denominator of
the diluted EPS calculation. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS is computed
similarly to primary EPS pursuant to APB Opinion No. 15.
SFAS No. 128 is effective for interim periods and fiscal years
ending after December 15, 1997. EPS for the three months ended March 31,
1997 has been restated in accordance with SFAS 128.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 sets standards for reporting and
presentation of comprehensive income and its components in financial
statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Once adopted, it requires reclassification adjustments and
changes in presentation for all prior periods shown. The impact of the
adoption of SFAS No. 130 on the Company was not material.
6
<PAGE>
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosure About
Segments of an Enterprise and Related Information", which establishes
standards for reporting information about operating segments in annual and
interim financial statements issued to shareholders. This statement also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company plans to adopt this
statement in 1998.
MARKETABLE SECURITIES AVAILABLE FOR SALE
All marketable securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with unrealized
gains and losses reported as a separate component of stockholders' equity.
Realized gains and losses and declines in value judged to be other than
temporary for available for sale securities are included in other income. As
of March 31, 1998 and 1997, all of the Company's investments were classified
as current as the Company may not hold investments until maturity in order to
take advantage of market conditions.
REVENUE RECOGNITION
The Company recognizes revenue from research and development
support and technology and database access fees as they are earned under the
terms of the agreement. Revenue is deferred for fees received before they
are earned. Revenues related to the achievement of certain milestones are
recognized when earned.
PRO FORMA NET LOSS PER COMMON SHARE
Pro forma net loss per common share is computed using the weighted
average number of shares of common stock outstanding giving effect to the
conversion of convertible preferred shares that automatically converted to
common stock upon completion of the Company's initial public offering (the
"IPO") using the if-converted method from the original date of issuance.
Common equivalent shares from stock options and warrants are excluded from
the computation for all periods as their effect is antidilutive.
NOTE 2. STOCKHOLDERS' EQUITY
During July 1997, the Company sold 4,444,443 shares of Series C
Convertible Preferred Stock in a private placement for net proceeds of
approximately $19.1 million. During November 1997, the Company completed an
IPO of 3,347,000 shares of Common Stock (including exercise of the
underwriters' over-allotment option) at $8.00 per share, generating net
proceeds of approximately $23.9 million. In conjunction with the Company's
IPO, all outstanding shares of preferred stock were converted to common stock
on a one-to-one basis.
The Company continues to apply the provisions of Accounting
Principles Board Opinion No 25, "Accounting for Stock Issued to Employees",
and related interpretations for its stock option plans. As such, the Company
has recorded compensation expense for the three months ended March 31, 1998
as follows:
<TABLE>
<CAPTION>
DEFERRED
COMPENSATION
------------
<S> <C>
Balance at December 31, 1997 $ (6,278)
Amortization of deferred compensation 433
--------
Balance at March 31, 1998 $ (5,845)
--------
--------
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND
THE FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION.
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. WORDS SUCH AS "ANTICIPATES," "BELIEVES,"
"ESTIMATES," "EXPECTS," "INTENDS" AND OTHER SIMILAR EXPRESSIONS ARE INTENDED
TO IDENTIFY FORWARD-LOOKING STATEMENTS, BUT ARE NOT THE EXCLUSIVE MEANS OF
IDENTIFYING SUCH STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED. THESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO,
THE EXTENT OF UTILIZATION OF GENOMIC INFORMATION BY THE PHARMACEUTICAL
INDUSTRY IN BOTH RESEARCH AND DEVELOPMENT, RISKS RELATING TO THE DEVELOPMENT
OF GENOMIC DATABASES AND THEIR USE BY POTENTIAL COLLABORATORS OF THE COMPANY,
THE IMPACT OF TECHNOLOGICAL ADVANCES AND COMPETITION, AS WELL AS OTHER RISKS
AND UNCERTAINTIES SET FORTH IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 1997 FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.
Flow-thru Chip-TM- and ACCELERATED DRUG DISCOVERY-TM- are
trademarks of the Company. Tradenames and trademarks of other companies
appearing in this Form 10-Q are the property of their respective holders.
OVERVIEW
The Company was incorporated in September 1994 and has devoted
substantially all of its resources to the development of its genomics
technologies, bioinformatics systems and database products used to identify
the expression of genes, drug targets and drug leads. During 1997, the
Company entered into strategic alliances with Procter & Gamble
Pharmaceuticals, Inc. ("Procter & Gamble"), Japan Tobacco Inc. ("Japan
Tobacco") and N.V. Organon ("Organon"), a pharmaceutical business unit of
Akzo Nobel NV. These agreements provide the Company with various combinations
of technology and database access fees and research funding and provide
certain additional payments upon the attainment of research and product
development milestones and royalty payments based on sales of any products
resulting from the strategic alliances. Procter & Gamble and Japan Tobacco
each have the option to expand the alliances to cover additional research
areas. Japan Tobacco purchased $3.0 million of the Company's Common Stock in
a private placement that closed simultaneously with the Company's initial
public offering.
