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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 SEPTEMBER 30, 2000.
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)
--------------------------------------------------------------------------------
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 25,932,056 as of October 31, 2000.
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GENE LOGIC INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets at September 30, 2000 and December 31, 1999........................3
Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2000 and 1999.........................................................4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999.........................................................5
Notes to Consolidated Financial Statements.....................................................6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition...............................................9
Item 3. Quantitative and Qualitative Disclosure About Market Risk..........................13
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................................................13
Item 6. Exhibits and Reports on Form 8-K...................................................14
Signatures....................................................................................15
</TABLE>
2.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENE LOGIC INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------------- ------------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents .................................. $ 231,419 $ 5,294
Marketable securities available-for-sale.................... - 7,152
Due from collaborators...................................... 3,008 3,549
Inventory................................................... 1,530 1,735
Prepaid expenses............................................ 1,891 822
Other current assets........................................ 2,675 1,335
------------------- ------------------
Total Current Assets................................... 240,523 19,887
Property and Equipment, net ...................................... 13,508 10,527
Long-term Investments............................................. 9,081 1,000
Goodwill, net..................................................... 4,582 5,725
Intangible and Other Assets, net ................................. 8,272 4,027
------------------- ------------------
Total Assets .......................................... $ 275,966 $ 41,166
------------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................................... $ 4,378 $ 4,506
Accrued expenses............................................ 5,121 2,759
Current portion of capital lease obligation................. - 192
Current portion of long-term debt........................... 1,385 1,335
Deferred revenue............................................ 2,879 5,672
------------------- ------------------
Total Current Liabilities............................. 13,763 14,464
Capital Lease Obligation.......................................... - 201
Deferred Revenue.................................................. 784 -
Long-Term Debt.................................................... 1,921 2,862
Other Noncurrent Liabilities...................................... 610 571
------------------- ------------------
Total Liabilities................................... 17,078 18,098
------------------- ------------------
Commitments and Contingencies - -
Stockholders' Equity:
Preferred Stock, $.01 par value; 10,000,000
shares authorized; no shares issued and
outstanding as of September 30, 2000 and
December 31, 1999......................................... - -
Common Stock, $.01 par value; 60,000,000
shares authorized; 25,925,767 and 20,005,688
shares issued and outstanding as of September
30, 2000 and December 31, 1999, respectively............. 259 200
Additional paid-in capital ................................... 355,840 103,497
Deferred compensation on stock options, net .................. (1,061) (2,488)
Accumulated other comprehensive loss.......................... - (3)
Accumulated deficit .......................................... (96,150) (78,138)
------------------- ------------------
Total Stockholders' Equity............................ 258,888 23,068
------------------- ------------------
Total Liabilities and Stockholders' Equity............ $ 275,966 $ 41,166
=================== ==================
</TABLE>
See accompanying notes.
3.
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GENE LOGIC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues ................................................ $ 5,269 $ 4,223 $ 16,811 $ 13,502
Expenses:
Research and development .............................. 11,955 7,020 31,049 21,506
Selling, general and administrative ................... 4,731 2,335 12,662 6,094
Amortization of goodwill .............................. 381 381 1,143 1,143
---------- ---------- ---------- ----------
Total expenses ................................. 17,067 9,736 44,854 28,743
---------- ---------- ---------- ----------
Loss from operations ........................... (11,798) (5,513) (28,043) (15,241)
Interest income, net .................................... 3,828 126 9,957 589
Other income ............................................ - - 234 30
---------- ---------- ---------- ----------
Loss Before Income Tax Expense ................. (7,970) (5,387) (17,852) (14,622)
Income tax expense ...................................... - - 160 100
---------- ---------- ---------- ----------
Net Loss ....................................... $ (7,970) $ (5,387) $ (18,012) $ (14,722)
---------- ---------- ---------- ----------
Basic and Diluted Net Loss Per Common Share ............. $ (0.31) $ (0.27) $ (0.72) $ (0.74)
---------- ---------- ---------- ----------
Shares Used In Computing Basic and Diluted Net Loss
Per Common Share ................................. 25,798 19,887 24,939 19,799
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
4.
