-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GZmWNVCZ06QpM8xtm/d63taSKKOaC36iGjCSIGdi5wueaIS+pcSchXBMNtAyajRG HIKPG9a20ClbTvbjscUJNQ== 0000891618-99-003669.txt : 19990812 0000891618-99-003669.hdr.sgml : 19990812 ACCESSION NUMBER: 0000891618-99-003669 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENELABS TECHNOLOGIES INC /CA CENTRAL INDEX KEY: 0000874443 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 943010150 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19222 FILM NUMBER: 99684364 BUSINESS ADDRESS: STREET 1: 505 PENOBSCOT DR CITY: REDWOOD CITY STATE: CA ZIP: 94063 BUSINESS PHONE: 6503969500 MAIL ADDRESS: STREET 1: 505 PENOBSCOT DR CITY: REDWOOD CITY STATE: CA ZIP: 94063 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1999 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 quarterly period ended June 30, 1999. 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 NO. 0-19222 GENELABS TECHNOLOGIES, INC. (Exact name of Registrant as specified in its charter) CALIFORNIA 94-3010150 (State or other jurisdiction of (I.R.S. employer identification number) incorporation or organization) 505 PENOBSCOT DRIVE, REDWOOD CITY, CALIFORNIA 94063 (Address of principal executive offices) (Zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 369-9500 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 [ ]. There were 39,852,042 shares of the Registrant's Common Stock issued and outstanding on July 30, 1999. ================================================================================ 1 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GENELABS TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
June 30, December 31, 1999 1998 --------------- --------------- (Unaudited) (Note) ASSETS Current assets: Cash, cash equivalents and short-term investments: Cash and cash equivalents $ 2,660 $ 3,631 Short-term investments 10,813 16,670 --------- --------- Total cash, cash equivalents and short-term investments 13,473 20,301 Other current assets 440 383 --------- --------- Total current assets 13,913 20,684 Property and equipment, net 1,848 1,401 Net assets of diagnostics subsidiary 2,913 3,372 Investment in Taiwan-based affiliate 1,174 1,174 Other assets 138 176 --------- --------- $ 19,986 $ 26,807 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 1,500 $ 2,500 Accounts payable and other accrued liabilities 3,076 3,671 Accrued compensation and related expenses 1,124 1,458 Unearned contract revenue 965 745 --------- --------- Total current liabilities 6,665 8,374 Long-term obligations 623 647 --------- --------- Total liabilities 7,288 9,021 --------- --------- Shareholders' equity: Preferred stock 9,682 9,682 Common stock 138,579 138,335 Accumulated deficit (135,761) (130,497) Accumulated other comprehensive income 198 266 --------- --------- Total shareholders' equity 12,698 17,786 --------- --------- $ 19,986 $ 26,807 ========= =========
See notes to condensed consolidated financial statements. Note: The condensed consolidated balance sheet at December 31, 1998 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. 2 3 GENELABS TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
For the three months ended For the six months ended June 30, June 30, -------------------------- ------------------------- 1999 1998 1999 1998 --------- -------- -------- -------- Contract revenue $ 2,310 $ 1,623 $ 4,139 $ 3,437 -------- -------- -------- -------- Operating expenses: Research and development 3,739 3,173 6,847 6,249 General and administrative 1,274 1,242 2,501 2,337 -------- -------- -------- -------- Total operating expenses 5,013 4,415 9,348 8,586 -------- -------- -------- -------- Operating loss (2,703) (2,792) (5,209) (5,149) Interest income, net 133 234 293 486 -------- -------- -------- -------- Loss from continuing operations (2,570) (2,558) (4,916) (4,663) -------- -------- -------- -------- Equity in loss of Taiwan-based affiliate, net of $1,645 gain on partial sale in 1998 -- 1,564 -- 1,422 Income/(loss) from discontinued operations of diagnostics subsidiary (317) 28 (348) 61 -------- -------- -------- -------- Net loss $ (2,887) $ (966) $ (5,264) $ (3,180) ======== ======== ======== ======== Loss per share - continuing operations $ (0.06) $ (0.06) $ (0.12) $ (0.12) ======== ======== ======== ======== Net loss per share $ (0.07) $ (0.02) $ (0.13) $ (0.08) ======== ======== ======== ======== Weighted average shares outstanding 39,825 39,554 39,802 39,526 ======== ======== ======== ========
See notes to condensed consolidated financial statements. 3 4 GENELABS TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS) (IN THOUSANDS) (UNAUDITED)
