-----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, SdD3eoD7n9RQiyyMDgmLAvM8loxrSJouQH0p0vhGUkboX9O1DhWYWRkOw/3bgfEE WvfaTX+UpLRQGPbyOcWHUA== 0000891618-99-004942.txt : 19991109 0000891618-99-004942.hdr.sgml : 19991109 ACCESSION NUMBER: 0000891618-99-004942 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991108 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: 99743400 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 PERIOD ENDED SEPTEMBER 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 September 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 incorporation or organization) identification number) 505 PENOBSCOT DRIVE, REDWOOD CITY, 94063 CALIFORNIA (Zip code) (Address of principal executive offices) 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 40,011,222 shares of the Registrant's Common Stock issued and outstanding on October 29, 1999. ================================================================================ 1 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GENELABS TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
September 30, December 31, 1999 1998 ------------- ------------ (Unaudited) (Note) ASSETS Current assets: Cash, cash equivalents and short-term investments: Cash and cash equivalents $ 1,729 $ 3,631 Short-term investments 9,403 16,670 --------- --------- Total cash, cash equivalents and short-term investments 11,132 20,301 Other current assets 570 383 --------- --------- Total current assets 11,702 20,684 Property and equipment, net 1,739 1,401 Net assets of diagnostics subsidiary 2,606 3,372 Investment in Taiwan-based affiliate 1,174 1,174 Other assets 127 176 --------- --------- $ 17,348 $ 26,807 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 1,000 $ 2,500 Accounts payable and other accrued liabilities 2,844 3,671 Accrued compensation and related expenses 1,250 1,458 Unearned contract revenue 1,184 745 --------- --------- Total current liabilities 6,278 8,374 Long-term obligations 650 647 --------- --------- Total liabilities 6,928 9,021 --------- --------- Shareholders' equity: Preferred stock 9,682 9,682 Common stock 138,823 138,335 Accumulated deficit (138,280) (130,497) Accumulated other comprehensive income 195 266 --------- --------- Total shareholders' equity 10,420 17,786 --------- --------- $ 17,348 $ 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 nine months ended September 30 September 30 -------------------------- ------------------------- 1999 1998 1999 1998 -------- --------- -------- -------- Contract revenue $ 2,003 $ 2,478 $ 6,142 $ 5,915 -------- -------- -------- -------- Operating expenses: Research and development 3,189 3,316 10,036 9,575 General and administrative 1,087 1,164 3,588 3,491 -------- -------- -------- -------- Total operating expenses 4,276 4,480 13,624 13,066 -------- -------- -------- -------- Operating loss (2,273) (2,002) (7,482) (7,151) Interest income, net 106 314 399 800 -------- -------- -------- -------- Loss from continuing operations (2,167) (1,688) (7,083) (6,351) -------- -------- -------- -------- Equity in loss of Taiwan-based affiliate, net of $1,645 gain on partial sale in 1998 -- -- -- 1,422 Income/(loss) from discontinued operations of diagnostics subsidiary (352) (24) (700) 37 -------- -------- -------- -------- Net loss $ (2,519) $ (1,712) $ (7,783) $ (4,892) ======== ======== ======== ======== Loss per share - continuing operations $ (0.05) $ (0.04) $ (0.18) $ (0.16) ======== ======== ======== ======== Net loss per share $ (0.06) $ (0.04) $ (0.20) $ (0.12) ======== ======== ======== ======== Weighted average shares outstanding 39,964 39,668 39,856 39,581 ======== ======== ======== ========
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 nine months ended September 30, --------------------------- 1999 1998 --------- --------- Cash flows from operating activities: Net loss $ (7,783) $ (4,892) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization expense 463 313 Loss/(income) of discontinued diagnostics 700 (37) subsidiary Gain on partial sale of Taiwan-based affiliate -- (1,422) Changes in assets and liabilities: Receivables and other current assets (187) 290 Accounts payable, accrued liabilities, accrued compensation and long-term obligations (1,032) 300 Unearned contract revenue 439 193 Other -- -- --------- --------- Net cash used in operating activities (7,400) (5,255) --------- --------- Cash flows from investing activities: Purchases of securities available-for-sale (5,565) (16,435) Proceeds from sales and maturities of securities available-for-sale 12,832 16,479 Capital expenditures (801) (1,341) Proceeds from partial sale of Taiwan-based affiliate -- 4,300 Net remittances from diagnostics subsidiary 44 172 --------- --------- Net cash provided by investing activities 6,510 3,175 --------- --------- Cash flows from financing activities: Payments on short-term borrowings (1,500) -- Proceeds from issuance of common stock 488 378 --------- --------- Net cash (used in)/provided by financing activities (1,012) 378 --------- --------- Net decrease in cash and cash equivalents (1,902) (1,702) Cash and cash equivalents, beginning of the period 3,631 4,230 --------- --------- Cash and cash equivalents, end of the period 1,729 2,528 Short-term investments, end of the period 9,403 16,825 --------- --------- Cash, cash equivalents and short-term investments, end of the period $ 11,132 $ 19,353 ========= =========