Gene Logic's future profitability will depend in part on the
successful establishment of strategic alliances, marketing of genomic
databases and bioinformatics software, and development of the Flow-thru Chip.
Payments from strategic alliance partners and interest income are expected
to be the only sources of revenue for the foreseeable future. Such revenue
is dependent in large part on the discovery of genes, drug targets and drug
leads using the Company's technologies. Royalties or other revenue from
commercial sales of products developed from any therapeutic or diagnostic
product identified using the Company's technologies are not expected for at
least several years, if at all. Payments under strategic alliances may be
subject to significant fluctuation in both timing and amount, and, therefore,
the Company's results of operations for any period may not be comparable to
the results of operations for any other period. Furthermore, the generation
of significant revenues and profitability will depend upon the Company
entering into additional alliances. There can be no assurance that the
Company will enter into additional alliances on acceptable terms, if at all,
or that current or future alliances will be successful.
8
<PAGE>
The Company has incurred operating losses in each year since its
inception, and, at March 31, 1998, the Company had an accumulated deficit of
approximately $14.8 million. The Company's losses have resulted principally
from costs incurred in research and development and from general and
administrative costs associated with the Company's operations. These costs
have exceeded the Company's revenues which to date have been generated
principally from strategic alliances. The Company expects to incur additional
operating losses over the next few years as a result of increases in its
expenses for research and development capabilities.
The Company's quarterly operating results may fluctuate
significantly as a result of a variety of factors, including changes in the
demand for the Company's technologies and products, variations in payments
under strategic alliances, including milestone payments, royalties, license
fees and other contract revenues, and the timing of new product
introductions, if any, by the Company. The Company's quarterly operating
results may also fluctuate significantly depending on changes in the research
and development budgets of the Company's strategic partners, the introduction
of new products by the Company's competitors and other competitive factors,
adoption of new technologies, and the cost, quality and availability of cell
and tissue samples and related reagents.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
Revenue was $2.2 million for the three months ended March 31,
1998. There was no revenue for the three months ended March 31, 1997. The
increase in revenues resulted from the Company's strategic alliance
agreements with Procter & Gamble, Japan Tobacco and Organon, which were
entered into subsequent to March 31, 1997. Under the terms of the strategic
alliance agreements, payments for technology and database access fees and
research funding are recognized ratably over the period for which the
payments are made. Payments related to the achievement of certain milestones
are recognized as revenue when the milestones are achieved.
Research and development expenses increased to $3.2 million for
the three months ended March 31, 1998 compared to $915,000 for the same
period in 1997. The increase in research and development expenses was
attributable to increased personnel expenses, laboratory supplies and
facility costs as a result of the Company expanding its target discovery
programs, Flow-thru Chip development and bioinformatics business. The
Company expects research and development expenses to continue to increase as
personnel and research and development facilities are expanded to accommodate
new and existing strategic alliances.
General and administrative expenses increased to $1.6 million for
the three months ended March 31, 1998 compared to $476,000 for the same
period in 1997. The increase is due primarily to increased personnel
expenses, professional fees and facility costs as a result of the Company's
overall scale-up of operations and business development efforts. The Company
expects that general and administrative expenses will continue to increase as
the Company continues to expand its operations.
Net interest income increased to $607,000 for the three months
ended March 31, 1998 from $61,000 for the same period in 1997 due to
investment of proceeds from the Company's private placement of equity
securities and initial public offering in 1997.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 1998, the Company financed its
operations through proceeds from the Company's initial public offering and
private placements of equity securities, payments from
9
<PAGE>
strategic alliance partners, a capital lease and an equipment loan. In
November 1997, the Company completed an initial public offering of 3,347,000
shares of its Common Stock (including exercise of the underwriters'
over-allotment option), generating net proceeds of approximately $23.9
million. The private placements of equity securities have provided the
Company with aggregate gross proceeds of approximately $33.2 million. The
Company has received, as of March 31, 1998, $6.5 million under its strategic
alliances for technology and database access fees and research funding. The
Company has also obtained $471,000 of capital lease financing and $1.1
million under an equipment loan. As of March 31, 1998, the Company had
approximately $41.8 million in cash and marketable securities, compared to
$46.6 million as of December 31, 1997.