For the six months ended June 30, ------------------------- 1999 1998 -------- -------- Cash flows from operating activities: Net loss $ (5,264) $ (3,180) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization expense 305 189 Loss/(income) of discontinued diagnostics subsidiary 348 (61) Equity in loss of Taiwan-based affiliate -- (1,422) Changes in assets and liabilities: Receivables and other current assets (57) 315 Accounts payable, accrued liabilities, accrued compensation and long-term obligations (953) (552) Unearned contract revenue 220 132 Other -- -- -------- -------- Net cash used in operating activities (5,401) (4,579) -------- -------- Cash flows from investing activities: Purchases of securities available-for-sale (3,000) (9,820) Proceeds from sales and maturities of securities available-for-sale 8,857 8,620 Capital expenditures (714) (1,022) Proceeds from partial sale of Taiwan-based affiliate -- 4,300 Net remittances from diagnostics subsidiary 43 111 -------- -------- Net cash provided by investing activities 5,186 2,189 -------- -------- Cash flows from financing activities: Payments on short-term borrowings (1,000) -- Proceeds from issuance of common stock 244 378 -------- -------- Net cash (used in)/provided by financing activities (756) 378 -------- -------- Net decrease in cash and cash equivalents (971) (2,012) Cash and cash equivalents, beginning of the period 3,631 4,230 -------- -------- Cash and cash equivalents, end of the period 2,660 2,218 Short-term investments, end of the period 10,813 18,069 -------- -------- Cash, cash equivalents and short-term investments, end of the period $ 13,473 $ 20,287 ======== ========
See notes to condensed consolidated financial statements. 4 5 GENELABS TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1999 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements include the accounts of Genelabs Technologies, Inc. and its wholly-owned subsidiaries ("Genelabs" or the "Company") after elimination of all significant intercompany accounts and transactions. In 1998 the Company adopted a plan to divest its diagnostics subsidiary, Genelabs Diagnostics Pte. Ltd. ("GLD"), and accordingly, the operating results of GLD have been segregated from continuing operations and reported separately. The Company has restated its prior financial statements in order to present the operating results and net assets of GLD as a discontinued operation, changing the manner by which GLD is included in the financial statements but not changing the previously reported net loss or shareholders' equity. These financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month and six month periods ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. These unaudited condensed consolidated financial statements are meant to be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 2. COMPREHENSIVE INCOME During the three months ended June 30, 1999 and 1998, the Company's comprehensive loss amounted to $(2,852,000) and $(676,000), respectively, and for the six months ended June 30, 1999 and 1998, the Company's comprehensive loss amounted to $(5,332,000) and $(2,754,000). 5 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All statements in Management's Discussion and Analysis of Financial Condition and Results of Operations that are not historical are forward-looking statements. Forward-looking statements involve a number of risks and uncertainties. These risks and uncertainties include, but are not limited to, those statements concerning clinical trials, progress of drug discovery programs, the Company's business plans, anticipated expenditures and the timing and need for additional funds. Forward-looking statements may be identified by terminology such as "may," "will," "expects," "anticipates," "intends," "believes" and similar expressions. Some of the factors that could cause material differences in actual results of the Company's activities are product development, regulatory approval and manufacturing risks. Additional factors include intellectual property rights, the Company's relationships with its collaborators and potential collaborators, and other factors and risks detailed under the caption "Risk Factors" in the Company's 1998 Annual Report on Form 10-K and other filings with the U.S. Securities and Exchange Commission. Shareholders and prospective investors in the Company should carefully consider these risk factors. The Company disclaims any obligation to update these statements for subsequent events. Genelabs Technologies, Inc. ("Genelabs" or the "Company") is a biopharmaceutical company that focuses on the discovery and development of novel drugs