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UNITED STATES
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 March 31, 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 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 39,582,511 shares of the Registrant's Common Stock issued and
outstanding on April 30, 1998.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ---------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,419 $ 4,230
Short-term investments 14,843 16,869
--------- ---------
Cash, cash equivalents and short-term investments 17,262 21,099
Accounts receivable 2,971 2,014
Inventories 2,514 2,281
Other current assets 334 554
--------- ---------
Total current assets 23,081 25,948
Property and equipment, net 1,944 1,239
Investment in Genelabs Biotechnology Co., Ltd. 3,516 3,658
Other assets 278 294
--------- ---------
$ 28,819 $ 31,139
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities $ 4,505 $ 4,458
Accrued compensation and related expenses 1,707 1,932
Unearned contract revenue 749 843
--------- ---------
Total current liabilities 6,961 7,233
Long-term obligations 472 696
--------- ---------
Total liabilities 7,433 7,929
--------- ---------
Shareholders' equity:
Preferred stock 9,682 9,682
Common stock 137,858 137,604
Accumulated deficit (126,106) (123,892)
Cumulative foreign currency translation adjustment (48) (184)
--------- ---------
Total shareholders' equity 21,386 23,210
--------- ---------
$ 28,819 $ 31,139
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
Note: The condensed consolidated balance sheet at December 31, 1997 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.
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GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
March 31,
--------------------------
1998 1997
--------- --------
<S> <C> <C>
Revenues:
Product sales $ 2,194 $ 2,575
Contract 1,814 817
-------- --------
Total revenues 4,008 3,392
-------- --------
Operating costs and expenses:
Cost of product sales 1,169 1,620
Research and development 3,161 2,793
Selling, general and administrative 2,005 2,190
-------- --------
Total operating costs and expenses 6,335 6,603
-------- --------
Operating loss (2,327) (3,211)
-------- --------
Interest income 255 338
Equity in loss of Genelabs Biotechnology Co., Ltd. (142) (109)
-------- --------
Net loss $ (2,214) $ (2,982)
======== ========
Net loss per share $ (0.06) $ (0.08)
======== ========
Weighted average shares outstanding 39,497 37,978
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
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GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
March 31,
------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,214) $ (2,982)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense 181 142
Equity in loss of Genelabs Biotechnology Co., Ltd. 142 109
Changes in assets and liabilities:
Receivables (957) 571
Inventories (233) 381
Accounts payable, accrued liabilities, accrued
compensation and long-term obligations (402) (1,031)
Unearned contract revenue (94) (94)
Other 327 19
-------- --------
Net cash used in operating activities (3,250) (2,885)
-------- --------
Cash flows from investing activities:
Purchases of securities available-for-sale (2,214) (10,228)
Proceeds from sales and maturities of securities
available-for-sale 4,240 3,501
Capital expenditures (863) (5)
-------- --------
Net cash provided by/(used in) investing activities 1,163 (6,732)
Cash flows from financing activities -
proceeds from issuance of common stock, net 254 7,493
Effect of exchange rate change on cash 22 (15)
-------- --------
Net decrease in cash and cash equivalents (1,811) (2,139)
Cash and cash equivalents, beginning of the period 4,230 4,377
-------- --------
Cash and cash equivalents, end of the period 2,419 2,238
Short-term investments, end of the period 14,843 26,068
-------- --------
Cash, cash equivalents and short-term investments,
end of the period $ 17,262 $ 28,306
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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GENELABS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
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. 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. Certain prior
year amounts have been reclassified to conform to the current year presentation.
Operating results for the three month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
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, 1997.