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GENE LOGIC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss................................................................ $ (18,012) $ (14,722)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization ...................................... 3,948 2,343
Amortization of goodwill............................................ 1,143 1,143
Amortization of deferred compensation .............................. 912 1,148
Loss on disposal of property and equipment.......................... 52 -
Other non-cash expense.............................................. 732 -
Changes in operating assets and liabilities:
Due from collaborators.............................................. 541 277
Inventory........................................................... 205 -
Prepaid expenses.................................................... (1,069) (1,068)
Other current assets................................................ (1,343) 50
Intangible and other assets......................................... (617) (420)
Accounts payable ................................................... (128) 814
Accrued expenses.................................................... 2,362 (846)
Accrued restructuring .............................................. - (184)
Deferred revenue ................................................... (2,009) 1,419
Other noncurrent liabilities........................................ 39 65
------------- -------------
Net Cash Flows From Operating Activities ...................... (13,244) (9,981)
------------- -------------
Cash Flows From Investing Activities:
Purchases of property and equipment ................................ (6,340) (2,838)
Purchase of equity investment ...................................... (8,081) -
Software and database development costs............................. (5,216) (517)
Decrease (increase) in notes receivable from employees.............. 663 (768)
Proceeds from sale and maturity of marketable securities
available-for-sale............................................... 7,155 2,596
------------- -------------
Net Cash Flows From Investing Activities....................... (11,819) (1,527)
------------- -------------
Cash Flows From Financing Activities:
Proceeds from public offering....................................... 262,080 -
Issuance costs of public offering................................... (14,624) -
Proceeds from issuance of common stock.............................. 4,728 376
Proceeds from note payable.......................................... - 425
Repayments of financing agreement................................... - (98)
Repayments of capital lease obligations and
equipment loans.................................................. (996) (986)
------------- -------------
Net Cash Flows From Financing Activities....................... 251,188 (283)
------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents.................... 226,125 (11,791)
Cash and Cash Equivalents, beginning of period.......................... 5,294 16,191
------------- -------------
Cash and Cash Equivalents, end of period................................ $ 231,419 $ 4,400
------------- -------------
Supplemental Disclosure:
Interest paid....................................................... $ 248 $ 311
------------- -------------
Non-Cash Transactions:
Capital lease termination........................................... $ 288 $ -
------------- -------------
</TABLE>
See accompanying notes.
5.
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GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements include the accounts
of Gene Logic Inc. and its wholly owned subsidiary (the "Company"). The
accompanying unaudited consolidated 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 consolidated balance sheet as of September 30, 2000, consolidated
statements of operations for the three and nine months ended September 30, 2000
and 1999 and the consolidated statements of cash flows for the nine months ended
September 30, 2000 and 1999 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
unaudited consolidated 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, 1999.
Comprehensive Loss
Total comprehensive loss was $7.97 million and $18.01 million for the
three and nine months ended September 30, 2000, respectively, and $5.34 million
and $14.73 million for the three and nine months ended September 30, 1999,
respectively.
Goodwill
Goodwill, from the acquisition of Oncormed, Inc. ("Oncormed") in
September 1998, represents the excess of the purchase price over the fair market
value of the net assets acquired. Goodwill is being amortized over five years at
a rate of approximately $1.5 million per year. Amortization expense was $0.4
million and $1.1 million for the three and nine months ended September 30, 2000,
respectively. Accumulated amortization of goodwill was $3.1 million and $1.9
million as of September 30, 2000 and December 31, 1999, respectively.
