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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
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, 1997.
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
incorporation or organization) number)
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 39,409,576 shares of the Registrant's Common Stock issued and
outstanding on October 31, 1997.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(Unaudited) (Note)
Current Assets:
Cash and cash equivalents $ 1,673 $ 4,377
Cash held in escrow -- 6,953
Short-term investments 21,782 19,135
-------- ---------
Cash, cash equivalents and short-term investments 23,455 30,465
Accounts receivable 2,163 3,170
Inventories 2,720 3,535
Other current assets 599 726
-------- ---------
Total current assets 28,937 37,896
Property and equipment, net 1,257 1,463
Investment in Genelabs Biotechnology, Ltd. 4,285 4,628
Other assets 160 132
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$34,639 $44,119
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilites $ 4,050 $ 4,778
Accrued compensation and related expenses 1,729 1,694
Unearned contract revenue 919 1,200
-------- ---------
Total current liabilities 6,698 7,672
Long-term obligations 582 523
-------- ---------
Shareholders' equity
Preferred stock 9,682 9,682
Common stock 137,530 129,591
Common stock to be issued -- 6,953
Accumulated deficit (119,853) (110,302)
-------- ---------
Total shareholders' equity 27,359 35,924
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$ 34,639 $ 44,119
======== =========
See notes to condensed consolidated financial statements.
Note: The condensed consolidated balance sheet at December 31, 1996 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)
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- ------------------
1997 1996 1997 1996
------- ------- -------- -------
Revenues:
Product sales $ 2,463 $ 2,863 $ 7,482 $8,576
Contract 786 243 2,342 772
------- ------- -------- -------
Total revenues 3,249 3,106 9,824 9,348
------- ------- -------- -------
Operating costs and expenses:
Cost of product sales 1,427 1,685 4,489 4,681
Research and development 3,326 2,407 8,966 7,403
Selling, general and administrative 2,073 2,163 6,397 6,759
------- ------- -------- -------
Total operating costs and expense 6,826 6,255 19,852 18,843
------- ------- -------- -------
Operating loss (3,577) (3,149) (10,028) (9,495)
Interest income, net 354 336 1,048 864
Equity in loss of
Genelabs Biotechnology, Ltd. (114) (112) (343) (162)
------- ------- -------- -------
Net loss $(3,337) $(2,925) $ (9,323) $(8,793)
======= ======= ======== =======
Net loss per share $ (0.08) $ (0.08) $ (0.24) $ (0.25)
======= ======= ======== =======
Weighted average shares outstanding 39,329 36,356 38,841 35,438
======= ======= ======== =======
See notes to condensed consolidated financial statements.
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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,
-------------------------
1997 1996
---------- ----------
Cash flows from operating activities:
Net loss $ (9,323) $ (8,793)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense 434 626
Equity in loss of Genelabs Biotechnology, Ltd. 343 162
Changes in assets and liabilities:
Receivables 1,007 (462)
Inventories 815 39
Accounts payable, accrued liabilities, accrued
compensation and long-term obligations (634) (1,006)
Unearned contract revenue (281) --
Other current assets 127 (68)
--------- ---------
Net cash used in operating activities (7,512) (9,502)
--------- ---------
Cash flows from investing activities:
Purchases of securities available-for-sale (12,507) (25,000)
Proceeds from sales and maturities of securities
available-for-sale 9,860 4,476
Capital expenditures (323) (411)
Other (121) 319
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Net cash used in investing activities (3,091) (20,616)
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Cash flows from financing activities:
Payments on long-term obligations -- (3,109)
Proceeds from issuance of common stock, net 7,939 11,753
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Net cash provided by financing activities 7,939 8,644
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Effect of exchange rate change on cash (40) 7
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Net decrease in cash and cash equivalents (2,704) (21,467)
Cash and cash equivalents, beginning of the period 4,377 22,557
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Cash and cash equivalents, end of the period 1,673 1,090
Short-term investments, end of the period 21,782 20,524
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Cash, cash equivalents, and short-term investments,
end of the period $ 23,455 $ 21,614
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See notes to condensed consolidated financial statements.
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GENELABS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
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 or nine month periods ended September 30, 1997
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997.
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, 1996.