See notes to condensed consolidated financial statements. 4 5 GENELABS TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 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 nine month periods ended September 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 September 30, 1999 and 1998, the Company's comprehensive loss amounted to $(2,522,000) and $(1,745,000), respectively, and for the nine months ended September 30, 1999 and 1998, the Company's comprehensive loss amounted to $(7,854,000) and $(4,499,000). 3. 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. 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 the regulatory approval process, 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 Company's principal drug development program is GL701 for systemic lupus erythematosus ("SLE"), for which two Phase III clinical trials have been conducted. Based on the results of the first Phase III trial and the preliminary results of the second Phase III trial, Genelabs intends to submit a New Drug Application ("NDA") to the U.S. Food and Drug Administration ("FDA"), and has requested a pre-NDA meeting with the FDA. 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. RESULTS OF OPERATIONS - THIRD QUARTER 1999 COMPARED TO THIRD QUARTER 1998 The net loss was $2.5 million for the three months ended September 30, 1999, compared to $1.7 million for the same period in 1998. The $0.8 million increase in net loss in the third quarter of 1999 compared to the third quarter of 1998 was largely due to a $1.0 million payment received in the third quarter of 1998 for expansion of hepatitis E virus ("HEV") vaccine rights granted to SmithKline Beecham plc ("SKB"). In addition, there was a larger net loss at GLD, the Company's diagnostics subsidiary, in the third quarter of 1999 compared to the third quarter of 1998. The results of GLD have been treated as a discontinued operation. Contract revenues decreased 19% in the third quarter of 1999 compared to the third quarter of 1998, to $2.0 million in 1999 compared to $2.5 million in 1998. The lower revenue was due to the above noted $1 million payment received from SKB in the third quarter of 1998, partially offset by 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, 6 7 continuation of existing corporate collaborations, achievement of milestones under these collaborations, and establishment of new research, development and/or licensing agreements. Operating expenses decreased 5% in the third quarter of 1999 compared to the third quarter of 1998. In the third quarter of 1999 research and development expenses were 75% of operating expenses compared to 74% in the third quarter of 1998. Research and development expenses decreased 4% in the third quarter of 1999 compared to the same period in 1998 due to lower clinical trial costs for GL701, partially offset by increased expenditures on the Company's drug discovery program, primarily related to the DARPA grant. General and administrative expenses decreased 7% in the third quarter of 1999 compared to the third quarter of 1998. RESULTS OF OPERATIONS - FIRST THREE QUARTERS OF 1999 COMPARED TO FIRST THREE QUARTERS OF 1998 The net loss was $7.8 million for the nine months ended September 30, 1999, compared to $4.9 million for the same period in 1998. The $2.9 million increase in net loss during the first nine months of 1999 compared to the first nine months of 1998 was largely due to the 1998 gain from the partial sale of Genelabs' investment in its Taiwan-based affiliate. Also contributing to the higher net loss in the first nine months of 1999 was a higher net loss of the Company's diagnostics subsidiary compared to a slight income in 1998. The results of the diagnostics operation have been treated as a discontinued operation. Contract revenues increased 4% in the first nine months of 1999 compared to the first nine months of 1998, increasing to $6.1 million in 1999 compared to $5.9 million in 1998. The increased revenue was primarily due to higher funding levels provided by the Company's DARPA grant, partially offset by a decrease in revenues related to the 1998 expansion of HEV vaccine rights granted to SKB. 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 4% in the first nine months of 1999 compared to the first nine months of 1998. In the first nine months of 1999 research and development expenses were 74% of operating expenses compared to 73% of operating expenses in the first nine months of 1998. Research and development expenses increased 5% in the first nine months of 1999, as increased expenditures on the Company's drug discovery program were partially offset by lower clinical trial costs for GL701. General and administrative expenses increased 3% in the first nine months of 1999 compared to the first nine months of 1998. Net interest income declined to $0.4 million in the first nine months of 1999 compared to $0.8 million in the same period of 1998 due to the Company's lower average cash and short-term investments balance. The loss from Genelabs diagnostics subsidiary, treated as a discontinued operation, increased to $0.7 million in