<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter 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 1-13768
ONCORMED, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-1842781
------------------------ -----------------------------------
(State of Incorporation) (I.R.S Employer Identification No.)
205 PERRY PARKWAY
GAITHERSBURG, MARYLAND 20877
----------------------------------------
(Address of principal executive offices)
(Zip code)
(301) 208-1888
----------------------------------------------------
(Registrant's telephone 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
------ ------
At August 5, 1998, there were 8,129,093 shares of Common Stock outstanding at a
par value of $.01.
<PAGE> 2
ONCORMED, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements 3
Balance Sheets as of June 30, 1998 and December 31, 1997. 4
Statements of Operations for the Three Months Ended 5
June 30, 1998 and 1997; for the Six Months Ended June 30, 1998
and 1997; and for the Period from Inception (July 12, 1993)
Through June 30, 1998.
Statements of Cash Flow for the Six Months Ended 6
June 30, 1998 and 1997 and for the Period from Inception
(July 12, 1993) Through June 30, 1998.
Notes to Financial Statements 7
ITEM 2 Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 27
ITEM 2 Changes in Securities 27
ITEM 3 Defaults Upon Senior Securities 27
ITEM 4 Submission of Matters To a Vote of Security Holders 27
ITEM 5 Other Information 27
ITEM 6 Exhibits and Reports on Form 8-K 27
Signatures 28
Exhibit Index 29
Calculation of Shares Used in Computing Earnings Per Share 30
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
The balance sheet as of June 30, 1998 and the statements of operations
for the three months ended June 30, 1998 and 1997, for the six months
ended June 30, 1998 and 1997, and for the period from inception (July
12, 1993) through June 30, 1998 and the statements of cash flow for the
six months ended June 30, 1998 and 1997 and for the period from
inception (July 12, 1993) through June 30, 1998, have been prepared by
the Company without audit. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash
flows for all periods presented have been made. The results for the
quarter ended June 30, 1998 presented in the accompanying financial
statements, are not necessarily indicative of the results for the
entire year or any other period. The balance sheet at December 31, 1997
has been taken from the audited financial statements.
The unaudited financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. While
the Company believes that the disclosures made are adequate to make the
information presented therein not misleading, these financial
statements should be read in conjunction with the audited financial
statements and related notes included in the Company's Annual Report
for the year ended December 31, 1997 on Form 10-K filed with the
Securities and Exchange Commission.
3
<PAGE> 4
ONCORMED, INC.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,178,007 $ 439,618
Short term investments -- 1,038,933
Accounts receivable, net allowance for doubtful
accounts of $45,000 and $42,000 180,677 298,538
Other current assets 135,551 275,274
------------ ------------
Total current assets 1,494,235 2,052,363
------------ ------------
Non-current assets:
Property and equipment, net 975,594 1,067,303
Deferred offering costs -- 56,949
------------ ------------
Total non-current assets 975,594 1,124,252
------------ ------------
TOTAL ASSETS $ 2,469,829 $ 3,176,615
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 837,968 $ 761,169
Accrued expenses and other liabilities 699,751 859,390
Payable to Oncor, Inc. 187,341 82,552
Note payable to Oncor Finance, Inc. 715,751 --
Deferred revenue 1,078,129 72,347
------------ ------------
Total current liabilities 3,518,940 1,775,458
------------ ------------
Non-current liabilities:
Note payable to Oncor Finance, Inc. -- 715,751
Deferred revenue 3,687 8,596
------------ ------------
Total non-current liabilities 3,687 724,347
------------ ------------
TOTAL LIABILITIES 3,522,627 2,499,805
------------ ------------
Commitments And Contingencies (Notes 1 and 6)
Stockholders' Equity:
Series A preferred stock, $.01 par value, 2,000,000 shares
authorized, 333 and 0 shares issued and outstanding 3,719,161 --
Common stock, $.01 par value, 40,000,000 shares,
authorized, 7,887,300 and 7,876,423 shares issued
and outstanding 78,873 78,764
Additional paid-in capital 30,492,544 30,234,082
Deferred compensation (75,854) (103,462)
Deficit accumulated during the development stage (35,267,522) (29,532,574)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (1,052,798) 676,810
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 2,469,829 $ 3,176,615
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE> 5
ONCORMED, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Period From
Inception
(July 12, 1993)
Through
Three Months Ended June 30, Six Months Ended June 30, June 30,
1998 1997 1998 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES $ 584,312 $ 207,096 $ 848,708 $ 322,375 $ 2,781,433
OPERATING EXPENSES:
Cost of sales - direct 169,933 110,680 366,778 164,646 1,302,754
Laboratory operations 765,689 666,853 1,572,829 1,373,658 11,360,954
Selling, general and administrative 1,743,023 1,363,197 3,729,035 2,688,018 21,238,881
Research and development 159,570 196,545 332,543 422,161 3,064,997
Acquired research and development
projects in-process -- -- -- 1,481,148 1,481,148
------------ ------------ ------------ ------------ ------------
Total expenses 2,838,215 2,337,275 6,001,185 6,129,631 38,448,734
------------ ------------ ------------ ------------ ------------
OPERATING LOSS (2,253,903) (2,130,179) (5,152,477) (5,807,256) (35,667,301)
Interest income 27,016 94,066 48,273 188,666 1,222,555
Interest expense (14,359) (14,650) (28,634) (29,248) (220,666)
Gain on sale of service
line assets 525,000 -- 525,000 -- 525,000
------------ ------------ ------------ ------------ ------------
NET LOSS $ (1,716,246) $ (2,050,763) $ (4,607,838) $ (5,647,838) $(34,140,412)
------------ ------------ ------------ ------------ ------------
Dividend and accretion embedded
in conversion of Series A
Convertible Preferred Stock (845,171) -- (1,127,110) -- (1,127,110)
------------ ------------ ------------ ------------ ------------
Net loss applicable
to common stock $ (2,561,417) $ (2,050,763) $ (5,734,948) $ (5,647,838) $(35,267,522)
============ ============ ============ ============ ============
BASIC AND DILUTED
NET LOSS PER SHARE
(unaudited) $ (0.32) $ (0.26) $ (0.73) $ (0.75) $ (5.88)
============ ============ ============ ============ ============
SHARES USED IN COMPUTING
NET LOSS PER COMMON
SHARE
(unaudited) 7,883,937 7,814,022 7,882,728 7,567,360 5,997,245
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
ONCORMED, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
Period From
Inception
Six Months Ended (July 12, 1993)
June 30, Through
1998 1997 June 30, 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,607,838) $ (5,647,838) $(34,140,412)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization 272,290 269,375 1,878,348
Amortization of deferred compensation 25,196 18,426 344,734
Gain on sale of service
line assets (525,000) -- (525,000)
Acquired in-process research and
development costs -- 1,481,148 1,481,148
Changes in operating assets and liabilities:
Accounts receivable 117,861 (17,647) (180,677)
Other assets 139,723 203,036 (135,551)
Accounts payable 76,799 (484,615) 837,968
Accrued expenses and other liabilities (159,639) (120,575) 699,751
Deferred revenue 1,000,873 20,717 1,081,816
Payable to Oncor, Inc. 104,789 20,004 187,341
------------ ------------ ------------
Net cash used in operating activities (3,554,946) (4,257,969) (28,470,534)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of service line assets 525,000 -- 525,000
Purchase of property and equipment (180,581) (263,133) (2,798,943)
Redemptions of short-term investments 1,038,933 3,392,387 6,784,528
Purchases of short-term investments -- (3,889,464) (6,784,528)
------------ ------------ ------------
Net cash provided by (used in) investing activities 1,383,352 (760,210) (2,273,943)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock 16,464 2,830,436 25,216,131
Net proceeds from sale of preferred stock 2,828,883 -- 5,819,322
Net proceeds from exercise of stock options 7,687 -- 171,280
Net proceeds from Note payable to Oncor Finance, Inc. -- -- 715,751
Decrease in deferred offering costs 56,949 -- --
------------ ------------ ------------
Net cash provided by financing activities 2,909,983 2,830,436 31,922,484
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 738,389 (2,187,743) 1,178,007
CASH AND CASH EQUIVALENTS, beginning of period 439,618 6,031,809 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,178,007 $ 3,844,066 $ 1,178,007
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Issuance of common stock in exchange for software
and technology $ -- $ -- $ 55,000
============ ============ ============
Issuance of common stock in exchange for stock
subscription receivable $ -- $ -- $ 25,000
============ ============ ============
Issuance of common stock and warrants in exchange
for research and development projects in-process $ -- $ 1,481,148 $ 1,481,148
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 28,634 $ 29,248 $ 220,666
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
As of June 30, 1998
(Unaudited)
1. BUSINESS DESCRIPTION:
Oncormed, Inc. (the "Company"), was incorporated on July 12, 1993, in the
State of Delaware. The Company is a genomics services company that
characterizes newly discovered genes to establish their medical relevance
and provides molecular profiling of patients for pharmacogenomic and
therapeutic purposes. The Company is in the development stage and has a
limited operating history, has incurred operating losses since its
inception and expects losses to continue and increase. Since its
inception, the Company has been engaged in research and development
activities, organizational efforts, and sales and marketing activities
including the development of its services, the hiring of its scientific
and marketing staff and its initial sales and marketing efforts. The
Company's services are currently offered principally in the United
States. There can be no assurance that the Company will be successful in
the development or commercialization of its services.