2. INVENTORIES
The components of inventory are as follows:
<TABLE>
<CAPTION>
(in thousands) March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Raw materials $ 1,380 $ 1,113
Work-in-process 493 542
Finished goods 641 626
----------- -----------
$ 2,514 $ 2,281
=========== ===========
</TABLE>
3. BUSINESS SEGMENTS
The Company operates in two business segments, biopharmaceuticals and
diagnostics. The biopharmaceutical business is engaged in research and
development directed towards drugs that treat human disease. Headquarters for
the biopharmaceutical business is integrated with the corporate headquarters in
Redwood City, California. The diagnostics business primarily sells tests for
detection of infectious diseases. The diagnostics' manufacturing headquarters
are located in Singapore and the principal sales office is based in Switzerland.
Revenues from external customers for the biopharmaceutical segment are reported
as contract revenues on the Condensed Consolidated Statement of Operations and
revenues from external customers for the diagnostics segment are reported as
product sales. For the three months ended March 31, 1998 and 1997,
biopharmaceutical operating loss was $(2,358,000) and $(3,089,000),
respectively, and diagnostics operating income/(loss) was $31,000 and
$(122,000), respectively.
4. CHANGES IN ACCOUNTING STANDARDS
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No.
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement has no impact on the
Company's net income or shareholders' equity. SFAS No. 130 requires, among other
things, unrealized gains or losses on the Company's foreign currency translation
adjustments to be included in comprehensive income or loss. During the three
months ended March 31, 1998 and 1997, the Company's comprehensive loss amounted
to $(2,078,000) and $(3,064,000), respectively.
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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
which involve a number of risks and uncertainties, including, but not limited
to, those statements concerning the commencement and completion of clinical
trials and the announcement of trial data results, the Company's strategic
plans, anticipated expenditures and the timing and need for additional funds.
Among the factors that could cause actual results of the Company's activities to
differ materially are product non-approval or delays by the U.S. Food and Drug
Administration and foreign regulatory authorities, product development,
manufacturing and market acceptance risks, the impact of competitive products,
pricing and intellectual property rights, the results of current and future
licensing and other collaborative relationships and other factors and risks
detailed under the caption "Risk Factors" in the Company's 1997 Annual Report on
Form 10-K and other filings with the U.S. Securities and Exchange Commission.
The Company disclaims any obligation to update these statements for subsequent
events.
OVERVIEW
Genelabs Technologies, Inc. (together with its subsidiaries, "Genelabs" or the
"Company") is a biopharmaceutical company with research focused on the discovery
of small molecule drugs that act by binding to DNA to regulate gene expression
or inactivate pathogens. The lead research program is based on a proprietary
enabling technology, MERLIN, for creating gene-specific, small organic,
DNA-binding molecules. A recently developed technology, VIRIA, is being applied
to the discovery of novel anti-viral RNA-binding compounds. The Company's
clinical development efforts are focused on its lead compound, GL701, which is
in Phase III clinical trials as a new therapy for systemic lupus erythematosus
("SLE").
The Company conducts its diagnostic business through its wholly-owned subsidiary
Genelabs Diagnostics (Pte.) Ltd. ("GLD"), located in Singapore, which sells
diagnostic tests for infectious diseases primarily in Europe and Asia. In
addition, Genelabs has an equity interest in a Taiwan-based company, Genelabs
Biotechnology Co., Ltd. ("GBL"), which is focused on late-stage development,
manufacture and commercialization of newly developed or formulated
pharmaceuticals for the Asian market.
The Company expects to continue to invest in biopharmaceutical product research
and development. Revenue from the sale of therapeutic products is not expected
until the launch of its first product, which is not expected to occur for
several years, if at all. The Company has several collaborations and is seeking
additional collaborations with other pharmaceutical companies for some of its
technologies to maximize its profitability for products that may result from
those technologies and to obtain funding for a portion of its research and
development expenses. However, Genelabs expects to continue to incur operating
losses for at least the next several years.
RESULTS OF OPERATIONS
Revenues
Total revenues for the quarter ended March 31, 1998 were $4.0 million, compared
to $3.4 million for the same period in 1997. Total revenues include both
diagnostic product sales and contract revenue. Diagnostic product sales were
$2.2 million for the quarter ended March 31, 1998, compared to $2.6 million for
the same period in 1997. The decrease in diagnostic product sales occurred
primarily in Asia.