2. INVENTORIES
The components of inventory are as follows:
September 30, December 31,
(in thousands) 1997 1996
------------ ------------
Raw materials $ 1,398 $ 2,126
Work-in-process 623 389
Finished goods 699 1,020
------------ ------------
$ 2,720 $ 3,535
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3. ISSUANCE OF COMMON STOCK
In connection with a 1996 private offering, the Company agreed to issue
1,900,000 shares of Common Stock to Veron International Limited ("Veron") for
net proceeds of $7.0 million, which the Company held in escrow at December 31,
1996 pending expiration or early termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. In February 1997, upon
termination of this waiting period, the funds held in escrow were released to
Genelabs and the shares, reported as Common Stock to be Issued at December 31,
1996, were issued to Veron.
4. NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, " Earnings Per Share" ("SFAS No. 128"), which is required to be adopted in
the Company's December 31, 1997 financial statements. SFAS No. 128 requires a
change in the method currently used to compute earnings per share and also
requires restatement of prior periods, excluding the dilutive effect of stock
options. The requirement is expected to have no effect on Genelabs' net loss per
share for the three or nine month periods ended September 30, 1997 and 1996.
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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 Company's ongoing clinical trials, the U.S.
Food and Drug Administration ("FDA") regulatory process, the Company's
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 FDA and foreign regulatory
authorities, product development, manufacturing and market acceptance risks, the
Company's early stage of development, 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 1996 Annual Report on
Form 10-K and other filings with the U.S. Securities and Exchange Commission.
OVERVIEW
Genelabs Technologies, Inc. is a global biopharmaceutical and diagnostics
company focused on gene-regulating drug discovery, infectious diseases including
hepatitis and immunological disorders including lupus. Using Genelabs' core
technologies and expertise in drug and viral discovery, the Company is engaged
in the research and development of potential new therapeutics, diagnostic tests
and vaccines, both internally and through collaborations with academic
institutions and corporations.
The Company's lead pharmaceutical product, GL701, is in Phase III clinical
trials as a new therapy for systemic lupus erythematosus ("lupus"). The lead
research program is based on a proprietary enabling technology, Merlin(TM), for
creating gene-specific, small organic, DNA-binding molecules. Additional
research efforts are underway in the area of genomics for the identification of
novel immunomodulatory genes. The Company's wholly-owned subsidiary, Genelabs
Diagnostics (Pte.) Ltd. ("GLD"), located in Singapore, sells diagnostic tests
for infectious diseases primarily in Europe and Asia. Genelabs has a 40%
interest in a Taiwan-based company, Genelabs Biotechnology, Ltd. ("GBL"), which
is focused on late-stage development, manufacture and commercialization of newly
developed or formulated pharmaceuticals for the rapidly expanding Asian market.
On April 25, 1997, the Company announced preliminary results of its first Phase
III trial of GL701 for lupus. The results indicated a treatment response in a
group of women with clinically active lupus, which constituted a majority of
patients enrolled in the study. However, when all patients were included in the
analysis the study did not achieve statistical significance, as an unexpectedly
high placebo response rate was observed among those patients with minimal or no
disease activity at baseline. The Company submitted the data package and study
report for this trial to the FDA on September 30, 1997, and has commenced
discussions with the FDA concerning the trial results.
The Company expects to continue to invest in biopharmaceutical product research
and development. Revenue from the sale of biopharmaceutical products is not
expected until the launch of its first biopharmaceutical 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 sales of
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.
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RESULTS OF OPERATIONS
Revenues
Total revenues for the quarter ended September 30, 1997 were $3.2 million,
compared to $3.1 million for the same period in 1996. For the nine months ended
September 30, 1997, total revenues were $9.8 million compared to $9.3 million
for the same period in 1996. Total revenues include diagnostic product sales and
contract revenue.
Diagnostic product sales were $2.5 million for the quarter ended September 30,
1997, compared to $2.9 million for the same period in 1996. For the nine months
ended September 30, 1997, diagnostic product sales were $7.5 million compared to
$8.6 million for the same period in 1996. The decline in diagnostic product
sales for both the three and nine month periods was due mainly to lower sales of
the Company's western blot products and reagents across all geographic areas.