The Company has incurred cumulative losses since its inception and, as of
June 30, 1998, had an accumulated deficit of approximately $35.3 million.
The Company has yet to generate any significant revenues and cannot
anticipate when, or if, it will be able to generate significant revenues
in the future. The Company expects that its operating losses will
continue as its sales and marketing efforts, research and development
programs and laboratory operations continue and increase. At August 7,
1998, the Company had cash and cash equivalents of approximately $1.4
million. In the event the Merger is not consummated, the Company will
need to raise additional funds which may not be available on a timely
basis or on satisfactory terms. The unavailability of adequate funds in
the future would have a material adverse effect on the Company's
business, financial condition and results of operations and raises
substantial doubt about whether the Company can continue as a going
concern. The financial statements do not include any adjustments that
might result if the Company is unable to continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of these financial statements required the use of certain
estimates by management in determining the entity's assets, liabilities,
revenues and expenses. Actual results could differ from those estimates.
7
<PAGE> 8
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less at
the date of purchase are considered to be cash equivalents; investments
with maturities between three and twelve months are considered to be
short term investments. The Company invests its excess funds in
commercial paper with banks, money market instruments in U.S. treasury
and investment grade securities, and overnight reverse repurchase
agreements collateralized by U.S. treasury and investment grade
securities. Short term investments are stated at cost, which approximates
market.
Revenue Recognition
Revenues are principally derived from providing genetic testing and
information services, technology licensing fees and royalties associated
with its proprietary information and software licensing associated with
its risk assessment service. Revenues are also derived from grant
contract work. Revenues from the Company's genetic testing and
information services and grant work are recognized as they are provided.
Revenues from technology licensing fees are recognized when the licensing
agreement has been executed. Revenues from technology licensing royalties
are recognized when earned. Revenues from its risk assessment service are
recognized over the license period.
Net Loss Per Common Share
In March 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 is effective for the
financial statements issued for period ending after December 15, 1997.
The Company implemented SFAS No. 128 in 1997. SFAS No. 128 requires dual
presentation of basic and diluted earnings per share. Basic loss per
share includes no dilution and is computed by dividing net loss available
to common stockholders by weighted average number of common shares
outstanding for the period. Diluted loss per share includes the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. Options and
convertible securities that were outstanding at June 30, 1998, were not
included in the computation of diluted loss per share as their effect
would be anti-dilutive. As a result, the basic and diluted loss per share
amounts are identical.
In February 1998, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 98 on computations of earnings per share.
SAB 98 replaces SAB 83 which previously required that all issuances of
common stock, options and warrants issued within one year of an initial
public offering be included in the calculation of earnings per share as
if outstanding for all periods presented. Under SAB 98, only issuances of
common stock, options and warrants issued for nominal consideration in
periods preceding an initial public offering are required to be included
in the calculation of earnings per share as if they were outstanding for
all periods presented. In the periods preceding the Company's initial
public offering the Company had no issuances of common stock, options or
warrants for nominal consideration.
8
<PAGE> 9
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Earnings per share for the inception to date period presented which
includes the periods preceding the Company's initial public offering has
been restated to comply with SAB 98.
Reclassification
Certain 1997 balances have been reclassified to conform with 1998
financial statement presentation.
3. RELATED-PARTY TRANSACTIONS:
As of June 30, 1998, Oncor Inc.'s ("Oncor") ownership of the Company's
outstanding common stock was approximately 25.4 percent (excluding the
conversion of the Series A convertible preferred stock.)
License Agreement
In February 1997, as modified in November 1997, the Company and Oncor
agreed to certain changes to an agreement with Oncor regarding
sublicenses for certain proprietary technology (the "Oncor Agreement").
Pursuant to the agreement, Oncor is providing the Company with an
exclusive worldwide license to certain of Oncor's existing human genome
technologies and a non-exclusive worldwide license to certain of Oncor's
existing human genome technologies, and any future improvements thereto.
Under the terms of the Oncor Agreement, the Company is obligated to make
payments on a quarterly basis to Oncor equal to a range of 4% to 2% of
the Company's annual net sales. During the period from April 1, 1997 to
March 31, 1998, the Company was obligated to pay Oncor a minimum amount
equal to $50,000 per quarter. During the period from April 1, 1998 to
March 31, 1999, the Company is obligated to pay Oncor a minimum amount
equal to $25,000 per quarter. Thereafter, there shall be no minimum
payment required to be made by the Company to Oncor in connection with
the agreement. In connection with the Merger, Gene Logic has the option
to either maintain the Oncor Agreement or to terminate the Oncor
Agreement. In the event that Gene Logic terminates the Oncor Agreement,
both the exclusive license and the non-exclusive license remain in full
force and effect under rates to be determined.
Services Agreements with Oncor, Inc. and Affiliates
As of June 30, 1998, the Company owed Oncor and Codon Pharmaceuticals,
Inc. ("Codon", a subsidiary of Oncor) $187,341 for charges which include
fees payable under the Oncor License, consulting and equipment. In
addition, in June 1994 the Company converted $715,751 owed to Oncor for
license fees previously incurred and for prior services rendered into a
Convertible Subordinated Promissory Note (the "Note"), which principal is
due in June 1999. The Note bears interest at 7 percent and is convertible
into common stock at Oncor's option at a conversion price of $20 per
share of
9
<PAGE> 10
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. RELATED-PARTY TRANSACTIONS: (Continued)
common stock. During the fourth quarter of 1994, Oncor assigned the Note
to its wholly-owned subsidiary Oncor Finance, Inc. Interest expense
recorded by the Company relating to the Note was $12,665 for the three
months ended June 30, 1998. The Note will be assumed by Gene Logic upon
consummation of the Merger.
Related party revenues and expenses are as follows:
<TABLE>
<CAPTION>
Period from
Inception
Three Months Six Months (July 12, 1993)
Ended June 30, Ended June 30, Through
-------------- -------------- June 30,
1998 1997 1998 1997 1998
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Sales to related party $ -- $ -- $ -- $ -- $ 51,821
Operating expenses to related party:
Laboratory operations 31,000 68,000 96,886 136,000 1,133,496
Selling, general and administrative 3,380 -- 6,963 -- 984,859
Research and development -- 1,039 -- 1,039 173,085
</TABLE>
Of the related party expenses for the three months ended June 30, 1998,
laboratory operations consisted of $6,000 for equipment rental from Codon
and $25,000 associated with the Oncor Agreement and selling, general and
administrative was for occupancy costs.
4. DEFERRED REVENUES:
Deferred revenues consist of a prepaid amount of $1 million related to the
Incyte collaboration, prepaid amounts related to laboratory testing and
prepaid fees related to various risk assessment service agreements.
5. STOCKHOLDERS' EQUITY:
Stock Option Plan
As of June 30, 1998, 2,250,000 shares of the Company's common stock had
been reserved for issuance, of which options to purchase 2,030,500 shares
had been granted. After giving effect to the cancelation of stock options,
shares available for issuance were 471,650 as of June 30, 1998.
Compensation expense for employees is recognized for the difference
between the exercise price of the options granted and the fair market
value of the Company's common stock. Compensation expense of $3,175,
$9,213, and $245,814 has been recognized for the three months ended June
30, 1998 and 1997 and for the period from inception (July 12, 1993) to
June 30, 1998, respectively.
