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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 JUNE 30, 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
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GENE LOGIC INC.
(Exact name of registrant as specified in its charter)
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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 14,704,498 as of July 31, 1998.
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GENE LOGIC INC.
TABLE OF CONTENTS
<TABLE>
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Balance Sheets at June 30, 1998 and December 31, 1997................3
Statements of Operations for the Three and Six Months Ended
June 30, 1998 and 1997.............................................4
Statements of Cash Flows for the Six Months Ended
June 30, 1998 and 1997.............................................5
Notes to Financial Statements........................................6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations...............10
Item 3. Quantitative and Qualitative Disclosure About Market Risk...........14
PART II OTHER INFORMATION
Item 1. Legal Proceedings...................................................14
Item 2. Changes in Securities and Use of Proceeds...........................14
Item 3. Defaults Upon Senior Securities.....................................15
Item 4. Submission of Matters to a Vote of Security Holders.................15
Item 5. Other Information...................................................16
Item 6. Exhibits and Reports on Form 8-K....................................16
Signatures..........................................................17
</TABLE>
2.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENE LOGIC INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............................................ $ 35,849 $ 46,522
Marketable securities available for sale ............................. 4,288 99
Due from strategic partner ........................................... 2,357 1,000
Prepaid expenses ..................................................... 510 481
Other current assets ................................................. 1,318 890
-------- --------
Total Current Assets ............................................. 44,322 48,992
Property and Equipment, net .............................................. 8,341 4,211
Intangible and Other Assets, net ......................................... 1,037 769
-------- --------
Total Assets ..................................................... $ 53,700 $ 53,972
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................................... $ 746 $ 181
Accrued expenses .................................................... 1,828 1,371
Current portion of capital lease obligation ......................... 120 115
Current portion of long-term debt ................................... 1,117 434
Deferred revenue .................................................... 2,417 4,436
-------- --------
Total Current Liabilities ....................................... 6,228 6,537
Capital Lease Obligation ................................................. 164 225
Long-Term Debt ........................................................... 3,381 777
Other Noncurrent Liabilities ............................................. 425 366
-------- --------
Total Liabilities .................................................... 10,198 7,905
======== ========
Stockholders' Equity:
Common Stock, $.01 par value; 60,000,000 shares authorized;
14,669,844 and 13,899,250 shares issued and outstanding as of
June 30, 1998 and December 31, 1997, respectively .................. 147 139
Preferred Stock, $.01 par value; 10,000,000 shares authorized;
no shares issued and outstanding as of June 30, 1998 and
December 31, 1997 ................................................. -- --
Additional paid-in capital .......................................... 64,343 64,882
Deferred compensation on stock options, net ......................... (4,735) (6,278)
Unrealized loss on marketable securities ............................ (10) (2)
Accumulated deficit ................................................. (16,243) (12,674)
-------- --------
Total Stockholders' Equity ....................................... 43,502 46,067
-------- --------
Total Liabilities and Stockholders' Equity ....................... $ 53,700 $ 53,972
======== ========
</TABLE>
See accompanying notes.
3.
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GENE LOGIC INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ....................................................... $ 3,680 $ 167 $ 5,875 $ 167
Expenses:
Research and development ..................................... 3,907 921 7,144 1,837
General and administrative ................................... 1,722 760 3,318 1,236
-------- -------- -------- --------
Total expenses ........................................... 5,629 1,681 10,462 3,073
-------- -------- -------- --------
Loss from operations ..................................... (1,949) (1,514) (4,587) (2,906)
Interest income, net ........................................... 491 30 1,099 91
Other expense .................................................. -- -- (80) --
-------- -------- -------- --------
Loss before income tax expense............................ (1,458) (1,484) (3,568) (2,815)
Income tax expense ............................................. -- -- -- --
-------- -------- -------- --------
Net loss.................................................. (1,458) (1,484) (3,568) (2,815)
Accretion of mandatory redemption of Preferred Stock ........... -- 182 -- 368
-------- -------- -------- --------
Net loss attributable to common
stockholders ........................................... $ (1,458) $ (1,666) $ (3,568) $ (3,183)
======== ======== ======== ========
Basic and Diluted Net Loss Per Common Share .................... $ (0.10) $ (2.61) $ (0.25) $ (4.99)
======== ======== ======== ========
Shares Used In Computing Basic and Diluted
Net Loss Per Common Share .................................... 14,219 638 14,060 638
======== ======== ======== ========
Pro Forma Net Loss Per Common Share ............................ $ (0.27) $ (0.51)
======== ========
Shares Used in Computing Pro Forma Net Loss Per Common Share ... 5,474 5,474
======== ========
</TABLE>
See accompanying notes.