Software and Database Development Costs
During the nine months ended September 30, 2000 and 1999, the Company
capitalized software development costs of $3.1 million and $0.5 million,
respectively, as a result of ongoing efforts to enhance the software interface
of the GeneExpress(R) Suite of databases ("GeneExpress Suite"). These costs are
being amortized over their expected useful life of three years upon release of
the software upgrades. Accumulated amortization of software development costs
was $0.5 million and $0.1 million as of September 30, 2000 and December 31,
1999, respectively.
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During the three months ended September 30, 2000, the Company
incurred $2.2 million of costs related to the update of the GeneExpress Suite
data with the new Affymetrix, Inc. HU-95 Human Genome GeneChip(R) set. This set
includes 60,000 human genes and expressed sequence tags ("ESTs") as compared to
the previous HU-35 Human Genome GeneChip set which included 42,000 human genes
and ESTs. These costs are being amortized over their expected useful life of two
years. Accumulated amortization of database development costs was $0.3 million
as of September 30, 2000.
Revenue Recognition
Technology and database access fees are recognized evenly over the
term of the Company's collaboration agreements. Revenues from research and
development support are recognized when they are earned, which is ordinarily
when the work is performed or costs are incurred. Milestone payments are
recognized as revenue in accordance with the applicable performance requirements
and contractual terms. Subscription fees to the GeneExpress Suite are recognized
evenly over the term of the subscription.
Nonrefundable upfront payments received for the value of data
purchased, transferred technology or other contractual rights that are not
contingent upon future performance under the terms of the collaboration
agreements are recognized as revenue when earned. Under collaboration agreements
in which the Company creates a research database in exchange for a fixed fee,
revenues from such collaborations are recognized on the percentage-of-completion
method.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). SAB 101 is based upon existing accounting rules and provides guidance on
how those rules should be applied. Should a change in accounting policy be
necessary, the change would be reported as a cumulative effect adjustment with
resulting deferred revenue being recognized in future periods over the remaining
terms of the applicable agreements. The Company will adopt SAB 101 when
required, which is currently expected to be in the fourth quarter of fiscal 2000
and is evaluating the effect the implementation of SAB 101 will have on its
results of operations and financial position. This impact is not expected to be
material.
Reclassifications
Certain reclassifications have been made to the prior years'
financial statements to conform with the current year presentation.
NOTE 2. LONG-TERM INVESTMENTS
Since April 2000, the Company has held an interest in NeuralStem
Biopharmaceuticals, Ltd. ("NeuralStem"), a company commercializing proprietary,
patented central nervous system stem cell technology as new therapeutics and
research tools for drug discovery. The carrying value of the investment in
NeuralStem is approximately $8.1 million and consists of Series A Convertible
Preferred Stock. The Company's voting stock interest in NeuralStem constituted
26.7% and 22.6% of the outstanding voting securities at the time of investment
and at September 30, 2000, respectively. The Company accounts for this
investment under the equity method of accounting. The Company holds no common
stock interest in NeuralStem. Therefore, in accordance with APB Opinion No. 18,
no portion of the earnings or losses of NeuralStem are reflected in the
Company's statements of operations.
NOTE 3. STOCKHOLDERS' EQUITY
On February 1, 2000, the Company completed a public offering of its
common stock at $56.00 per share. The Company sold 4,680,000 shares, including
the underwriters' over-allotment option. Net proceeds to the Company, after
deducting the underwriting discounts and commissions and offering expenses, were
approximately $247.5 million.
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NOTE 4. LITIGATION
In December 1999, Incyte Genomics, Inc., formerly Incyte
Pharmaceuticals, Inc., ("Incyte") filed an action against the Company in the
United States District Court for the Northern District of California, Case No.
C99-5180 MJJ. In the action, Incyte asserts claims against the Company for
infringement of certain patents held by Incyte. The alleged infringement
involves the Company's use of a process that Affymetrix, Inc. recommends be used
in the preparation of samples for use with the Affymetrix GeneChip(R) platform.