10
<PAGE> 11
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. STOCKHOLDERS' EQUITY: (Continued)
Series A Convertible Preferred Stock
Pursuant to a Convertible Preferred Stock Purchase Agreement (the "Stock
Purchase Agreement") an aggregate of 333 shares of the Company's Series A
Preferred Stock was issued to the Preferred Holders. Pursuant to
agreements, dated July 6, 1998, by and between the Company and certain
investors (the "Preferred Holders"), the Preferred Holders have agreed to
vote any shares beneficially owned by them on the record date of the
Merger in favor of the Merger and related transactions, have agreed to
convert their respective Series A Preferred Stock into shares of the
Company's Common Stock on or prior to the effective date of the merger,
and have waived certain other rights in connection with the Company's
Series A Preferred Stock. In addition, the Preferred Holders waived their
rights to additional financings under a Series B Convertible Preferred
Stock arrangement. Pursuant to the Company's Preferred Stock Purchase
Agreement, the Preferred Holders received Series A Warrants to purchase an
aggregate of 166,666 shares of the Company's Common Stock at an exercise
price of $8.54 per share. The Series A Warrants expire on February 27,
2001. Approximately $237,000 of the net proceeds was allocated to the
value of the warrants.
The Company recognizes the difference between the conversion price and the
quoted market price as a dividend which is being recorded over the
expected conversion period. Approximately $353,000 was recorded in the
second quarter of 1998.
Dividends in the amount of six percent (6%) per annum will be due
quarterly on the shares of Series A Preferred Stock. The Company may pay
such dividends either in cash or through the issuance of shares of Common
Stock. Dividends of $49,813 were recorded in the second quarter of 1998.
The difference between the carrying amount of the preferred stock and the
redemption amount is being accreted over the period from issuance to
expected conversion.
In connection with the purchase of the Series A Preferred Stock, the
Company and the Preferred Holders entered into a Registration Rights
Agreement. Such registration statement was declared effective on April 23,
1998.
6. AGREEMENTS:
On May 18, 1998, the Company and Myriad Genetics, Inc. ("Myriad") settled
all outstanding lawsuits between the parties. As part of the settlement,
the Company granted to Myriad exclusive rights to all current and pending
Company patents in the field of BRCA1 and BRCA2 for reference lab testing
in consideration for certain licensing fees and royalties payable to the
Company. Both parties will retain diagnostic product and therapeutic
rights in their respective patents. Also, as part of this agreement, the
Company recorded a $525,000 gain related to the sale of the breast
cancer testing service, which includes certain customer lists, databases
and other intangible assets.
11
<PAGE> 12
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. AGREEMENTS: (Continued)
On July 6, 1998, the Company, Gene Logic Inc. and Gene Logic Acquisition
Corp. entered into a definitive Agreement and Plan of Merger and
Reorganization (the "Merger Agreement") whereby the Company will merge
with and into Gene Logic Acquisition Corp. (the "Merger"). Upon
consummation of the Merger, the Company will cease to exist. As part of
the proposed Merger, Gene Logic Inc. has extended to the Company a $2.0
million line of credit (the "Loan") secured by certain assets for working
capital purposes until the Merger is consummated. Advances under the Loan
shall not exceed $500,000 per month. Interest accrues daily at a per annum
rate that Citibank N.A. has announced as its prime lending rate. As of
August 7, 1998, $1 million had been extended to the Company under the
Loan. 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 the Company
secures alternate financing of at least $2,000,000 on terms satisfactory
to the Company at its sole discretion, or (iii) the date on which the
Company sells or otherwise disposes of, all or substantially all of the
assets or business of the Company, or any liquidation, merger, or other
business combination of the Company (other than the Merger).
12
<PAGE> 13
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations:
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's results
of operations and financial condition. The discussion should be read in
conjunction with the audited financial statements of the Company and notes
thereto, included in the Company's Annual Report for the year ended December 31,
1997 on Form 10-K filed with the Securities and Exchange Commission. This report
contains certain statements of a forward-looking nature relating to future
events or the future financial performance of the Company. Investors are
cautioned that such statements are only predictions and that actual events or
results may differ materially. In evaluating such statements, investors should
carefully consider the various factors identified in this report which could
cause actual results to differ materially from those indicated by such
forward-looking statements, including the matters set forth under Certain
Factors Affecting Operations and Market Price of Securities.
OVERVIEW
The Company commenced operations in July 1993, has a limited operating history
and is a development stage company. Since its inception, the Company has been
engaged in research and development activities, organizational efforts and sales
and marketing activities, including the development of its services, the hiring
of its scientific and marketing staff and its initial marketing efforts. The
Company has incurred operating losses since its inception. As of June 30, 1998,
the Company's accumulated deficit was approximately $35.3 million. The Company's
losses have resulted principally from selling, general and administrative
expenses, laboratory operations and research and development expenses. Revenues
are principally derived from providing genetic testing and information services,
technology licensing associated with its proprietary information and software
licensing associated with its risk assessment service. Revenues are also derived
from grant contract work. Revenues from the Company's genetic testing and
information services and grant work are recognized as they are provided.
Revenues from technology licensing fees are recognized when the licensing
agreement has been executed, provided all obligations have been met. Revenues
from technology licensing royalties are recognized when earned. Revenues from
its risk assessment service are recognized over the license period. The Company
has yet to generate any significant revenues and cannot anticipate when, or if,
it will be able to generate significant revenues in the future. The Company
expects its operating losses to continue as its sales and marketing efforts,
research and development programs and laboratory operations continue and
increase. The Company's ability to achieve profitability depends on its ability
to successfully market and sell its services. There can be no assurance when, or
if, the Company will become profitable. In July 1998, as part of the Merger and
pending the consummation of the Merger, Gene Logic extended a $2.0 million line
of credit to the Company for working capital purposes which is secured by
certain of the Company's tissue repository assets. As of August 7, 1998, $1
million had been extended to the Company under the Loan. 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 the Company secures alternate financing of at least
$2,000,000 on terms satisfactory to the Company at its sole discretion, or (iii)
the date on which the Company sells or otherwise disposes of, all or
substantially all of the assets or business of the Company, or any liquidation,
merger, or other business combination of the Company (other than the Merger). At
August 7, 1998, the Company had cash and cash equivalents of approximately $1.4
million. In the event the Merger is not consummated, the Company will need to
raise additional funds which may not be available on a timely basis or on
satisfactory terms. If additional funds are raised by issuing equity securities,
further dilution to existing stockholders will result and future investors may
be granted rights superior to those of existing stockholders. In the event the
Merger is not consummated, the unavailability of adequate funds in the future
would have a material adverse effect on the Company's business, financial
condition and results of operations and raises substantial doubt about whether
the Company can continue as a going concern.
RESULTS OF OPERATIONS
Revenues for the three months and six months ended June 30, 1998 were $584,312
and $848,708 respectively, compared to $207,096 and $322,375 for the same
periods in 1997. The increase in revenues
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is primarily due to an upfront licensing fee from Myriad Genetics, project
management fees associated with a collaboration and to a lesser extent genetic
testing services. The Company is in the development stage and cannot anticipate
when, or if, it will be able to generate any significant revenues.
Cost of sales - direct was $169,933 and $366,778 for the three months and six
months ended June 30, 1998, respectively, compared to $110,680 and $164,646 for
the same periods in 1997. Cost of sales - direct includes costs for supplies,
direct labor, shipping, reference laboratory work, and royalties (other than
those under the Oncor License) for testing services and computer hardware costs
associated with the Company's risk assessment services. The increase in cost of
sales - direct reflected the corresponding increase in the Company's revenues.
Laboratory operations expenses were $765,689 and $1,572,829 for the three months
and six months ended June 30, 1998, respectively, compared to $666,853 and
$1,373,658 for the same periods in 1997. The increase in laboratory operations
expenses was primarily due to increased product licensing-related fees and
increased reference laboratory costs. Related party expenses incurred during
these periods consisted of technology license fees paid to Oncor and laboratory
equipment rental payments to Codon.