4.
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GENE LOGIC INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss ........................................ $ (3,568) $ (2,815)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization ................. 692 224
Cancellation of note receivable ............... -- 43
Amortization of deferred compensation ......... 828 5
Loss on disposal of property and equipment .... 81 --
Changes in operating assets and liabilities:
Due from strategic partner .................... (1,357) --
Prepaid expenses .............................. (29) (317)
Other current assets .......................... (427) 52
Intangibles and other assets .................. (312) (201)
Accounts payable .............................. 565 47
Accrued expenses .............................. 458 (675)
Deferred revenue .............................. (2,019) 2,833
Other noncurrent liabilities .................. 59 --
-------- --------
Net Cash Flows From Operating Activities .. (5,029) (804)
-------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment ........... (4,859) (762)
Increase in notes receivable from employees ... -- (13)
Purchase of marketable securities for sale .... (4,198) --
Proceeds from sale and maturity of
marketable securities available for sale .... -- 4,347
-------- --------
Net Cash Flows From Investing Activities .. (9,057) 3,572
-------- --------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock ........ 183 --
Proceeds from equipment loans ................. 3,577 1,084
Repayments of financing agreement ............. (90) --
Repayments of capital lease obligation and
equipment loans ............................. (257) (90)
-------- --------
Net Cash Flows From Financing Activities .. 3,413 994
-------- --------
Net (Decrease) Increase in Cash and
Cash Equivalents ............................ (10,673) 3,762
Cash and Cash Equivalents, beginning of period .. 46,522 1,137
-------- --------
Cash and Cash Equivalents, end of period ........ $ 35,849 $ 4,899
======== ========
Supplemental Disclosure:
Interest expense paid ......................... $ 63 $ 32
======== ========
</TABLE>
See accompanying notes.
5.
<PAGE> 6
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 1998, statements of operations for the
three and six months ended June 30, 1998 and 1997 and the statements of cash
flows for the six months ended June 30, 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 and Registration Statement on From S-4 (File No. 333-60135),
both 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 earnings per share ("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 and six months ended June 30, 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.
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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 June 30, 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. Nonrefundable signing fees which are not contingent upon future
performance under the terms of the agreement are recognized as revenue upon
execution of such 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. STRATEGIC ALLIANCES
In June 1998, the Company and Hoechst Schering AgrEvo GmbH ("AgrEvo")
entered into a 3-year strategic alliance for discovery of genes for the
development of crop protection and crop improvement products. The initial
research term may be extended for up to 5 additional years. Payments by AgrEvo
to the Company in the form of committed signing fees, technology and database
access fees and research funding total a minimum of $45 million if the research
program continues for its full expanded term and the Company performs its
research obligations under the agreement. Under the alliance, approximately $1.5
million, $1.0 million of which is payable pursuant to a promissory note due in
January 1999, has been recognized as revenue as a signing fee under the terms of
the agreement during the six months ended June 30, 1998. Such signing fee was
made in consideration of initial access to the technology and other rights under
the agreement. AgrEvo will be obligated to make additional payments to the
Company for the achievement of specified target discovery and related
agricultural product development milestones. AgrEvo will also pay the Company
royalties on worldwide net sales of all agricultural products that may result
from targets discovered pursuant to the alliance.
In June 1998, the Company and the Wyeth-Ayerst Research Division of
American Home Products Corporation ("Wyeth-Ayerst") entered into a
pharmacogenomics strategic alliance in the field of preclinical toxicology.
7.
<PAGE> 8
The Company and Wyeth-Ayerst will collaborate, using the Company's proprietary
gene expression and bioinformatics technologies and Wyeth-Ayerst's expertise in
toxicology, to develop a database of gene expression profiles predictive of
different classes of drug toxicity. Wyeth-Ayerst will have the right to use
information and inventions resulting from the alliance to perform toxicology
studies in connection with its internal drug discovery and development
activities. The Company may non-exclusively license databases, Flow-thru Chips
and other products developed under the alliance to third party customers.