In August 2000, Incyte amended its complaint, withdrawing one of its
patents from the litigation. At this time, the Company filed counterclaims
against Incyte alleging unfair business practice and interference with
contractual relations. Incyte subsequently filed like counterclaims against the
Company.
In August 2000, Incyte filed a second action against the Company in
the United States District Court for the Northern District of California, Case
No. 00-20876 PVT. In the action, Incyte asserts claims for infringement of a
patent in the field of bioinformatics.
In August 2000, Incyte filed a patent infringement action against
Affymetrix, Inc. in the United States District Court for the Northern District
of California, asserting infringement by Affymetrix of the same two Incyte
patents which remain at issue in the Incyte v. Gene Logic litigation first
mentioned above. The court has granted "related case" status to these two suits
and may consider consolidation of at least some aspects of the two cases.
The Company intends to defend its position vigorously in the above
two cases where it is a defendant. There can be no guarantee that the Company's
defense will be successful and neither the ultimate outcome nor the range of any
losses resulting from these actions can be predicted at this time. The Company
expects these actions will continue to require significant management time and
expense for the foreseeable future.
NOTE 5. SEGMENT INFORMATION
At December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, Disclosure about Segments of an Enterprise and
Related Information ("SFAS No. 131"). SFAS No. 131 establishes standards for
reporting information about operating segments in annual and interim financial
statements and related disclosures about its products, services, geographic
areas and major customers. The Company's operations are treated as one operating
segment.
The following is a breakdown of revenue by major collaborators
exceeding ten percent (10%) of such revenues and by geographic areas:
<TABLE>
<CAPTION>
MAJOR COLLABORATORS GEOGRAPHIC AREA
----------------------------------------------------- ------------------------------------
A B C D E F JAPAN EUROPE US
-------- -------- -------- -------- -------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the three months ended:
September 30, 2000............... 35% 19% - - 12% 11% 35% - 42%
September 30, 1999............... 48% 26% - 13% - - 48% 13% 26%
For the nine months ended:
September 30, 2000............... 37% 21% - 11% - - 37% 11% 21%
September 30, 1999............... 41% 24% 11% 13% - - 41% 24% 24%
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This Report contains forward-looking statements that involve risks and
uncertainties. We generally use words such as "anticipate," "estimate," "plan,"
"project," "continuing," "ongoing," "expect," "management believes," "we
believe," "we intend" and similar expressions to indicate when we are making
forward-looking statements. You should not place undue reliance on these
forward-looking statements. The forward-looking statements speak only as of the
date on which they are made, and we undertake no obligation to update any
forward-looking statement. Forward-looking statements include statements about
the performance and utility of our products, the timing and availability of
products under development, the ability of our customers to develop products
identified using our products, the adequacy of capital resources and other
expectations, plans, objectives, assumptions or future events. These statements
involve estimates, assumptions and uncertainties that could cause actual results
to differ materially from those expressed in this Report. These risks and
uncertainties include, but are not limited to, the extent of utilization of
genomic information by the pharmaceutical and biotechnology industries in both
research and development, our ability to retain existing and obtain additional
database customers, risks relating to the development of genomic database
products and their use by existing and potential customers, the impact of
technological advances and competition, our ability to enforce our intellectual
property rights, and the impact of the intellectual property rights of others,
as well as other risks and uncertainties identified in our filings with the
Securities and Exchange Commission including our Annual Report on Form 10-K for
the year ended December 31, 1999.
GeneExpress(R) and Flow-thru Chip(TM) are our trademarks. GeneChip(R)
is a registered trademark of Affymetrix, Inc.
OVERVIEW
We were incorporated in September 1994 and have devoted substantially
all of our resources to the development of our genomics technologies,
bioinformatics systems and database products for use in pharmaceutical,
diagnostic and agricultural product research and development.