Selling, general and administrative expenses were $1,743,023 and $3,729,035 for
the three months and six months ended June 30, 1998, respectively, compared to
$1,363,197 and $2,688,018 for the same periods in 1997. General and
administrative expenses were $1,531,403 and $3,249,452 for the three months and
six months ended June 30, 1998, respectively, compared with $1,042,114 and
$2,039,633 for the three months and six months ended June 30, 1997,
respectively. The increase in general and administrative expenses was primarily
due to increased professional fees specifically in legal fees associated with
patent issues and related litigation, and to a lesser extent the addition of
personnel and related costs. Selling expenses were $211,620 and $479,583 for the
three months and six months ended June 30, 1998, respectively, compared with
$321,083 and $648,385 for the three months and six months ended June 30, 1997,
respectively. The decrease in selling expenses was due to a decrease in
marketing costs, specifically in literature and direct mail and a reduction in
personnel associated with the Myriad agreement. Related party selling, general
and administrative expenses were $3,380 and $6,963 for the three months and six
months ended June 30, 1998, respectively. There were no related party selling,
general and administrative expenses for the three months and six months ended
June 30, 1997.
Research and development expenses were $159,570 and $332,543 for the three
months and six months ended June 30, 1998, respectively, compared to $196,545
and $422,161 for the same periods in 1997. The decrease in research and
development expenses was primarily due to the reduced need for outside
consultants on various projects. There were no related party expenses for the
three months and six months ended June 30, 1998. Related party expenses were
$1,039 for the three months and six months ended June 30, 1997, and consisted of
costs associated with consulting services.
There were no acquired in-process research and development projects for the
three months and six months ended June 30, 1998. Acquired in-process research
and development projects were $0 and approximately $1.5 million for the three
months and six months ended June 30, 1997, respectively. This one-time write off
of approximately $1.5 million was associated with licensing of technology under
a License, Services and Marketing Agreement with Incyte Pharmaceuticals, Inc.
(the "Incyte Agreement").
Related party expenses, other than the Oncor License, will continue to decrease
and remain nominal in the future.
Interest income was $27,016 and $48,273 for the three months and six months
ended June 30, 1998,
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respectively, compared to $94,066 and $188,666 for the same periods in 1997. The
decrease in interest income was due to the decreased amounts available for
investment. Interest expense was $14,359 and $28,634 for the three months and
six months ended June 30, 1998, respectively, compared to $14,650 and $29,248
for the same periods in 1997.
For the reasons set forth above, net losses applicable to Common Stockholders
were $2,561,417 and $5,734,948 for the three months and six months ended June
30, 1998, respectively, compared to $2,050,763 and $5,647,838 for the same
periods in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash expenditures have exceeded revenues since the Company's inception. The
Company has incurred cumulative losses since its inception and, as of June 30,
1998, had an accumulated deficit of approximately $35.3 million. The Company has
yet to generate any significant revenues and cannot anticipate when, or if, it
will be able to generate significant revenues in the future. The Company's
operations have historically been funded primarily through private placements
and public offerings of equity securities. In February 1998, the Company
completed a $3.3 million private placement of equity securities (the "Stock
Purchase Agreement"), resulting in net proceeds of approximately $2.8 million to
the Company. In July 1998, as part of the Merger and pending the consummation of
the Merger, Gene Logic extended a $2.0 million line of credit to the Company for
working capital purposes which is secured by certain of the Company's tissue
repository assets. As of August 7, 1998, $1 million had been extended to the
Company under the Loan. 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 the Company
secures alternate financing of at least $2,000,000 on terms satisfactory to the
Company at its sole discretion, or (iii) the date on which the Company sells or
otherwise disposes of, all or substantially all of the assets or business of the
Company, or any liquidation, merger, or other business combination of the
Company (other than the Merger). At August 7, 1998, the Company had cash and
cash equivalents of approximately $1.4 million. In the event the Merger is not
consummated, the Company will need to raise additional funds which may not be
available on a timely basis or on satisfactory terms. The unavailability of
adequate funds in the future would have a material adverse effect on the
Company's business, financial condition and results of operations and raises
substantial doubt about whether the Company can continue as a going concern. The
Company expects its operating losses to continue as its sales and marketing
efforts, research and development programs and laboratory operations continue
and increase. The Company also intends to make additional laboratory equipment
purchases and other capital expenditures in the future, although currently it
has no specific material commitments to do so and decisions concerning such
purchases and other capital expenditures, if the merger is consummated, will be
made by Gene Logic. The Company's ability to achieve profitability depends on
its ability to successfully market and sell its services. There can be no
assurance when, or if, the Company will become profitable.
Cash used in operating activities was approximately $3.6 million for the six
months ended June 30, 1998 compared with approximately $4.3 million for the same
period in 1997. The decrease was primarily attributable to the prepayment
received from Incyte Pharmaceuticals, Inc. during the first quarter of 1998.
Cash provided by investing activities was approximately $1.4 million for the
six months ended June 30, 1998 compared to cash used in investing activities of
$760,210 for the same period in 1997. The increase in cash provided was due to
the reduction in purchases of short-term investments during the six months ended
June 30, 1998 as compared to the same period in 1997.
Cash provided by financing activities was approximately $2.9 million for the six
months ended June 30, 1998 compared with approximately $2.8 million for the same
period in 1997. In the first quarter of 1998, the Company entered into a
convertible preferred stock purchase agreement with certain unaffiliated
investors and Incyte Pharmaceuticals, Inc. ("Incyte"). In the first quarter of
1997, as part of the agreements, the Company issued Common Stock to Incyte.
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Minimum payments due under lease commitments and various research, license and
consulting agreements, excluding the Oncor License, will be approximately
$317,000 through 1998.
In January 1998, the Company and Children's Hospital Los Angeles ("CHLA")
entered into an agreement (the "CHLA Agreement") whereby CHLA agreed to provide
resources and personnel to act as a biorepository site for the Company's library
of tissue samples. The CHLA Agreement expires on January 29, 2001, unless
modified by written amendment, renewal or extension or earlier terminated in
accordance with its terms. The Company has agreed to pay for CHLA's costs
incurred in the performance of the scope of work, as described in the CHLA
Agreement. In March 1998, the Company and CHLA agreed to certain amendments to
the CHLA Agreement. Dr. Triche, the Company's CEO and Chairman of the Board of
Directors, is the Pathologist-in-Chief for CHLA.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 established standards for the reporting and
display of comprehensive income and its components in the financial statements.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company has adopted SFAS No. 130 and has
concluded that there was no impact.
Also in June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131
established standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for the Company's 1998 year-end financial
statements. Financial statement disclosures for prior periods are required to be
restated. Management is in the process of determining the financial statement
impact of the application of SFAS No. 131.
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CERTAIN FACTORS AFFECTING OPERATIONS AND MARKET PRICE OF SECURITIES
The Company's future business, financial condition, and results of operations,
and the market price for its securities are dependent on the Company's ability
to successfully manage the following business considerations. No assurance can
be given that the Company will be able to manage such considerations
successfully. The failure to manage such considerations could have a material
adverse effect on the Company's business, financial conditions, and results of
operations, and on the market price of its securities.
Additional Financing Requirements; Going Concern; Access to Capital
The Company has incurred cumulative losses since its inception and, as of June
30, 1998, had an accumulated deficit of approximately $35.3 million. The Company
has expended, and will continue to expend, substantial funds to continue its
sales and marketing efforts, research and development programs and laboratory
operations. The Company has yet to generate any significant revenues and cannot
anticipate when, or if, it will be able to generate significant revenues in the
future. The Company's ability to achieve profitability depends on its ability to
successfully market and sell its services. There can be no assurance when, or
if, the Company will become profitable. In July 1998, as part of the Merger and
pending the consummation of the Merger, Gene Logic extended a $2.0 million line
of credit to the Company for working capital purposes which is secured by
certain of the Company's tissue repository assets. As of August 7, 1998, $1
million had been extended to the Company under the Loan. 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 the Company secures alternate financing of at least
$2,000,000 on terms satisfactory to the Company at its sole discretion, or (iii)
the date on which the Company sells or otherwise disposes of, all or
substantially all of the assets or business of the Company, or any liquidation,
merger, or other business combination of the Company (other than the Merger). At
August 7, 1998, the Company had cash and cash equivalents of approximately $1.4
million. In the event the Merger is not consummated, the Company will need to
raise additional funds which may not be available on a timely basis or on
satisfactory terms. If additional funds are raised by issuing equity securities,
further dilution to existing stockholders will result and future investors may
be granted rights superior to those of existing stockholders. In the event the
Merger is not consummated, the unavailability of adequate funds in the future
would have a material adverse effect on the Company's business, financial
condition and results of operations and raises substantial doubt about whether
the Company can continue as a going concern.