In May 1998, the Company granted to SmithKline Beecham ("SmithKline") a
license to the Company's Object Protocol Model ("OPM") based bioinformatics
system and software tools. Under the agreement, the Company and SmithKline have
agreed to use OPM to develop a series of customized databases and servers to
integrate a range of public and proprietary data sources into SmithKline's data
mining process. The Company retains the right to license software and products
developed under the agreement to third party customers. Under the agreement the
Company will receive software license fees and will be entitled to research
funding for its portion of the collaborative development program.
NOTE 3. LONG-TERM DEBT
In June 1998, the Company and Oxford Venture Leasing, LLC ("Oxford
Leasing") entered into a Master Loan and Security Agreement (the "Oxford Loan")
for the financing of laboratory, computer and office equipment. Under the Oxford
Loan, the Company may borrow up to $5.0 million through June 1999. In addition,
the Company entered into a promissory note with Oxford Leasing (the "Promissory
Note") in the amount of approximately $3.6 million relating to its initial
equipment schedule. The Promissory Note bears interest at 8.8% and is payable
in 48 equal monthly installments including a 15% balloon payment at the end of
the initial term. The Company granted Oxford Leasing a security interest,
collateralized by all the equipment and fixtures acquired under the Oxford Loan.
Simultaneous with entering into the Oxford Loan, the Promissory Note was
assigned by Oxford Leasing to Phoenixcor, Inc.
NOTE 4. 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
the activity relating to deferred compensation on stock options for the six
months ended June 30, 1998 as follows:
<TABLE>
<CAPTION>
DEFERRED
COMPENSATION
------------
<S> <C>
Balance at December 31, 1997 $(6,278)
Amortization of deferred compensation 828
Write-off of forfeited stock options 715
-------
Balance at June 30, 1998 $(4,375)
=======
</TABLE>
8.
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NOTE 5. SUBSEQUENT EVENTS
On July 6, 1998, the Company, the Company's new wholly owned subsidiary,
Gene Logic Acquisition Corp. (the "Merger Sub") and Oncormed, Inc. ("Oncormed")
entered into an Agreement and Plan of Merger and Reorganization (the "Merger
Agreement") whereby Oncormed will merge with and into Merger Sub (the "Merger").
The Merger is subject to the approval of the holders of a majority of shares of
of each of the Company and Oncormed. Upon consummation of the Merger, the
Company will issue up to an aggregate of 4,849,815 shares of the Company's
Common Stock to Oncormed stockholders (the "Total Merger Shares"); provided,
however, that in the event the average closing price of the Company's Common
Stock as reported on the Nasdaq National Market System for the fifteen trading
days ending the second day prior to the Company's special meeting of
stockholders (the "Closing Price") is more than $7.88 per share, then the Total
Merger Shares shall be reduced to a number of shares of the Company's Common
Stock equal to $38,204,420 divided by the Closing Price. Oncormed may terminate
the Merger Agreement if the Closing Price of the Company's Common Stock is less
than $6.34 per share.
In connection with the Merger, the Company and Oncormed have entered
into a loan agreement (the "Loan Agreement") dated July 6, 1998 whereby the
Company has agreed to make available to Oncormed through February 28, 1999, a
credit facility of up to $2,000,000 (the "Loan") to be used by Oncormed for
working capital purposes. Interest on all amounts outstanding under the Loan
shall accrue daily at the per annum rate that Citibank N.A. has announced as its
prime lending rate. Advances under the Loan shall not exceed $500,000 per month.
All outstanding principal and accrued interest on the Loan is due and payable
upon the earliest to occur of (i) March 31, 1999; (ii) in the event the Merger
is not consummated, that date upon which Oncormed secures alternate financing of
at least $2,000,000 on terms satisfactory to Oncormed in its sole discretion; or
(iii) the date on which Oncormed sells or otherwise disposes of all or
substantially all of the assets or business of Oncormed, or any liquidation,
merger or other business combination of Oncormed (other than the Merger). If any
of the Merger Agreement, Loan Agreement or the license agreement (entered into
in accordance with the Merger and the Loan whereby Oncormed has granted the
Company non-exclusive access until March 31, 1999 to Oncormed's tissue
biorespository for the purpose of selecting tissue samples for further analysis)
is terminated, the Company will not be obligated to make any further advances to
Oncormed under the Loan. All amounts outstanding under the Loan are secured by
certain of Oncormed's tissue biorespository assets.
9.