for serious human diseases. The aim of the Company's principal drug discovery program is to produce drug candidates targeted to specific disease-causing genes using Genelabs' patented technologies. The Company believes these technologies have the potential to create an entirely new class of pharmaceutical products that work by binding to DNA and changing the level of expression of a specific gene. While traditional drugs typically affect the activity of proteins derived from the expression of genes, Genelabs' drug discovery approach is to target the disease-causing genes directly. Related technologies are being applied to the discovery of novel antiviral RNA-binding compounds. The Company's principal drug development program is GL701 for systemic lupus erythematosus ("SLE"), for which two Phase III clinical trials have been conducted. Data from the first Phase III trial demonstrated that GL701 could reduce the use of steroids in steroid-dependent SLE patients with active disease. Preliminary data from the second Phase III trial is expected to be available later this summer. RESULTS OF OPERATIONS - SECOND QUARTER 1999 COMPARED TO SECOND QUARTER 1998 The net loss was $2.9 million for the three months ended June 30, 1999, compared to $1.0 million for the same period in 1998. The $1.9 million increase in net loss in the second quarter of 1999 compared to the second quarter of 1998 was largely due to a $1.6 million gain on the partial sale of Genelabs' investment in its Taiwan-based affiliate during the second quarter of 1998. In addition, there was a net loss at the Company's diagnostics operation in the second quarter of 1999 compared to income in the second quarter of 1998. The results of the diagnostics operation have been treated as a discontinued operation. Contract revenues increased 42% in the second quarter of 1999 compared to the second quarter of 1998, increasing to $2.3 million in 1999 compared to $1.6 million in 1998. The increased revenue was primarily due to higher funding levels provided by the Company's Defense Advanced Research Projects Agency ("DARPA") grant. Contract revenues include grant, licensing, milestone, and research and development payments. Contract revenues recognized in the future will be dependent upon the continuation of existing grants, continuation of existing corporate collaborations, achievement of milestones under these collaborations, and establishment of new research, development and/or licensing agreements. 6 7 Operating expenses increased 14% in the second quarter of 1999 compared to the second quarter of 1998. In the second quarter of 1999, research and development expenses were 75% of operating expenses compared to 72% of operating expenses in 1998. Research and development expenses increased 18% in the second quarter of 1999, due to increased expenditures on the Company's drug discovery program, primarily related to the DARPA grant, partially offset by lower clinical trial costs for GL701. General and administrative expenses increased 3% in the second quarter of 1999 compared to the second quarter of 1998. RESULTS OF OPERATIONS - FIRST HALF 1999 COMPARED TO FIRST HALF 1998 The net loss was $5.3 million for the six months ended June 30, 1999, compared to $3.2 million for the same period in 1998. The $2.1 million increase in net loss in the first half of 1999 compared to the first half of 1998 was largely due to the $1.6 million gain on the partial sale of Genelabs' investment in its Taiwan-based affiliate during the first half of 1998. In addition, there was a net loss of $0.3 million at the Company's diagnostics operation in 1999, compared to income of $0.1 million in 1998. The results of the diagnostics operation have been treated as a discontinued operation. Net interest income declined to $0.3 million in the first half of 1999 compared to $0.5 million in the same period of 1998 due to the Company's lower average cash and short-term investments balance. Contract revenues increased 20% in the first half of 1999 compared to the first half of 1998, increasing to $4.1 million in 1999 compared to $3.4 million in 1998. The increased revenue was primarily due to higher funding levels provided by the Company's DARPA grant. Contract revenues include grant, licensing, milestone, and research and development payments. Contract revenues recognized in the future will be dependent upon the continuation of existing grants, continuation of existing corporate collaborations, achievement of milestones under these collaborations, and establishment of new research, development and/or licensing agreements. Operating expenses increased 9% in the first half of 1999 