Development Stage Company; History of Operating Losses; Uncertainty of Future
Profitability
The Company commenced operations in July 1993, has a limited operating history
and is a development stage company. Since its inception, the Company has been
engaged in research and development activities, organizational efforts and sales
and marketing activities, including the development of its services, the hiring
of its scientific and marketing staff and its initial sales and marketing
efforts. The Company has incurred operating losses since its inception. As of
June 30, 1998, the Company's accumulated deficit was approximately $35.3
million. The Company's losses have resulted principally from selling, general
and administrative expenses, laboratory operations and research and development
expenses. The Company has yet to generate any significant revenues and the
Company cannot anticipate when, or if, it will be able to generate significant
revenues in the future. In July 1998, as part of the Merger and pending the
consummation of the Merger, Gene Logic extended a $2.0 million line of credit to
the Company for working capital purposes which is secured by certain of the
Company's tissue repository assets. As of August 7, 1998, $1 million had been
extended to the Company under the Loan. 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
the Company secures alternate financing of at least $2,000,000 on terms
satisfactory to the Company at its sole discretion, or (iii) the date on which
the Company sells or otherwise disposes of, all or substantially all of the
assets or business of the Company, or any liquidation, merger, or other business
combination of the Company (other than the Merger). In the event the Merger is
not consummated, the Company will need to raise additional funds which may not
be available on a timely basis or on satisfactory terms. The unavailability of
adequate funds in the future would have a material adverse effect on the
Company's business, financial condition and results of operations and raises
substantial doubt about whether the Company can continue as a going concern. The
Company expects its operating losses to continue as its sales and marketing
efforts, research and development programs and laboratory operations continue
and increase. The Company also intends to make additional laboratory equipment
purchases and other capital expenditures in the future, although
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<PAGE> 18
currently it has no specific material commitments to do so and decisions
concerning such purchases and other capital expenditures, if the Merger is
consummated, will be made by Gene Logic. The Company's ability to achieve
profitability depends on its ability to successfully market and sell its
services. There can be no assurance when, or if, the Company will become
profitable.
Dependence on Proprietary Rights
The Company relies on a combination of patent, trade secret and copyright laws
and confidentiality agreements to protect its proprietary technology, rights and
know-how. The Company's success will depend in part on its ability or the
ability of its licensors or sublicensors to obtain patents, defend patents,
maintain trade secrets, defend copyrights and operate without infringing upon
the proprietary rights of others, both in the United States and in foreign
countries. The patent position of companies relying upon biotechnology is highly
uncertain in general and involves complex legal and factual issues, and no
consistent policy has emerged regarding the breadth of claims allowed in
biotechnology patents. Except for a patent issued to the Company in early July
1997 for a pattern recognition methodology and three patents issued related to
the BRCA1 gene, to date, none of the Company, its licensors or its sublicensors
has been granted any patents related to the technology or genetic discovery
underlying the Company's services. Although the Company and certain of the
Company's licensors and sublicensors have patent applications pending relating
to such technologies and discoveries, there can be no assurance that patents
will be issued as a result of such patent applications or that, if issued, such
patents will be sufficiently broad to afford protection against competitors with
similar technologies or discoveries. There can also be no assurance that
patents, if any, issued to the Company, or for which the Company has license or
sublicense rights, will not be challenged, invalidated or circumvented, or that
the rights granted thereunder will provide competitive advantages to the
Company. The commercial success of the Company also will depend upon avoiding
the infringement of patents issued to third parties, obtaining licenses to third
parties' technologies and genetic discoveries and maintaining licenses upon
which certain of the Company's services are, or might be, based. There can be no
assurance that any required licenses would be available on acceptable terms, or
at all. In particular, third parties, including competitors such as Myriad and
other potential competitors, have been issued patents relating to certain genes
and genetic mutations including BRCA1 and related mutations, underlying certain
of the Company's services, and have filed and may in the future file additional
patent applications relating to genes and genetic mutations including BRCA2, p16
and related mutations. On May 18, 1998, the Company and Myriad settled all
outstanding lawsuits between the parties. The failure of the Company to
successfully defend its intellectual property rights, or the failure by the
Company to obtain any licenses related to such rights, if required, would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Oncor has the primary right and obligation to obtain, maintain and enforce
proprietary rights in relation to its own technologies and any improvements to
such technologies assigned to Oncor by the Company. The amount and timing of
resources devoted to such activities are beyond the Company's control. There can
be no assurance that Oncor will perform such obligations on a timely basis or at
all, or that it will expend sufficient resources on such activities. The Company
has the primary right and obligation to obtain, maintain and enforce proprietary
rights in relation to all its own technologies.
The Company relies on certain technologies, trade secrets and know-how that are
not patentable or proprietary and are available to the Company's competitors.
Although the Company has taken steps to protect its unpatented technologies,
trade secrets and know-how, in part through the use of confidentiality
agreements with its employees, consultants and certain of its contractors, there
can be no assurance that these agreements will not be breached, that the Company
would have adequate remedies for any breach or that the Company's trade secrets
will not otherwise become known or be independently developed or discovered by
competitors.
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Government Regulation
CLIA provides for regulation of clinical laboratories by the United States
Department of Health and Human Services ("HHS"). These regulations mandate that
virtually all clinical laboratories be certified to perform testing on human
specimens and provide specific conditions for certification. These regulations
also contain requirements for the qualifications, responsibilities, training,
working conditions and oversight of clinical laboratory employees. In addition,
specific standards are imposed for each type of test that is performed in a
laboratory. The Company's laboratory is certified under these regulations and
the Company believes that it is in substantial compliance with them. CLIA and
the regulations promulgated thereunder are enforced through continuous quality
inspections of test methods, equipment, instrumentation, materials and supplies
on a bi-annual and "spot" basis. While the United States Food and Drug
Administration (the "FDA") minimally regulates the genetic tests underlying the
Company's services if they are performed in the Company's CLIA certified
clinical laboratory, there can be no assurance that the FDA will not seek to
further regulate such tests in the future. If, in the future, the FDA should
determine that the tests underlying the Company's services should receive FDA
approval prior to their provision in the Company's laboratory, or impose other
requirements, there can be no assurance that such requirement would be met on a
timely basis or at all. Any change in CLIA or related regulations, or in the
interpretation thereof, or in the Company's certification under CLIA, or in the
FDA's position on regulating the tests underlying the Company's services, could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's laboratory is licensed and regulated by
the State of Maryland, in which it is located. The Company's laboratory is also
regulated by certain other states from which the Company may accept specimens.
The Company has received approval for a license from the State of New York and
the State of Florida and intends to seek approval from other states as required.
No assurance can be given that the Company will be able to obtain such approvals
on a timely basis or at all. The loss of, or the failure to obtain, any required
state license or other required approval, could have a material adverse effect
on the Company's business, financial condition and results of operations.
The use of human tissue in medical research and the operation of human tissue
repositories to collect, store and distribute human tissue materials for
research purposes are regulated under federal regulations. These regulations
mandate that IRBs are the mechanism by which research protocols are reviewed and
approved to assure the protection of human rights. The Health and Human Services
Office for the Protection from Research Risks oversees this process and issues
guidelines for IRBs to use when evaluating research protocols to assure informed
consent and that privacy is protected and confidentiality is maintained. Some
states have requirements that are similar to the foregoing guidelines. The
Company believes that it is in compliance with federal and state regulations in
the establishment and operation of a human tissue repository for use in genomic
research. The Company operates its repository under an IRB-approved protocol and
requires that all institutions and pathologists supplying tissue have an
IRB-approved protocol to assure patient informed consent, privacy and
confidentiality. The Company does not have access to patient identifiers. The
use of human tissue, especially for genetic research, is continuously examined
by a number of agencies. There are no assurances that federal or state
regulations will not be passed in the future that would materially affect the
Company's ability to operate a human tissue repository.
The Company is subject to extensive federal, state and local regulation,
including regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other laws, rules and regulations governing
health care, clinical laboratory activities, waste disposal, handling of toxic,
dangerous or radioactive materials and other matters. Although the Company's
services are currently considered screening services under Medicare and are
therefore excluded from coverage under Medicare, the Company's services may
still be subject to laws, rules and regulations governing reimbursement and
fraud and abuse and prohibiting the filing of false claims.
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These laws, rules and regulations include "anti-kickback" and "Stark" laws,
which contain extremely broad proscriptions, the violation of which may result
in exclusion from Medicare and Medicaid and criminal and civil penalties. In
addition, the Company is subject to state laws, rules and regulations limiting
certain financial relationships between health care service providers and
physicians and other referral sources as well as state Medicaid requirements.