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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 and Registration
Statement on Form S-4 (File No. 333-60135 ), both 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 and Registration Statement on Form S-4 (File No. 333-60135),
both filed with the Securities and Exchange Commission.
Flow-thru Chip(TM) is a trademark of the Company.
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. To date, the Company has
entered into strategic alliances with Procter & Gamble Pharmaceuticals, Inc.
("Procter & Gamble"), Japan Tobacco Inc. ("Japan Tobacco") and N.V. Organon a
pharmaceutical business unit of Akzo Nobel NV, SmithKline Beecham and the
Wyeth-Ayerst Research Division of American Home Products Corporation. In
addition, the Company has an exclusive alliance with Hoechst Shering AgrEvo Gmbh
("AgrEvo") for discovery of genes to develop crop protection and improvement
products. These agreements provide the Company with various combinations of
technology and database access fees,signing 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, diagnostic or agricultural product
identified using the Company's technologies are not expected for at least
several years, if at all. Revenues 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
10.
<PAGE> 11
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.
The Company has incurred operating losses in each year since its
inception, and, at June 30, 1998, the Company had an accumulated deficit of
approximately $16.2 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 revenues 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 and Six Months Ended June 30, 1998 and 1997
Revenue was $3.7 million and $5.9 million for the three months and six
months ended June 30, 1998, respectively, compared to $167,000 for the same
periods in 1997. The increase in revenues resulted from the Company's strategic
alliance agreements which were entered into primarily during the last year.
Under the terms of the strategic alliance agreements, payments for technology
and database access fees and research funding are recognized over the period for
which they are earned. Payments for nonrefundable signing fees, which are not
contingent upon future performance under the terms of the agreement are
recognized as revenue upon execution of such agreement. Payments related to the
achievement of certain milestones are recognized as revenue when the milestones
are achieved.
Research and development expenses increased to $3.9 million and $7.1
million for the three months and six months ended June 30, 1998, respectively,
compared to $921,000 and $1.8 million for the same periods 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 $1.7 million and $3.3
million for the three months and six months ended June 30, 1998, respectively,
compared to $760,000 and $1.2 million for the same periods 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 $491,000 and $1.1 million for the three
months and six months ended June 30, 1998, respectively, from $30,000 and
$91,000 for the same periods in 1997 due to
11.
<PAGE> 12
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 June 30, 1998, the Company financed its
operations through proceeds from the Company's initial public offering and
private placements of equity securities, payments from strategic alliance
partners, a capital lease and equipment loans. 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 June 30, 1998, $8.0
million under its strategic alliances for technology and database access fees
and research funding. In connection with the Company's alliance with AgrEvo, the
Company holds a promissory note for $1.0 million due from AgrEvo in January
1999. The Company has also obtained $471,000 of capital lease financing and $4.7
million under equipment loans. As of June 30, 1998, the Company had
approximately $40.1 million in cash and marketable securities, compared to $46.6
million as of December 31, 1997.
Net cash used in operating activities was $5.0 million for the six
months ended June 30, 1998, as compared to net cash used in operating activities
of $804,000 for the six months ended June 30, 1997. The increase in net cash
used in operating activities resulted from timing of payments from strategic
partners, 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 $4.9 million for the six months
ended June 30, 1998, as compared to $762,000 for the six months ended June 30,
1997. 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 provided by financing
activities was $3.4 million for the six months ended June 30, 1998, as compared
to net cash provided by financing activities of $1.0 million for the six months
ended June 30, 1997. The increase is due to proceeds received under an equipment
loan that was entered into in June 1998.
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.
In June 1998, Gene Logic and Oxford Venture Leasing, LLC ("Oxford
Leasing") entered into a Master Loan and Security Agreement (the "Oxford Loan")
for the financing of laboratory, computer and office equipment. Under the Oxford
Loan, Gene Logic may borrow up to $5.0 million through June 1999. In addition,
Gene Logic entered into a promissory note with Oxford Leasing (the "Promissory
Note") in the amount of approximately $3.6 million relating to its initial
equipment schedule. The
12.
<PAGE> 13
Promissory Note bears interest at 8.8% and is payable in 48 equal monthly
installments including a 15% balloon payment at the end of the initial term.
Gene Logic granted Oxford Leasing a security interest, collateralized by all the
equipment and fixtures acquired under the Oxford Loan. Simultaneous with
entering into the Oxford Loan, the Promissory Note was assigned by Oxford
Leasing to Phoenixcor, Inc.