the first nine months of 1999 compared to break-even in the first nine months of 1998. The increased diagnostics net loss was due to lower sales of its reagents and its western blot diagnostic products, in addition to costs incurred to defend litigation alleging patent infringement. LIQUIDITY AND CAPITAL RESOURCES The Company had cash, cash equivalents and short-term investment balances totaling $11.1 million at September 30, 1999, compared to $20.3 million at December 31, 1998. The $9.2 million decrease in cash, cash equivalents and short-term investments was primarily attributable to $7.4 million cash used in operations, but also included $1.5 million in payments on short-term borrowings and $0.8 million in purchases of research equipment, partially offset by $0.5 million received from the exercise of stock options granted under the Company's Stock Option Plans. The net cash used in operations included 7 8 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 the sale of equity, contract revenues and grants. 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 and actions of regulatory agencies. The Company anticipates that its current resources and expected revenues from existing collaborative agreements will enable it to maintain its planned operations through mid-2000, although the Company intends to seek additional funds through the sale of equity, 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 that 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. Regulatory approvals are uncertain. In September 1999, Genelabs announced positive results from its second Phase III trial of GL701 for SLE. Based on these preliminary results and the positive results of its first Phase III trial, the Company plans to submit an NDA to the FDA. The manufacturing and marketing of the Company's products are subject to rigorous requirements by the FDA as well as other governmental agencies. Many biopharmaceutical companies have suffered significant setbacks with respect to drugs under development, even after obtaining what they believe to be promising results. Genelabs can provide no assurance that the FDA will view the results of the Company's clinical trials of GL701 as sufficient to serve as the basis for submission or approval of an NDA. While Genelabs has agreements in place for the manufacture of the bulk raw material for GL701 and for the contract manufacture of the finished dosage, the Company cannot provide assurance that these outside manufacturers will continue to meet the requirements of the FDA. The Company's Research programs are likely to require additional funds. The Company has incurred losses in each year since its inception and has accumulated approximately $138 million in net losses through September 30, 1999, including a net loss of $7.8 million for the first nine months of 1999. To date the Company has funded its operations from the sale of equity and from contract revenues provided by corporate collaborations and government grants. 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 8 9 the Company's products and technologies, which would have a material adverse effect on the Company's business, financial condition and results of operations. 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. Year 2000 issue The year 2000 issue is the result of the failure of hardware or software components to properly handle dates that occur on or after January 1, 2000. Genelabs has evaluated its computer systems and believes that they will function properly in the year 2000 and thereafter. The Company has also evaluated the year 2000 readiness of key suppliers, contractors and collaborators, and believes that their systems will also function properly. However, the Company cannot provide assurance that these systems will adequately handle all year 2000 issues. The costs of dealing with the year 2000 issue have largely been limited to internal costs and software upgrades, and have not been significant. The Company estimates that these costs were less than $0.2 million in total, and no additional costs are expected, although Genelabs expects to continue monitoring its year 2000 readiness. 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 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 September 30, 1999. 9 10 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: November 8, 1999 ------------------------------------------ JAMES A.D. SMITH President Principal Financial Officer: /s/ RICHARD A. WALDRON Date: November 8, 1999 ------------------------------------------ RICHARD A. WALDRON Vice President and Chief Financial Officer Principal Accounting Officer: /s/ MATTHEW M. LOAR Date: November 8, 1999 ------------------------------------------ MATTHEW M. LOAR Vice President, Finance 10 EX-27 2 FINANCIAL DATA SCHEDULE
5 0000874443 GENELABS TECHNOLOGIES, INC./CA 1,000 U.S. DOLLARS 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1 1,729 9,403 305 0 0 11,702 9,819 8,080 17,348 6,278 0 0 9,682 138,823 (138,085) 17,348 0 6,142 0 0 13,624 0 (399) (7,083) 0 (7,083) (700) 0 0 (7,783) (0.20) (0.20) CONSISTS OF ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE INCOME. CONSISTS OF RESEARCH AND DEVELOPMENT, AND GENERAL AND ADMINISTRATIVE EXPENSES.
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