Net cash used in operating activities was $908,000 for the three
months ended March 31, 1998, as compared to net cash used in operating
activities of $2.0 million for the three months ended March 31, 1997. The
decrease in net cash used in operating activities resulted from a payment
received from a strategic partner, revenue recognized under strategic
alliances and timing of payments relating to the Company's obligations. The
Company's investing activities, other than purchases, sales and maturities of
available-for-sale securities, primarily consisted of capital expenditures,
which totaled $3.8 million and $353,000 for the three months ended March 31,
1998 and 1997, respectively. The increase was primarily due to funding
tenant improvements relating to the completion of the Company's new office
and research laboratory facility in February 1998 and laboratory and computer
equipment and furniture purchases to support the Company's expanding
business. Net cash used in financing activities was $133,000 and $26,000 for
the three months ended March 31, 1998 and 1997, respectively. The increase is
due to repayments under an equipment loan that was entered into in April 1997.
As of December 31, 1997, the Company had net operating loss
carryforwards of approximately $10.4 million to offset federal and state
income taxes. The Company's research and development tax credit carryforwards
were estimated to be approximately $279,000 as of December 31, 1997 for
federal income tax purposes. If not utilized, the federal and state net
operating loss carryforwards will expire through 2012.
To date, all revenue received by the Company has been from its
strategic alliances. The Company expects that substantially all revenue for
the foreseeable future will come from strategic alliance partners and
interest income. Furthermore, the Company's ability to achieve profitability
will be dependent upon the ability of the Company to enter into additional
strategic alliances. There can be no assurance that the Company will be able
to negotiate additional strategic alliances in the future on acceptable
terms, if at all, or that current or future strategic alliances will be
successful and provide the Company with expected benefits.
The Company believes that existing cash and marketable securities
and anticipated cash flow from its current strategic alliances will be
sufficient to support the Company's operations for at least the next 24
months. The estimate for the period for which the Company expects its
available cash balances and estimated cash flow from its current strategic
alliances to be sufficient to meet its capital requirements is a
forward-looking statement that involves risks and uncertainties as set forth
herein and elsewhere in this Quarterly Report on Form 10-Q. The Company's
actual future capital requirements and the adequacy of its available funds,
will depend on many factors, including progress of its discovery programs,
the number and breadth of these programs, the ability of the Company to
establish and maintain additional strategic alliance and licensing
arrangements and the progress of the development and commercialization
efforts of the Company's strategic partners. These factors also include the
level of the Company's activities relating to its independent discovery
programs and to the development and commercialization rights it retains in
its strategic alliance arrangements, competing technological and market
developments, the costs associated with obtaining access to tissue samples
and related information and the costs involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims and other intellectual
property
10
<PAGE>
rights. The Company expects that it will require significant additional
financings in the future, which it may seek to raise through public or
private equity offerings, debt financing or additional strategic alliance and
licensing arrangements. No assurance can be given that additional financing
or strategic alliance and licensing arrangements will be available when
needed, if at all, or that, if available, will be obtained on terms favorable
to the Company and its stockholders. To the extent that the Company raises
additional capital by issuing equity or convertible debt securities,
ownership dilution to stockholders will result. If adequate financing is not
available when needed, the Company may be required to curtail significantly
one or more of its research and development programs or to obtain funds
through arrangements with strategic partners or others that may require the
Company to relinquish rights to certain of its technologies, discoveries or
potential products, or to grant licenses on terms that are not favorable to
the Company, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. In the
event that adequate funds are not available, the Company's business would be
adversely affected.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products
are coded to accept two digit entries in the date code field. These date
code fields will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, in less than two years,
computer systems and software used by many companies may need to be upgraded
to comply with such "Year 2000" requirements. The Company uses a significant
number of computer software programs and operating systems in connection with
its database products, services and internal operations, including
applications used in financial business systems and various administration
functions. The Company is in the process of formulating and implementing a
program designed to ensure that all software used in connection with the
Company's database products, services and internal operations systems will
manage and manipulate data involving the transition of dates from 1999 to
2000 without functional or data abnormality and without inaccurate results
related to such dates. The Company currently anticpates that it will not
incur material costs in connection with such program.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not hold any financial instruments subject to
significant market risk.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1998, the Company has sold and issued the following
securities which were not registered under the Securities Act of 1933, as
amended (the "Securities Act"):
(1) During the period, the Company granted stock options to employees,
officers and directors of the Company under its 1997 Equity Incentive Plan
covering an aggregate of 305,500 shares of the Company's Common Stock.