The Company intends to solicit the approval of the Company's
stockholders of the Agreement and Plan of Merger and Reorganization dated as of
July 6, 1998 (the "Merger Agreement") among the Company, Gene Logic Acquisition
Corp., a Delaware corporation and wholly owned subsidiary of the Company
("Merger Sub"), and Oncormed, Inc., a Delaware corporation ("Oncormed"), and the
merger of Oncormed with and into Merger Sub (the "Merger") pursuant to which
Oncormed will cease to exist and Merger Sub will be the surviving corporation.
There can be no assurance that the Merger will be completed timely, if at all,
that the combined company will not experience any problems associated with
integrating the two companies, or that no problems will occur as a result of
other uncertainties associated with the ongoing businesses of each company.
In connection with the Merger, the Company and Oncormed have entered
into a loan agreement (the "Loan Agreement") dated July 6, 1998 whereby the
Company has agreed to make available to Oncormed through February 28, 1999 a
credit facility of up to $2,000,000 (the "Loan") to be used by Oncormed for
working capital purposes. Interest on all amounts outstanding under the Loan
shall accrue daily at the per annum rate that Citibank N.A. has announced as its
prime lending rate. Advances under the Loan shall not exceed $500,000 per month.
All outstanding principal and accrued interest on the Loan is due and payable
upon the earliest to occur of (i) March 31, 1999; (ii) in the event the Merger
is not consummated, that date upon which Oncormed secures alternate financing of
at least $2,000,000 on terms satisfactory to Oncormed in its sole discretion; or
(iii) the date on which Oncormed sells or otherwise disposes of all or
substantially all of the assets or business of Oncormed, or any liquidation,
merger or other business combination of Oncormed (other than the Merger). If any
of the Merger Agreement, Loan Agreement or the non-exclusive license agreement
between Gene Logic and Oncormed entered into in accordance with the Merger and
the Loan is terminated, Gene Logic will not be obligated to make any further
advances to Oncormed under the Loan. All amounts outstanding under the Loan are
secured by certain of Oncormed's tissue biorepository assets.
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 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
13.
<PAGE> 14
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 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. Such software and systems were purchased and
installed with a view towards Year 2000 compliance. Nevertheless, Year 2000
problems could affect the Company's research and development, financial,
administrative and communication operations.
The Company is in the process of formulating and implementing a program
designed to address any Year 2000 problems. As a result, a project team has
performed an initial review of all internal computer systems and is developing
and implementing a more detailed assessment to include internal and external
compliance audits, Year 2000 validation testing, Year 2000 certification from
third parties the Company has material agreements with and contingency plans.
Systems critical to the Company's business identified as non-Year 2000 compliant
will be replaced or corrected through programming modifications and/or software
upgrades. In addition, third parties such as vendors, major strategic partners,
service suppliers, communication providers and banks will be asked to verify,
through a compliance assurance questionnaire, their Year 2000 readiness. The
Company expects these projects to be successfully completed in 1999. The
Company has not assessed software and systems which would be acquired upon the
consummation of the proposed Merger with Oncormed, however the Company
plans to undertake a review commensurate with its review of existing software
and systems.
External and internal costs specifically associated with modifying
internal software for Year 2000 compliance are expensed as incurred. To date,
costs have not been material and are not expected to be in the future. Such
costs do not include normal system upgrades and replacements. Based on the
Company's current plans and efforts to date, the Company believes that changes
mandated by the Year 2000 issue will not cause any material adverse effects on
the Company's business, financial condition and results of operations. There is
no guarantee, however, that all problems will be foreseen and corrected, or that
no material disruption of the Company's business will occur.
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
During the quarter ended June 30, 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, 100 shares of Common Stock were issued pursuant
to the exercise of stock options granted under the 1997 Equity Incentive Plan
and 277,230 shares of Common Stock were 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.
14.
<PAGE> 15
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 June 30, 1998, approximately $2.1 million had been used to fund
tenant improvements, approximately $2.6 million had been used to fund capital
expenditures, approximately $347,000 had been used to repay obligations under a
capital lease and equipment loans, approximately $7.2 million had been used for
expansion of internal research and development capabilities and approximately
$3.4 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 $8.3 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.
The Company held its Annual Meeting of Stockholders on June 5, 1998 (the
"Annual Meeting"). At the Annual Meeting, the Company's stockholders elected two
directors to the Company's Board of Directors and approved the proposal as more
fully described below.