Although the Company believes that it is in substantial compliance with all
applicable laws, rules and regulations, there can be no assurance that the
Company will remain in compliance with applicable laws, rules and regulations or
that changes in, or new interpretations of, existing laws, rules and regulations
would not have a material adverse effect on the Company's business, financial
condition and results of operations.
Relationship with Oncor
In February 1997, as modified in November 1997, the Company and Oncor agreed to
certain changes to the Oncor Agreement. Pursuant to the Oncor Agreement, Oncor
is providing the Company with an exclusive worldwide license to certain of
Oncor's existing human genome technologies that are useful for the development
and commercialization of certain of the Company's services, including: (i)
testing, detection and/or analysis of genes; (ii) genetic assessment of risk of
an individual to develop cancer; and (iii) testing and analysis for the purposes
of cancer management. In addition, Oncor is providing the Company with a
non-exclusive worldwide license to certain of Oncor's existing human genome
technologies, and any future improvements thereto, to be used by the Company in
the provision of services direct to third parties other than services that are
provided pursuant to the exclusive license. The Company does not have the right
to sublicense any Oncor technologies licensed to it by Oncor without Oncor's
prior written consent. Technologies sublicensed to the Company by Oncor include
technologies covered by the collaborative licensing and research agreements
between Oncor and each of The Johns Hopkins University and the Massachusetts
General Hospital. The term of the Oncor Agreement shall expire in June 2004
unless earlier terminated in accordance with its terms. Further, in the event of
a change of control of Oncor, the acquiring party shall have the option to
either maintain the Oncor Agreement or to terminate the Oncor Agreement. In the
event that the acquirer terminates the Oncor Agreement, both the exclusive
license and the non-exclusive license shall remain in full force and effect
under rates to be determined. In connection with the Merger, Gene Logic has the
option to either maintain the Oncor Agreement or to terminate the Oncor
Agreement. In the event that Gene Logic terminates the Oncor Agreement, both the
exclusive license and the non-exclusive license remain in full force and effect
under rates to be determined.
Certain of the Company's services are reliant on the technologies licensed
directly from Oncor and from third parties through Oncor which form the basis
for some of the Company's services. The Company's rights under the Oncor
Agreement are subject to certain rights retained by Oncor, which include Oncor's
right to use the licensed technologies for internal, non-commercial research and
development purposes and for development and commercialization of Oncor's
products. Oncor intends to develop its technologies into diagnostic products for
sale to third parties. These third parties may then use these products to
provide services that compete directly with the Company's services, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that the Oncor Agreement
will be renewed at the end of its initial term or that it will not be terminated
earlier pursuant to its terms. There also can be no assurance that conflicts of
interest between Oncor and the Company will not arise with respect to the Oncor
Agreement, any services that might be provided by Oncor to the Company in the
future or other aspects of the Company's relationship with Oncor.
The Company's rights to technologies licensed to the Company from third parties
through Oncor are subject to various provisions in the license agreements
between such third parties and Oncor. No assurance can be given that Oncor will
perform its obligations under such agreements, that such agreements will not be
terminated or that such agreements can be renewed upon termination or
expiration. If Oncor breaches such
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agreements or otherwise fails to comply with such agreements, or if such
agreements are terminated or otherwise expire, the development or
commercialization of certain of the Company's services may be delayed or
terminated, or the Company would have to expend substantial additional resources
on development and commercialization, which would have a material adverse effect
on the Company's business, financial condition and results of operations. Oncor
currently owns approximately 25.4 percent (excluding the conversion of the
Series A convertible preferred stock) of the Company's outstanding Common Stock.
Accordingly, Oncor may be able to effectively control or influence certain
actions such as the election of directors and the authorization of certain
transactions that require stockholder approval and may be able to otherwise
effectively control the Company's policies without concurrence of the Company's
other stockholders. In addition, Stephen Turner, Chief Executive Officer of
Codon Pharmaceuticals, Inc., a subsidiary of Oncor, is a director of the
Company, and Timothy J. Triche, M.D., Ph.D., a director of Oncor, is the Chief
Executive Officer and Chairman of the Board of Directors of the Company. Mr.
Turner is not a nominee for re-election at the Company's 1998 annual
stockholders' meeting.
Reliance on Pharmaceutical Industry
The Company expects that a significant portion of its revenues in the
foreseeable future will be derived from services provided to the genomics,
pharmaceutical and biotechnology industries. Accordingly, the Company's success
in the foreseeable future will be directly dependent upon the success of the
companies within those industries and their continued demand for the Company's
services. The Company's operations may in the future be subject to substantial
period-to-period fluctuations as a consequence of reductions and delays in
research and development expenditures by companies in such industries resulting
from factors such as changes in economic conditions, pricing pressures,
market-driven pressures on companies to consolidate and reduce costs, and other
factors affecting research and development spending.
Lengthy Sales Cycle
The ability of the Company to obtain collaborators and subscribers for its
services depends in significant part upon the perception that such services can
help accelerate the translation of cancer-related genetic discoveries into
clinically-useful products. The sales cycle for the Company's services is
typically lengthy due to the education effort that is required as well as the
need to effectively sell the benefits of the Company's services to a variety of
constituencies within potential collaborators and subscribers, including
research and development personnel and key management. In addition, each
subscription and collaboration will involve the negotiation of agreements
containing terms that may be unique to each subscriber or collaborator. The
Company may expend substantial funds and management effort with no assurance
that a collaboration or subscription will result.
Limited Patient Populations For Certain Services
Certain of the Company's services currently address subtypes of broader types of
cancers. Patients with such subtypes typically represent only a small percentage
of those patients who are under treatment or have a history of the broader types
of cancer. Accordingly, the market for such services may be limited and such
services may not generate significant revenues.
Unproven Commercial Strategy
The Company's success will depend upon its ability to assemble a portfolio of
identified disease-related genes and regulatory regions which have potential
therapeutic value and to select appropriate commercialization strategies for
drug discovery and development. While the Company anticipates that it will
select appropriate commercialization strategies, depending on the service, with
several different strategic
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partners, failure to allocate its resources to those services with the most
commercial potential and to the appropriate strategic partner could have a
material adverse effect on the Company's business, financial condition and
results of operations. Even if the Company is successful in identifying
disease-related genes, relatively few products based on genes have been
developed and commercialized to date, and there can be no assurance that the
Company or other entities working in collaboration with the Company will be able
to discover drugs and develop commercial products based upon its gene
discoveries. In addition, the development and commercialization of drugs based
on genes discovered by the Company will be subject to the risks inherent in any
new drug. These risks include the possibilities that any or all of the products
will be found to be ineffective or toxic, or otherwise fail to receive necessary
regulatory clearances; that the products, if safe and effective, will be
difficult to manufacture on a large scale or uneconomical to market; that
proprietary rights of third parties will preclude the Company or its strategic
partners from marketing products; or that third parties will market superior or
equivalent products. As a result, the Company's commercial strategy is unproven.
The Company's clinical genomics services represent a new approach to cancer
management for which there is little precedent and for which the market is
evolving. The Company's business is to help accelerate the translation of
genetic discoveries into clinically useful cancer therapeutics and diagnostics.
The Company's ability to successfully develop its business is unproven and is
dependent on its ability to translate genetic discoveries into clinically useful
cancer therapeutics and diagnostics; expand the distribution of its services
both domestically and internationally; develop strategic alliances and
collaborations with pharmaceutical, genomics and biotechnology partners;
identify, license and develop emerging genetic discoveries and mutation
detection technologies; and continue to expand its portfolio of services. There
can be no assurance that the market for the Company's services will continue to
evolve or that the Company's business strategy will be successful. The
discoveries and technologies which form the basis for the Company's clinical
services have not been widely adopted by the medical community and there can be
no assurance that adoption of these technologies and services will occur.
Uncertain Availability of Health Care Reimbursement and Market Acceptance of
Services
The successful commercialization of the Company's genetic testing and
information services depends in part on the ability of its customers to obtain
adequate reimbursement for such services and related treatments from
governmental agencies, private health care insurers and other third party
payors. Government and private third party payors are increasingly attempting to
contain health care costs by limiting both the extent of coverage and the
reimbursement rate for new diagnostic and therapeutic products and services.