Since 1997, we have developed custom gene expression databases
designed for certain of our customers' internal programs and needs and targeted
to specific therapeutic areas of interest, including heart failure, kidney
disease, osteoporosis, psychiatric disorders and other major illnesses. Building
on this know-how, in March 1999, we began developing the GeneExpress Suite, our
large-scale reference database of gene expression information. The GeneExpress
Suite contains information from a broad range of normal and diseased human
tissues, tissues from experimental animals, human and animal cell lines and
tissues that have been treated with many different drugs. We completed
development of the first commercial version of the GeneExpress Suite in November
1999. We currently market the GeneExpress Suite through nonexclusive
subscriptions to customers in the pharmaceutical, biotechnology and diagnostic
industries, and are developing versions of the database suite to market to the
academic and government life science research community and to physicians and
patients. We sold our first subscription to the GeneExpress Suite in December
1999.
Customers for our custom database and related software products can
provide us with various combinations of recurring technology and database access
fees, research fees, certain additional payments upon the attainment of research
and product development milestones, royalty payments based on sales of any
products resulting from their use of our products, and nonrefundable upfront
payments. Subscribers to our GeneExpress Suite pay us varying database
subscription fees depending upon the level and type of information they obtain.
Technology and database access fees are recognized evenly over the
term of each customer agreement. We recognize revenues from research and
development support when they are earned, which is ordinarily when the work is
performed or costs are incurred. Milestone payments and royalties are recognized
when they are earned in accordance with the applicable performance requirements
and
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contractual terms. Subscription fees to the GeneExpress Suite are recognized
evenly over the term of the subscription. Nonrefundable upfront payments
received for the value of data purchased, transferred technology or other
contractual rights that are not contingent upon future performance under the
terms of the agreements are recognized as revenue when earned. Under
collaboration agreements in which we create research databases in exchange for
fixed fees, revenues from such collaborations are recognized on the
percentage-of-completion method.
Our future profitability will depend in part on the successful
establishment of agreements with additional customers which include various
combinations of genomic databases, bioinformatics software and genomics
technology and the successful commercialization of the GeneExpress Suite.
Payments for access to custom databases and the GeneExpress Suite are expected
to be our primary source of revenue for the foreseeable future. We have not
received, and do not expect to receive, significant royalty or other revenues
from development and commercialization of products by our customers using our
databases and other technology for several years, if at all. Revenues from our
customers may be subject to significant fluctuation in both timing and amount,
and, therefore, our results of operations for any period may not be comparable
to the results of operations for any other period.
We have incurred operating losses in each year since our inception.
At September 30, 2000, we had accumulated losses of approximately $96.2 million.
Our losses have resulted principally from costs incurred in the development of
our gene expression databases, a $35.2 million non-recurring charge incurred in
connection with our acquisition of Oncormed and selling, general and
administrative costs associated with our operations. These costs have exceeded
our revenues which, to date, have been generated principally from agreements for
our custom database and related software products. We expect to incur additional
operating losses in future years.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2000 and 1999
Revenues increased $1.0 million or 25% to $5.3 million for the three
months ended September 30, 2000 from $4.2 million for the same period in 1999.
Revenues increased $3.3 million or 25% to $16.8 million for the nine months
ended September 30, 2000 from $13.5 million for the same period in 1999. The
increase in revenues resulted primarily from additional subscribers to the
GeneExpress Suite of products offset somewhat by a decline in custom database
revenues due in part to the conclusion of a collaboration with Aventis
CropScience. Payments from each of American Home Products Corp.'s Wyeth-Ayerst
Laboratories, Genaissance Pharmaceuticals, Japan Tobacco and Procter & Gamble
accounted for 10% or more of revenue for the three months ended September 30,
2000. Payments from each of Aventis CropScience, Japan Tobacco and Procter &
Gamble accounted for 10% or more of revenue for the three months ended September
30, 1999 and the nine months ended September 30, 2000. Payments from each of
Aventis CropScience, Japan Tobacco, Organon and Procter & Gamble accounted for
10% or more of revenue for the nine months ended September 30, 1999.