Contract revenues were $1.8 million for the quarter ended March 31, 1998,
compared to $0.8 million for the same period in 1997. Contract revenues include
grant, licensing, milestone, and research and development payments. The increase
in contract revenues in the first quarter of 1998, compared to the first quarter
of 1997,
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was primarily due to recognition of revenue under a grant funded by the Defense
Advanced Research Projects Agency ("DARPA"). Contract revenues recognized in the
future will be dependent upon the continuation of existing corporate
collaborations, achievement of milestones under these collaborations,
continuation of the DARPA grant and establishment of new research, development
and/or licensing agreements.
Cost of Product Sales
Cost of product sales were $1.2 million for the quarter ended March 31, 1998,
compared to $1.6 million for the same period in 1997. Gross margins increased to
47% for the first quarter of 1998 from 37% for the same period in the prior
year. The increase in gross margins was primarily due to an increase in sales of
higher margin products combined with a production yield higher than that of the
prior year.
Research and Development Expenses
The Company's research and development expenses were $3.2 million for the
quarter ended March 31, 1998, compared to $2.8 million for the same period in
1997. The increase was primarily due to additional expenditures related to the
Company's drug discovery research programs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $2.0 million for the quarter
ended March 31, 1998, compared to $2.2 million for the same period in 1997. The
Company presently anticipates that further decreases are not likely.
Net Loss
The Company has operated at a loss since its inception and had an accumulated
deficit of $126.1 million as of March 31, 1998. The net loss was $2.2 million
for the three months ended March 31, 1998, compared to $3.0 million for the same
period in 1997. The reduced net loss was primarily due to higher contract
revenues during the quarter ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents and short-term investment balances
totaling $17.3 million at March 31, 1998, compared to $21.1 million at December
31, 1997. The decrease in cash, cash equivalents and short-term investments was
primarily attributable to $3.3 million used in operations as the Company
expanded its drug discovery research and continued development of GL701 for SLE.
Purchases of capital equipment used in drug discovery research also contributed
to the use of cash during the period ended March 31, 1998. The use of cash, cash
equivalents and short-term investments in subsequent quarters of 1998 is
expected to be lower as the Company receives funds from the DARPA grant.
The Company has funded its operations since inception primarily through public
and private offerings of its common stock, private offerings of its preferred
stock, contract revenues and product sales. The Company has no bank debt or open
credit lines. Genelabs expects to incur substantial additional costs, including
costs for clinical trials for products currently under development and costs for
further research on drug discovery. The amount of the additional costs, as well
as increased expenditures necessary for working capital and capital
requirements, will depend on numerous factors including the timing and outcome
of any regulatory actions related to the Company's products. In addition,
funding requirements will depend on the progress of the Company's research and
development programs as well as its ability to establish and maintain
collaborations with other pharmaceutical companies to fund these programs.
The Company anticipates that its current resources and expected revenues from
existing collaborative agreements will enable it to maintain its current and
planned operations through 1999. The Company anticipates realizing a net loss at
least until 2000, and profitability thereafter is subject to significant
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uncertainty. There can be no assurance that revenues from product sales or
royalties or from other sources will be sufficient to fund operations or that
the Company will achieve profitability or positive cash flow. Additional
financing may be required to fund the Company's continuing operations and
research and development activities in the form of debt or equity securities or
bank financing. There can be no assurance that such financing will be available
on acceptable terms, if at all. The unavailability of such financing could delay
or prevent the development, testing, regulatory approval, manufacturing or
marketing of some or all of the Company's products and technologies and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
CERTAIN BUSINESS RISKS
Genelabs' technology and product candidates are at an early stage of
development. The Company has experienced significant operating losses since its
inception and expects to incur significant losses over the next several years.