compared to the first half of 1998. In both the first half of 1999 and the first half of 1998, research and development expenses were 73% of operating expenses. Research and development expenses increased 10% in the first half of 1999, as increased expenditures on the Company's drug discovery program, primarily related to the DARPA grant, offset lower clinical trial costs for GL701. General and administrative expenses increased 7% in the first half of 1999 compared to the first half of 1998, primarily due to expanded business development activities in 1999. LIQUIDITY AND CAPITAL RESOURCES The Company had cash, cash equivalents and short-term investment balances totaling $13.5 million at June 30, 1999, compared to $20.3 million at December 31, 1998. The decrease in cash, cash equivalents and short-term investments was primarily attributable to cash used in operations, but also included payments on short-term borrowings and purchases of research equipment. The net cash used in operations included the expansion of the drug discovery research program and the continuation of the development of GL701 for SLE. Genelabs has operated at a loss since its inception and has funded its operations primarily through contract revenues, grants and the sale of equity. Genelabs expects to incur substantial additional costs, including research costs for the Company's drug discovery technologies and development costs for GL701. The amount of the additional costs will depend on numerous factors including the progress of Genelabs' research and development programs, the status of its corporate partnerships, results of clinical trials and actions of regulatory agencies. 7 8 The Company anticipates that its current resources and expected revenues from existing collaborative agreements will enable it to maintain its operations through 2000, although the Company intends to seek additional funds through corporate collaborations, asset sales or other means prior to such time. The Company anticipates realizing a net loss for this time frame and profitability thereafter is subject to significant uncertainty. Additional funds for the Company's research and development activities may not be available on acceptable terms, if at all. The unavailability of additional funds could delay or prevent the development, approval or marketing of some or all of the Company's products and technologies, which would have a material adverse effect on the Company's business, financial condition and results of operations. CERTAIN BUSINESS RISKS The following discussion summarizes certain business risks which management believes are particularly relevant at this time. There is more detailed information about these risks and additional risks under the caption "Risk Factors" in the Company's 1998 Annual Report on Form 10-K, which shareholders and prospective investors are encouraged to review. Clinical trial results of GL701 are unpredictable. In 1999, Genelabs expects to announce the preliminary results of its second Phase III trial of GL701 for SLE. Subsequently, once the data analysis is complete, Genelabs will decide whether to continue the development of this drug candidate. Many biopharmaceutical companies have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials. The Company can provide no assurance that the results of this second Phase III trial of GL701 for SLE will be sufficient to support proceeding with a New Drug Application ("NDA") or continuing development of the drug candidate. Regulatory approvals are uncertain. The manufacturing and marketing of the Company's products are subject to rigorous requirements by the U.S. Food and Drug Administration ("FDA") and by comparable agencies in other countries and by state regulatory authorities. There can be no assurance that the Company will be able to obtain or maintain the necessary approvals for manufacturing or marketing of GL701 or that the data it obtains in clinical trials will be sufficient to establish its safety and efficacy. The Company has agreements in place for the manufacture of the bulk raw material for GL701 and for the contract manufacture of the finished dosage, but cannot provide assurance that these outside manufacturers will continue to meet the requirements of the FDA. Genelabs can provide no assurance that the FDA will view the results of the Company's Phase III trials of GL701 as sufficient to serve as the basis for filing or approval of an NDA. Research programs are likely to require additional funds. The Company has incurred losses in each year since its inception and has accumulated approximately $136 million in net losses through June 30, 1999, including