Research and development expenses increased to $12.0 million and
$31.0 million for the three and nine months ended September 30, 2000,
respectively, from $7.0 million and $21.5 million for the same periods in 1999.
The increase in research and development expenses for the three and nine month
periods ended September 30, 2000 was primarily attributable to increased tissue
acquisition and processing costs, Affymetrix GeneChips usage, and agreements
with third parties to expand and enhance the content and product offerings of
the GeneExpress Suite. We expect research and development expenses to increase
as we expand the content of the GeneExpress Suite, further develop the Flow-thru
Chip and pursue our collaboration with Life Technologies, Inc.
Selling, general and administrative expenses increased to $4.7
million and $12.7 million for the three and nine months ended September 30,
2000, respectively, from $2.3 million and $6.1 million for the same periods in
1999. For the three and nine month periods approximately $1.9 million and $4.3
million, respectively, of the increase was attributable to the establishment of
sales and marketing efforts. The
10.
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remainder of the increase is due to the expansion of general business
operations. Selling, general and administrative expenses are expected to
increase as we expand our product offerings and sales and marketing efforts.
Amortization of goodwill was $0.4 million and $1.1 million for the
three and nine months ended September 30, 2000, respectively, as a result of the
acquisition of Oncormed in September 1998.
Net interest income increased to $3.8 million and $10.0 million for
the three and nine months ended September 30, 2000, respectively, from $0.1
million and $0.6 million for the same periods in 1999 primarily due to
investment of the proceeds of our public offering of common stock in February
2000.
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 30, 2000, we have financed our
operations through the sale of equity securities, payments from customers, and
equipment and tenant improvement financing. In February 2000, we completed a
public offering of 4,680,000 shares of our common stock (including exercise of
the underwriters' over-allotment option), generating net proceeds of
approximately $247.5 million. As of September 30, 2000, we have also obtained
$0.5 million of capital lease financing and $6.3 million under equipment and
tenant improvement loans. As of September 30, 2000, we had approximately $231.4
million in cash, cash equivalents and marketable securities, compared to $12.4
million as of December 31, 1999.
Net cash used in operating activities was $13.2 million for the nine
months ended September 30, 2000 compared to $10.0 million for the same period in
1999. During the nine months ended September 30, 2000 and 1999, we primarily
used cash to fund our operating losses.
The Company's investing activities, other than sales, maturities and
purchases of available-for-sale securities, consisted of capital expenditures,
an $8.1 million equity investment in NeuralStem and software and database
development costs. The increase in capital expenditures, which totaled $6.3
million and $2.8 million for the nine months ended September 30, 2000 and 1999,
respectively, was primarily due to increases in capacity needed to expand the
content of the GeneExpress Suite of products. During the fourth quarter of 2000
and the first quarter of 2001, we expect to invest approximately $6.0 million in
tenant improvements to meet our expanding facility requirements.
Software and database development costs were $5.2 million and
$0.5 million for the nine months ended September 30, 2000 and 1999,
respectively. We incurred software development costs of $3.1 million and $0.5
million for the nine months ended September 30, 2000 and 1999, respectively,
related to ongoing efforts to enhance the software interface of the
GeneExpress Suite. Also, during the three months ended September 30, 2000 we
incurred $2.2 million of database development costs related to the update of our
GeneExpress Suite data as a result of Affymetrix, Inc.'s release of their HU-95
Human Genome GeneChip set. This new set includes 60,000 human genes and ESTs as
compared to the HU-35 Human Genome GeneChip set which included 42,000 human
genes and ESTs. Software and database development costs are being amortized over
their expected useful lives of three and two years, respectively. Software
development costs are expected to continue as a result of ongoing efforts to
further enhance the GeneExpress Suite while database development costs are not
expected to recur in the near future.