Medicare has determined that the Company's genetic testing and information
services are screening services and therefore are excluded from coverage under
Medicare. Although, various third party payors have begun to reimburse some of
the Company's services, there can be no assurance that third party reimbursement
for the Company's services will be consistently available to its customers or
that any such reimbursement will be adequate. Disapproval of, or limitations in,
coverage by third party payors could materially and adversely affect market
acceptance of the Company's services which would have a material adverse effect
on the Company's business, financial condition and results of operations.
Dependence on Strategic Collaborations and Licenses with Others
The Company's strategy for the research, development and commercialization of
certain of its services is to rely in part on various collaborative and license
arrangements with academic medical centers, research institutions and commercial
entities. Accordingly, the Company is dependent in part upon such third parties
performing their obligations. The Company has entered into certain commercial
relationships, including arrangements with Affymetrix, Inc. , Incyte
Pharmaceuticals, Inc., Merck & Co., Inc., Rhone-Poulenc Rorer Pharmaceuticals,
Inc. and Schering-Plough Research Institute. There can be no assurance that the
Company
22
<PAGE> 23
will be able to enter into acceptable collaborative and license arrangements in
the future or that the parties with which the Company has established or will
establish arrangements will perform their obligations under such arrangements.
There also can be no assurance that its current arrangements or any future
arrangements will lead to the development of additional services with commercial
potential, that the Company will be able to obtain or license proprietary rights
with respect to any technology developed in connection with these arrangements
and that the Company will be able to ensure the confidentiality of any
proprietary rights and information developed in such arrangements or prevent the
public disclosure thereof. In general, the Company's collaborative and license
arrangements provide that they may be terminated under certain circumstances.
There can be no assurance that such arrangements will not be terminated or that
the Company will be able to extend any of its collaborative and license
arrangements upon their expiration. The Company currently has certain licenses
from third parties, either directly or indirectly through the Oncor Agreement,
and in the future may require additional licenses from these or other parties to
develop and market commercially viable services. There can be no assurance that
such licenses will be obtainable on commercially reasonable terms, if at all, or
renewable, that the patents underlying such licenses, if any, will be valid and
enforceable or that the nature of the technology underlying such licenses will
remain proprietary.
The Company's rights to technologies licensed to the Company from third parties
through the Oncor Agreement are subject to the license agreements between such
third parties and Oncor. No assurance can be given that the third parties to
these agreements will perform their obligations under such agreements on a
timely basis or at all. If such third parties breach or terminate their
agreements with Oncor or otherwise fail to, or are unable to, comply with the
provisions of their agreements with Oncor for whatever reason, the Company would
have no direct recourse and would be dependent on Oncor to enforce such
agreements. The agreements between Oncor and the third parties expire at various
times. There can be no assurance that these agreements will be renewed at the
end of their initial terms or that such agreements will not be terminated or
canceled prior to their expiration. The Company has no rights under these third
party agreements and is reliant upon Oncor to negotiate renewals of such
agreements and resolve disputes under such agreements. If the third parties to
the agreements that the Company licenses from Oncor through the Oncor Agreement
breach such agreements or otherwise fail to comply with such agreements, or such
agreements are terminated or otherwise expire, the development or
commercialization of certain of the Company's services may be delayed or
terminated, or the Company would have to expend substantial additional resources
on development and commercialization, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
Competition
The Company is engaged in the genomics, biotechnology and pharmaceutical
industries which are characterized by extensive research and development
efforts, rapid technological progress and intense competition. There are many
public and private companies, including well-known pharmaceutical companies,
biotechnology companies and academic institutions, engaged in developing medical
services and the technology underlying such services. Although there are
relatively few direct competitors of the Company, it is anticipated that the
number of direct competitors will increase significantly in the future. Many of
the Company's current and potential competitors have substantially greater
financial and technological resources, sales and marketing capabilities and
experience, and research and development experience than the Company.
Accordingly, the Company's competitors may succeed in developing services and
the underlying technology more rapidly than the Company and in developing
services that are more accurate and useful and less costly than any of the
Company's services. The Company's competitors also may be more successful than
the Company in marketing and selling such services. In addition, other
technologies are, or in the future may become, the basis for competitive
products and services. Oncor may develop technologies under the Oncor Agreement
into products that Oncor will sell to third parties. These third
23
<PAGE> 24
parties may then use these products to provide services that compete directly
with the Company's services, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company relies on certain technologies that are not patentable or
proprietary and consequently may be available to the Company's competitors.
Competition may increase further as a result of the potential advances in the
technology underlying the services developed by the Company. The Company also is
aware that other companies have developed or may be developing genomics
discovery, development and information technologies, services and products that
are and may be competitive with the Company's services. There can be no
assurance that the Company's competitors will not succeed in developing
technologies, services and products that are more accurate and useful than any
being developed by the Company or that would render the Company's technology and
services obsolete or noncompetitive.
The Company requires that all employees and consultants (including certain
scientific advisors) enter into confidentiality agreements that prohibit the
disclosure of confidential information to anyone outside the Company and require
disclosure and assignment to the Company of their ideas, developments,
discoveries or inventions developed during the course of their service to the
Company. However, no assurance can be given that competitors of the Company will
not gain access to trade secrets and other proprietary information developed by
the Company and disclosed to employees, consultants and/or scientific advisors.
Confidentiality; Risk of Discrimination Against Customers; Potential Adverse
Impact on Insurability
The availability of genetic predisposition testing and human tissue usage for
research purposes has raised certain ethical, legal and social issues regarding
the appropriate utilization and confidentiality of information provided by such
testing. The medical information obtained or determined about an individual from
the Company's services is of an extremely sensitive nature. In providing its
services, the Company is subject to certain statutory, regulatory and common law
requirements regarding the confidentiality of such medical information. The
Company maintains an internal regulatory compliance review program to monitor
compliance with applicable confidentiality requirements, and believes that it is
in substantial compliance with such requirements. Failure to comply with such
confidentiality requirements could result in material liability to the Company.
It is possible that discrimination by insurance companies could occur through
the raising of premiums by insurers to prohibitive levels, the cancellation of
insurance or the unwillingness to provide coverage to patients shown to have a
genetic predisposition to a particular disease. The Company could experience a
delay in market acceptance or a reduction in the size of its potential
serviceable market if insurance discrimination were to become a significant
factor, which would have a material adverse effect on the Company's business,
financial condition and results of operations. Similarly, governmental
authorities could, for social or other purposes, limit the use of or prohibit
genetic predisposition testing and human tissue usage for research purposes. If
efforts by the Company and others to mitigate potential discrimination are not
successful or if the use of genetic testing is limited, the Company could
experience a delay or reduction in market acceptance of its services, which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Limited Sales and Marketing Experience
The Company has limited experience in selling and marketing its services and
will have to further develop its sales force and/or rely on collaborators,
licensees or others to provide for the sales and marketing of its services.
There can be no assurance that the Company will be able to establish adequate
sales and marketing capacity or make arrangements with collaborators, licensees
or others to perform such activities on acceptable terms or at all.
24
<PAGE> 25
Risk of Liability; Adequacy of Insurance Coverage
The marketing and sale of genetic testing and information services could expose
the Company to the risk of certain types of litigation, including medical
malpractice or negligence claims or contract disputes. The Company currently
maintains medical malpractice insurance coverage. There can be no assurance,
however, that such coverage will be adequate to protect the Company against
future claims or that insurance will be available to the Company in the future
on acceptable terms, if at all. A medical malpractice or other claim for which
the Company was not adequately insured could have a material adverse effect on
the Company's business, financial condition and results of operations.