At the Annual Meeting, 9,296,257 shares out of a total of 13,902,107
shares of Common Stock outstanding at the record date were represented in person
or by proxy.
The proposals considered at the Annual Meeting were voted on as follows:
1. Election of Directors
Proposal to elect two directors to hold office until the 2001 Annual
Meeting of Stockholders or his earlier resignation or removal.
15.
<PAGE> 16
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
------- --------- --------------
<S> <C> <C>
Jules Blake, Ph.D. 9,296,257 0
Michael J. Brennan, M.D., Ph.D. 9,265,657 30,600
</TABLE>
The following individuals' term of office as a director continue after
the meeting: Jeffrey D. Sollender, Alan G. Walton, Ph.D., D.Sc., Charles
L. Dimmler III and G. Anthony Gorry, Ph.D.
2. Appointment of Independent Auditors
Proposal to ratify the selection of Arthur Andersen LLP as independent
auditors of the Company for its fiscal year ending December 31, 1998.
Proposal was approved by a vote of 9,296,157 shares in favor and 100
shares against.
ITEM 5. OTHER INFORMATION.
Pursuant to the Company's By-laws, stockholders who wish to bring
matters or propose nominees for director at the Company's 1999 annual meeting of
stockholders must provide specified information in writing to the Company not
later than the close of business on the sixtieth day nor earlier than the close
of business on the ninetieth day prior to the first anniversary of the preceding
year's annual meeting (unless such matters are included in the Company's proxy
statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended). The Company's 1998 annual meeting of stockholders took place on June
5, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS:
<TABLE>
<S> <C>
11.1 Statement regarding computation of net loss per share
27.1 Financial Data Schedule
</TABLE>
B) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended June
30, 1998. The Company filed a report on Form 8-K on July 6, 1998 related to
an Agreement and Plan of Merger and Reorganization between the Company, Gene
Logic Acquisition Corp., a Delaware corporation and wholly owned subsidiary of
the Company and Oncormed, Inc., a Delaware corporation.
16.
<PAGE> 17
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: August 14, 1998 By: /s/ MICHAEL J. BRENNAN, M.D., Ph.D.
--------------------------------------
Michael J. Brennan, M.D., Ph.D.
President, Chief Executive Officer and
Director (Principal Executive Officer)
Date: August 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)
17.
<PAGE> 1
EXHIBIT 11.1
GENE LOGIC INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
BASIC AND DILUTED:
Weighted average common shares outstanding . 14,219 638 14,060 638
Net Loss ................................... $(1,458) $(1,484) $(3,568) $(2,815)
Accretion of mandatory redeemable value of
convertible preferred stock ............. -- 182 -- 368
------- ------- ------- -------
Net loss attributable to common stockholders $(1,458) $(1,666) $(3,568) $(3,183)
======= ======= ======= =======
Net loss per common share .................. $ (0.10) $ (2.61) $ (0.25) $ (4.99)
======= ======= ======= =======
PRO FORMA:
Weighted average common shares outstanding .. 638 638
Dilutive common stock equivalents:
Convertible securities, using the
if-converted method .................... 4,837 4,837
------- -------
Common and common equivalent shares used in
the calculation of net loss per share ..... 5,475 5,475
------- -------
Net loss .................................... $(1,484) $(2,815)
======= =======
Net loss per common and common equivalent
share .................................... $ (0.27) $ (0.51)
======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 35,849 35,849
<SECURITIES> 4,288 4,288
<RECEIVABLES> 2,357 2,357
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 44,322 44,322
<PP&E> 9,646 9,646
<DEPRECIATION> 1,305 1,305
<TOTAL-ASSETS> 53,700 53,700
<CURRENT-LIABILITIES> 6,228 6,228
<BONDS> 3,545 3,545
0 0
0 0
<COMMON> 147 147
<OTHER-SE> 43,355 43,355
<TOTAL-LIABILITY-AND-EQUITY> 53,700 53,700
<SALES> 0 0
<TOTAL-REVENUES> 3,680 5,875
<CGS> 0 0
<TOTAL-COSTS> 5,629 10,462
<OTHER-EXPENSES> 0 80
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (1,458) (3,568)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,458) (3,568)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,458) (3,568)
<EPS-PRIMARY> ($0.10) (0.25)
<EPS-DILUTED> (0.10) (0.25)
</TABLE>