Our financing activities, other than the repayment of capital lease
obligations and equipment loans, consisted of the issuance of common stock
primarily through our public offering in February 2000 and the exercise of stock
options.
We believe that existing cash and cash equivalents and anticipated
payments from customers will be sufficient to support our operations for the
foreseeable future. These estimates are forward-looking statements that involve
risks and uncertainties. Our actual future capital requirements and the adequacy
of
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our available funds will depend on many factors, including those discussed in
our Annual Report on Form 10-K for the year ended December 31, 1999 and the
following:
- progress of our discovery programs;
- the number and breadth of these programs;
- our ability to establish and maintain additional arrangements with
customers, including additional subscriptions to the GeneExpress
Suite;
- the commercial success of the in-process technologies we acquired in
our acquisition of Oncormed;
- the progress of the development and commercialization efforts of our
customers;
- the level of our activities relating to our independent discovery
programs and to the development and commercialization rights we
retain in our arrangements with customers;
- 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.
We could require additional financing in the future, which we may
seek to raise through public or private equity or debt offerings. To the extent
that we raise additional capital by issuing equity or convertible debt
securities, ownership dilution to stockholders will result. If adequate
financing is not available when needed, we may be required to:
- curtail significantly one or more of our research and development
programs;
- obtain funds through arrangements with customers that may require us
to relinquish rights to certain of our technologies, discoveries or
potential products; or
- grant licenses on terms that are not favorable to us.
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NEW PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101"). SAB 101 is based upon existing accounting rules and provides
guidance on how those rules should be applied. Should a change in accounting
policy be necessary, the change would be reported as a cumulative effect
adjustment with resulting deferred revenue being recognized in future periods
over the remaining terms of the agreements. We will adopt SAB 101 when required,
which is currently expected to be in the fourth quarter of fiscal 2000. We are
evaluating the effect the implementation of SAB 101 will have on its results of
operations and financial position. This impact is not expected to be material.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not hold any financial instruments subject to significant
market risk.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 1999, Incyte Genomics, Inc., formerly Incyte
Pharmaceuticals, Inc., filed an action against us in the United States District
Court for the Northern District of California, Case No. C99-5180 MJJ. In the
action, Incyte asserts claims against us for infringement of certain patents
held by Incyte. The alleged infringement involves our use of a process that
Affymetrix, Inc. recommends be used in the preparation of samples for use with
the Affymetrix GeneChip(R) platform.
In August 2000, Incyte amended its complaint, withdrawing one of its
patents from the litigation. At this time, we filed counterclaims against Incyte
alleging unfair business practice and interference with contractual relations.
Incyte subsequently filed like counterclaims against us.
In August 2000, Incyte filed a second action against us in the United
States District Court for the Northern District of California, Case No. 00-20876
PVT. In the action, Incyte asserts claims for infringement of a patent in the
field of bioinformatics.
In August 2000, Incyte filed a patent infringement action against
Affymetrix, Inc. in the United States District Court for the Northern District
of California, asserting infringement by Affymetrix of the same two Incyte
patents which remain at issue in the Incyte v. Gene Logic litigation first
mentioned above. The court has granted "related case" status to these two suits
and may consider consolidation of at least some aspects of the two cases.
We intend to defend our position vigorously in the above two cases
where we are the defendants. There can be no guarantee that our defense will be
successful and neither the ultimate outcome nor the range of any losses
resulting from these actions can be predicted at this time. We expect these
actions will continue to require significant management time and expense for the
foreseeable future.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS:
10.67 Lease Agreement, dated July 21, 2000 between
Registrant and ARE-50 West Watkins Mill, LLC.
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
September 30, 2000.
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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: November 14, 2000 By:/s/ Philip L. Rohrer, Jr.
--------------------------------------------
Philip L. Rohrer, Jr.
Chief Financial Officer
(Principal Financial and Accounting Officer)
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