Dependence on Key Management and Qualified Personnel
The Company is highly dependent upon the efforts of its senior management,
scientific advisory board and consultants. The loss of the services of one or
more members of senior management could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the loss of the services of certain members of the Company's scientific advisory
board and certain consultants could materially and adversely affect the Company
to the extent that the Company is pursuing research and development in areas of
such scientific advisors' or consultants' expertise. Although the Company is the
beneficiary of $1 million key-man life insurance policies on each of its Chief
Executive Officer, Timothy J. Triche, M.D., Ph.D., and its President and Chief
Operating Officer, Douglas Dolginow, M.D., the Company does not believe such
amounts would be adequate to compensate for the loss of either executive. Due to
the specialized scientific nature of the Company's business, the Company is also
highly dependent upon its ability to attract and retain qualified scientific,
technical and key management personnel. There is intense competition for
qualified personnel in the areas of the Company's activities and there can be no
assurance that the Company will be able to continue to attract and retain the
qualified personnel necessary for the development of its existing business and
its expansion into areas and activities requiring additional expertise. The loss
of, or failure to recruit, scientific, technical, sales and marketing and
managerial personnel could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's scientific advisors and consultants may be employed by or have
consulting agreements with entities other than the Company, some of which may
compete with the Company. To the extent that members of the Company's scientific
advisory board or consultants have consulting arrangements with or become
employed by any competitor of the Company, the Company could be materially and
adversely affected. Any inventions or processes independently discovered by the
scientific advisors or the consultants will not, unless otherwise agreed, become
the property of the Company and will remain the property of such persons or
their full-time employers. In addition, the institutions with which the
scientific advisors and consultants are affiliated may make available the
research services of their scientific and other skilled personnel, including the
scientific advisors and consultants, to competitors of the Company pursuant to
sponsored research agreements. Under such sponsored research agreements, such
institutions may be obligated to assign or license to a competitor of the
Company patents and other proprietary information that may result from research
sponsored by an entity other than the Company, including research performed by a
scientific advisor or consultant for a competitor of the Company.
Certain Anti-Takeover Provisions
The Company's Certificate of Incorporation grants the Board of Directors the
authority to issue up to 2,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or
25
<PAGE> 26
the designation of such series, without further vote or action by the
stockholders. Pursuant to the terms of the Convertible Preferred Stock Purchase
Agreement, dated February 27, 1998 (the "Stock Purchase Agreement"), the Company
has issued an aggregate of 333 shares of 6% Series A Convertible Preferred Stock
(the "Series A Stock") to certain investors. The rights of the holders of Common
Stock will be subject to, and may be materially and adversely affected by, the
rights of the holders of the Series A Stock or any Preferred Stock that may be
issued in the future. Further, the Company is subject to Section 203 of the
Delaware General Corporation Law, which prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years unless certain conditions are met.
Dividend Policy
The Company is obligated to pay dividends of 6% per annum on the Series A Stock,
payable by the Company on a quarterly basis either in cash or through the
issuance of shares of Common Stock. The Company has never declared or paid any
cash dividends on its Common Stock. The Company currently anticipates that it
will retain all its earnings for use in the operation of its business and,
therefore, does not anticipate that it will pay any cash dividends on its Common
Stock in the foreseeable future.
Possible Volatility of Stock Price
The price of the Company's Common Stock has fluctuated substantially since its
initial public offering on September 27, 1994. The market price of the shares of
the Common Stock, like that of the common stock of many other biotechnology
companies, is likely to continue to be highly volatile. Factors such as
fluctuations in the Company's operating results, additional financing
requirements and access to capital, governmental regulation, healthcare
legislation, developments in patent or other proprietary rights of the Company
or its competitors, including litigation, and market conditions for
biotechnology stocks and life science stocks in general, could have a
significant impact on the future price of the Common Stock. In addition, the
number of shares of Common Stock issuable upon conversion of the Series A Stock
and the subsequent sale of such shares could have a significant impact on the
future price of the Common Stock. Further, the failure of the Company to
maintain compliance with the listing requirements of the American Stock Exchange
may result in the delisting of the Company's Common Stock from the American
Stock Exchange.
Control by Existing Stockholders
As of December 31, 1997, officers and directors of the Company and stockholders
owning more than five percent of the Common Stock, together with their
affiliates, beneficially owned approximately 59.0% of the outstanding Common
Stock. As of June 30, 1998, Oncor, Inc. holds approximately 25.4 percent
(excluding the conversion of the Series A convertible preferred stock) of the
Company's outstanding Common Stock. Such shares were acquired by Oncor in a
transaction not involving a public offering and are therefore "restricted
securities" under the Securities Act and may only be sold (i) in accordance with
Rule 144 promulgated thereunder or (ii) pursuant to an effective registration
statement under the Securities Act. Currently, Oncor has no rights with respect
to the registration of such shares of Common Stock under the Securities Act.
Furthermore, Oncor is considered an "affiliate" of the Company and is therefore
subject to the volume and other limitations of Rule 144 promulgated under the
Securities Act. Under the proposed Merger agreement, Oncor's shares will be
registered subject to certain restrictions. As a result, these stockholders, if
acting together, would be able to significantly influence all matters requiring
approval by the stockholders of the Company, including the election of directors
and the approval of mergers and consolidations, sales of all or substantially
all of the assets of the Company or other business combination transactions.
26
<PAGE> 27
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
On May 18, 1998, the Company and Myriad Genetics, Inc. ("Myriad")
settled all outstanding lawsuits between the parties.
Item 2 Changes in Securities
Pursuant to agreements, dated July 6, 1998, by and between the
Company and certain investors (the "Preferred Holders"), the
Preferred Holders have agreed to vote any shares beneficially owned
by them on the record date of the Merger in favor of the Merger and
related transactions, have agreed to convert their respective Series
A Preferred Stock into shares of the Company's Common Stock on or
prior to the effective date of the merger, and have waived certain
other rights in connection with the Company's Series A Preferred
Stock. In addition, the Preferred Holders waived their rights to
additional financings under a Series B Convertible Preferred Stock
arrangement.
Item 3 Defaults Upon Senior Securities
None.
Item 4 Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Stockholders scheduled for
June 23, 1998 was adjourned to a future date.
Item 5 Other Information
None.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits filed as part of this Form 10-Q
None.
(b) Reports on Form 8-K
In a report filed on Form 8-K dated July 7,1998, the Company
issued two press releases announcing an Agreement and Plan of
Merger and Reorganization with Gene Logic, Inc., a Delaware
corporation, and Gene Logic Acquisition Corp., a Delaware
corporation and a wholly owned subsidiary of Gene Logic, Inc.
In a report filed on Form 8-K dated July 23, 1998, the Company
filed the Agreement and Plan of Merger and Reorganization as an
exhibit.
27
<PAGE> 28
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.
ONCORMED, INC.
<TABLE>
<S> <C>
Date: August 13, 1998 /s/ DR. TIMOTHY J. TRICHE
-----------------------------------------------------------
Dr. Timothy J. Triche, Chairman and Chief Executive Officer
Date: August 13, 1998 /s/ DR. DOUGLAS DOLGINOW
-----------------------------------------------------------
Dr. Douglas Dolginow, President and Chief Operating Officer
Date: August 13, 1998 /s/ L. ROBERT JOHNSTON, JR.
-----------------------------------------------------------
L. Robert Johnston, Jr., Sr. Vice President and Chief
Financial Officer
</TABLE>
28
<PAGE> 29
ONCORMED, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
EX-11 Calculation of Earnings Per Share 30
EX-27 Financial Data Schedule
( in EDGAR transmission Only)
</TABLE>
29
<PAGE> 1
EXHIBIT 11
ONCORMED, INC.
EARNINGS PER SHARE
CALCULATION OF SHARES USED IN COMPUTING
NET LOSS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Period From
Inception
Three Months Ended Six Months Ended (July 12, 1993)
June 30, June 30, Through
1998 1997 1998 1997 June 30, 1998
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Common Stock 7,883,937 7,814,022 7,882,728 7,567,360 5,997,245
------------ ----------- ----------- ----------- ------------
Shares used in computing net loss per share 7,883,937 7,814,022 7,882,728 7,567,360 5,997,245
============ =========== =========== =========== ============
</TABLE>
30
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND THE STATEMENT OF OPERATIONS FILED AS PART OF THE ANNUAL REPORT FORM
10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM
10Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,178,007
<SECURITIES> 0
<RECEIVABLES> 225,438
<ALLOWANCES> 44,761
<INVENTORY> 0
<CURRENT-ASSETS> 1,494,235
<PP&E> 2,853,942
<DEPRECIATION> 1,878,348
<TOTAL-ASSETS> 2,469,829
<CURRENT-LIABILITIES> 3,518,940
<BONDS> 0
3,719,161
0
<COMMON> 78,140
<OTHER-SE> (4,850,832)
<TOTAL-LIABILITY-AND-EQUITY> 2,469,829
<SALES> 848,708
<TOTAL-REVENUES> 848,708
<CGS> 366,778
<TOTAL-COSTS> 6,001,185
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,634
<INCOME-PRETAX> (5,734,948)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,734,948)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,734,948)
<EPS-PRIMARY> (0.73)
<EPS-DILUTED> 0
</TABLE>