a net loss of $5.3 million for the first half of 1999. To date the Company has funded its operations from contract revenues, provided through corporate collaborations and government grants, and the sale of equity. Contract revenues recognized in the future will be dependent upon the continuation of existing corporate collaborations, continuation of existing grants, achievement of performance milestones, and establishment of new contracts and grants. Genelabs may require additional funding for its continuing operations from other sources including the sale of equity, and this may dilute existing shareholders or provide certain rights to Genelabs' assets. The unavailability of additional funds from contract revenues or other sources could delay or prevent the development, testing, approval or marketing of some or all of the Company's products and technologies, which would have a material adverse effect on the Company's business, financial condition and results of operations. 8 9 The Company depends on key employees for the execution of its business plan Genelabs' success depends on the services of key employees in executive and research and development positions. The loss of the services of key executives or other employees could have a material adverse impact on Genelabs' ability to execute its business plan. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On October 5, 1998, Institut Pasteur and Pasteur Sanofi Diagnostics (collectively, the "Plaintiffs") filed a Writ of Summons in the High Court of the Republic of Singapore against GLD, the wholly-owned diagnostics subsidiary of Genelabs, and Nagase Singapore Pte. Ltd., GLD's Malaysian distributor. In the Writ, the Plaintiffs allege that GLD has, by making, using and selling HIV-2 Western Blot diagnostic products, infringed a Singaporean patent owned by Institut Pasteur and exclusively licensed to Pasteur Sanofi. The Plaintiffs are seeking injunctive relief and damages in an unspecified amount. GLD believes that it has substantial defenses and is defending the suit vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 16, 1999, the Company held its Annual Meeting of shareholders. Matters voted upon at the meeting and the number of affirmative votes, negative votes, withheld votes and abstentions cast with respect to each such matter were as follows:
Affirmative Withheld Votes Votes 1. Election of the Company's Directors: Irene A. Chow 34,723,522 1,804,729 J. Richard Crout 34,734,004 1,794,247 Thomas E. Dewey 34,719,497 1,808,754 Frank L. Douglas 34,720,347 1,807,904 Arthur Gray, Jr. 34,726,242 1,802,009 H.H. Haight 34,725,497 1,802,754 Alan Y. Kwan 34,728,597 1,799,654 James A.D. Smith 34,724,876 1,803,375 Nina K. Wang 34,734,804 1,793,447
2. A proposal to approve amendments to the 1995 Stock Option Plan was approved with 16,772,773 affirmative votes, 4,282,862 negative votes, 195,658 abstentions and 15,276,958 broker non-votes. The amendments increased the number of shares reserved for issuance by 2,000,000 shares and changed the number of shares each optionee may be granted for purposes of Section 162(m) of the Internal Revenue Code. 3. A proposal to approve an amendment to the Employee Stock Purchase Plan, increasing the number of shares reserved for issuance by 500,000 shares, was approved with 20,428,173 affirmative votes, 662,079 negative votes, 161,041 abstentions and 15,276,958 broker non-votes. 9 10 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 27. Financial Data Schedule (b) REPORTS ON FORM 8-K There were no reports on Form 8-K filed during the quarter ended June 30, 1999. 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. GENELABS TECHNOLOGIES, INC. (Registrant) Principal Executive Officer: /s/ JAMES A.D. SMITH Date: August 11, 1999 ----------------------------------- JAMES A.D. SMITH President Principal Financial Officer: /s/ RICHARD A. WALDRON Date: August 11, 1999 ----------------------------------- RICHARD A. WALDRON Chief Financial Officer Principal Accounting Officer: /s/ MATTHEW M. LOAR Date: August 11, 1999 ----------------------------------- MATTHEW M. LOAR Vice President, Finance 10 11 EXHIBIT INDEX
Exhibit # Description - --------- ----------- 27.1 Financial Data Schedule
EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 2,660 10,813 130 0 0 13,913 9,781 7,933 19,986 6,665 0 0 9,682 138,579 (135,563) 19,986 0 4,139 0 0 9,348 0 (293) (4,916) 0 (4,916) (348) 0 0 (5,264) (0.13) (0.13) CONSISTS OF ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE INCOME. CONSISTS OF RESEARCH AND DEVELOPMENT, AND GENERAL AND ADMINISTRATIVE EXPENSES.
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