The Company's technologies, including the DNA and RNA-binding technologies, are
in many cases new and still under development. These approaches have not yet
been proven to have a therapeutic effect. There can be no assurance that these
technologies or any of the Company's product candidates resulting therefrom will
be successfully developed. All of Genelabs' proposed therapeutic products,
including GL701 for the treatment of SLE, are in research or development and
will require substantial additional research and development efforts prior to
any commercial use, including extensive clinical testing as well as potentially
lengthy regulatory approval. There can be no assurance that any of these
therapeutic products or others resulting from Genelabs' research programs will
be successfully developed, prove to be safe and efficacious at each stage of
clinical trials, meet applicable regulatory standards, be capable of being
produced in commercial quantities at reasonable costs or be successfully
marketed.
The active ingredient in GL701 for the treatment of SLE is
dehydroepiandrosterone ("DHEA"). DHEA is currently being marketed by others as a
dietary supplement. The Company believes that DHEA is a drug that should be
subject to regulation and approval by the FDA. The Company further believes that
in a few instances these supplements do not contain true DHEA, but instead
contain related substances that are not biologically equivalent. The Company has
submitted documentation to the FDA requesting clarification of DHEA's status as
a drug and removal from the market as a dietary supplement. However, to date the
FDA has taken no action to limit or regulate the sale of these dietary
supplements, and no assurance can be given as to the willingness or ability of
the FDA to do so in the future. In the event that clinical trials for GL701 are
promising and the drug candidate receives FDA marketing approval, the concurrent
sale of these dietary supplements could adversely affect the market for or the
selling price of GL701. While the Company has obtained a U.S. patent relating to
the use of GL701 to reduce steroid dose in SLE patients, Genelabs is unable to
obtain patent protection for the compound itself.
The Company has no internal manufacturing capabilities for pharmaceutical
products and is entirely dependent on contract manufacturers to manufacture
clinical and, if successfully developed, commercial-scale quantities of GL701
pursuant to supply agreements. There can be no assurance that these third party
manufacturers will continue to meet FDA or product specification standards or
that the Company's manufacturing requirements can be met in a consistent and
timely manner. In addition, the Company has only limited sales, marketing and
distribution capabilities. If the Company successfully develops any new
products, Genelabs must either rely on large pharmaceutical companies to market
such products or must develop a marketing and sales force with technical
expertise and supporting distribution capability in order to market such
products directly. Also inherent in the Company's stage of development is a
range of additional risks, including competition, uncertainties regarding
protection of patents and proprietary rights and the possibility of infringement
of the proprietary rights of others, government regulation, and uncertainties
regarding health care reform.
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PART II - OTHER INFORMATION
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 March 31, 1998.
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)
Chief Executive Officer:
Date: May 6, 1998 /s/ IRENE A. CHOW
------------------------------------
IRENE A. CHOW
President and Chief Executive Officer
Principal Accounting Officer:
Date: May 6, 1998 /s/ MATTHEW M. LOAR
------------------------------------
MATTHEW M. LOAR
Director of Finance and Controller
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EXHIBIT INDEX
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF GENELABS TECHNOLOGIES, INC. FOR THE QUARTER
ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,419
<SECURITIES> 14,843
<RECEIVABLES> 2,971
<ALLOWANCES> 0
<INVENTORY> 2,514
<CURRENT-ASSETS> 23,081
<PP&E> 12,287
<DEPRECIATION> 10,343
<TOTAL-ASSETS> 28,819
<CURRENT-LIABILITIES> 6,717
<BONDS> 0
0
9,682
<COMMON> 137,858
<OTHER-SE> (126,154)
<TOTAL-LIABILITY-AND-EQUITY> 28,819
<SALES> 2,194
<TOTAL-REVENUES> 4,008
<CGS> 1,169
<TOTAL-COSTS> 1,169
<OTHER-EXPENSES> 5,308
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (255)
<INCOME-PRETAX> (2,214)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,214)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,214)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
