<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 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
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------- ---------------
(Unaudited) (Note)
ASSETS
<S> <C> <C>
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
========= =========
</TABLE>
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
<PAGE> 3
GENELABS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------- -------------------------
1999 1998 1999 1998
--------- -------- -------- --------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended
June 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Affirmative Withheld
Votes Votes
<S> <C> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 11
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit # Description
- --------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,660
<SECURITIES> 10,813
<RECEIVABLES> 130
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,913
<PP&E> 9,781
<DEPRECIATION> 7,933
<TOTAL-ASSETS> 19,986
<CURRENT-LIABILITIES> 6,665
<BONDS> 0
0
9,682
<COMMON> 138,579
<OTHER-SE> (135,563)<F1>
<TOTAL-LIABILITY-AND-EQUITY> 19,986
<SALES> 0
<TOTAL-REVENUES> 4,139
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,348<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (293)
<INCOME-PRETAX> (4,916)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,916)
<DISCONTINUED> (348)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,264)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
<FN>
<F1>CONSISTS OF ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE INCOME.
<F2>CONSISTS OF RESEARCH AND DEVELOPMENT, AND GENERAL AND ADMINISTRATIVE
EXPENSES.
</FN>
</TABLE>