Certain of these options vest over a period of time following their
respective dates of grant. During the period, 100 shares of Common Stock were
issued pursuant to the exercise of stock options granted under the 1997
Equity Incentive Plan and 275,857 shares of Common Stock were
11
<PAGE>
issued pursuant to the exercise of stock options granted under the 1996 Stock
Plan (such plan was amended and restated in September 1997 as the 1997 Equity
Incentive Plan.).
The issuance of Common Stock described in paragraph (1) above was
deemed to be exempt from registration under the Securities Act by virtue of
Rule 701 promulgated thereunder in that they were offered and sold either
pursuant to written compensatory benefit plans or pursuant to a written
contract relating to compensation, as provided by Rule 701.
On November 20, 1997, the Company's Form S-1 Registration Statement
(File no. 333-37317) was declared effective by the Securities and Exchange
Commission. The Registration Statement, as amended, covered the offering of
3,000,000 shares of the Company's Common Stock, $.01 par value. The offering
commenced on November 21, 1997 and the sale to the public of 3,000,000 shares
of Common Stock at $8.00 per share was completed on November 26, 1997 for an
aggregate price of $24.0 million. The Registration Statement covered an
additional 450,000 shares of Common Stock that the underwriters had the
option to purchase solely to cover over-allotments. The managing underwriters
for the offering were BancAmerica Robertson Stephens, Hambrecht & Quist LLC
and UBS Securities LLC. On December 22, 1997, the underwriters exercised
their option to purchase 347,000 additional shares of Common Stock. A total
of 3,347,000 shares of Common Stock were sold in the offering at an aggregate
price of approximately $26.8 million. All of the shares sold in the offering
were sold by the Company.
Expenses incurred by the Company through December 31, 1997 in
connection with the issuance and distribution of Common Stock in the offering
included underwriting discounts, commissions and allowances and other
expenses of approximately $1.9 million and $1.0 million, respectively. Total
offering expenses of approximately $2.8 million resulted in net offering
proceeds to the Company of approximately $23.9 million. No expenses were
paid to directors, officers or affiliates of the Company or 10% owners of any
class of equity securities of the Company.
Of the net offering proceeds to the Company of approximately $23.9
million, through March 31, 1998, approximately $1.4 million had been used to
fund tenant improvements, approximately $1.5 million had been used to fund
capital expenditures, approximately $133,000 had been used to repay capital
lease and equipment loan obligations, approximately $3.3 million had been
used for expansion of internal research and development capabilities and
approximately $1.7 million had been used for general corporate purposes. No
payments were made to directors, officers or affiliates of the Company or 10%
owners of any class of equity securities of the Company. Approximately $15.9
million of the net offering proceeds remain as working capital.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
12
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS:
11.1 Statement regarding computation of net loss per share
27.1 Financial Data Schedule
B) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the three months ended
March 31, 1998.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENE LOGIC INC.
Date: May 14, 1998 By: /S/ MICHAEL J. BRENNAN
------------------------------
Michael J. Brennan, M.D., Ph.D.
President, Chief Executive Officer
and Director
(PRINCIPAL EXECUTIVE OFFICER)
Date: May 14, 1998 By: /S/ MARK D. GESSLER
------------------------------
Mark D. Gessler
Senior Vice President, Corporate
Development,
Chief Financial Officer and
Secretary
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
14
<PAGE>
EXHIBIT 11.1
GENE LOGIC INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1998 1997
---- ----
<S> <C> <C>
BASIC AND DILUTED:
Weighted average common shares outstanding 13,900 638
Net loss $(2,111) $(1,330)
Accretion of mandatory redeemable value of convertible preferred stock -- 186
Net loss attributable to common stockholders $(2,111) $(1,516)
------- --------
------- --------
Net loss per common share $ (0.15) $ (2.38)
------- --------
------- --------
PRO FORMA:
Weighted average common shares outstanding 13,900 638
Dilutive common stock equivalents:
Convertible securities, using the if-converted method -- 4,837
Common and common equivalent shares used in the calculation of net loss
per share 13,900 5,475
------- --------
Net loss $(2,111) $(1,330)
------- --------
Net loss per common and common equivalent share $ (0.15) $ (0.24)
------- --------
------- --------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 37,455
<SECURITIES> 4,362
<RECEIVABLES> 353
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 43,779
<PP&E> 8,548
<DEPRECIATION> 928
<TOTAL-ASSETS> 52,302
<CURRENT-LIABILITIES> 6,545
<BONDS> 858
0
0
<COMMON> 139
<OTHER-SE> 44,248
<TOTAL-LIABILITY-AND-EQUITY> 52,302
<SALES> 0
<TOTAL-REVENUES> 2,196
<CGS> 0
<TOTAL-COSTS> 4,833
<OTHER-EXPENSES> 81
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,111)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,111)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,111)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