Contract revenue was $0.8 million for the quarter ended September 30, 1997,
compared to $0.2 million for the same period in 1996. For the nine months ended
September 30, 1997, contract revenue was $2.3 million compared to $0.8 million
for the same period in 1996. Contract revenue includes licensing, milestone and
research and development payments. The increase for both the three and nine
month periods of 1997, compared to the same periods in 1996, was primarily due
to recognition of revenue under a gene-regulating drug discovery collaboration
that the Company began in January 1997. Contract revenue recognized in the
future will be dependent in part upon the continuation of this agreement,
achievement of milestones under this and other existing agreements and
establishment of new research, development and/or licensing agreements with
corporate collaborators.
Cost of Product Sales
Cost of product sales were $1.4 million for the quarter ended September 30,
1997, compared to $1.7 million for the same period in 1996. Gross margin
increased to 42% for the third quarter of 1997 from 41% for the same period a
year ago.
For the nine months ended September 30, 1997, cost of product sales were $4.5
million compared to $4.7 million for the same period in 1996. Gross margins
decreased to 40% for the first nine months of 1997 from 45% for the same period
a year ago. The decline in gross margins was primarily due to a decline in sales
of certain higher margin products combined with a lower production yield on
other products earlier in the year.
Research and Development Expenses
The Company's research and development expenses were $3.3 million for the
quarter ended September 30, 1997, compared to $2.4 million for the same period
in 1996. For the first nine months of 1997, research and development expenses
were $9.0 million compared to $7.4 million for the same period in 1996. The
increases were primarily due to additional expenditures related to a
gene-regulating drug discovery collaboration and higher patient enrollment in
the Company's second Phase III trial of GL701 for lupus, partially offset by
reduced spending on the hepatitis G virus program.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $2.1 million for the quarter
ended September 30, 1997, compared to $2.2 million for the same period in 1996.
For the first nine months of 1997, selling, general and administrative expenses
were $6.4 million compared to $6.8 million for the same period in 1996.
Reductions for both the three and nine month periods primarily reflect the
Company's continuing efforts to contain operating expenses.
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Net Loss
The Company has operated at a loss since its inception and had an accumulated
deficit of $119.7 million as of September 30, 1997. The net loss was $3.3
million for the three months ended September 30, 1997, compared to $2.9 million
for the same period in 1996. For the first nine months of 1997, net loss was
$9.3 million compared to $8.8 million for the same period in 1996. The increase
in net loss for both the quarter and the nine months was primarily driven by an
increase in research and development expenses combined with a decline in the
gross profit of diagnostic products.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and short-term investment balances totaling $23.5 million
at September 30, 1997, compared to $30.5 million at December 31, 1996. The
decrease in cash and short-term investments was primarily attributable to $7.5
million used in operations, partially offset by funds received upon exercise of
stock options. The cash and short-term investments balance at December 31, 1996
included $7.0 million from a 1996 private placement that was held in escrow by
the Company pending expiration or early termination of the waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976. These funds were
released to the Company in February 1997 and are shown as proceeds from issuance
of common stock in the accompanying Condensed Consolidated Statement of Cash
Flows.
The Company has funded its operations since inception primarily through public
and private offerings of its equity securities, 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 of
product candidates and costs for further research on gene-regulating 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 clinical trials and 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 at least through 1998. The Company anticipates realizing a
net loss at least through 1998, and profitability thereafter is subject to
significant 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,
which may result in substantial dilution to existing shareholders. 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.
The foregoing are forward looking statements which involve a number of risks and
uncertainties.
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CERTAIN BUSINESS RISKS
Genelabs is at an early stage of development. The Company has experienced
significant operating losses since its inception and expects to incur
significant operating losses over the next several years. The development of the
Company's proposed products will require a commitment of substantial funds to
conduct these costly and time-consuming activities. The Company's technologies,
including DNA-binding and gene regulating drug discovery technology, are in many
cases new and still under development. All of Genelabs' proposed therapeutic
products, including GL701 for the treatment of lupus, 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. Genelabs currently is seeking
additional drug discovery research collaborations using its gene regulating
technology with various pharmaceutical companies. No assurance can be given as
to the ability of the Company to complete an agreement with such a collaborator
on a timely basis or at all.
On April 25, 1997, the Company announced preliminary results of its first Phase
III trial of GL701 for lupus. The results indicated a treatment response in a
group of women with clinically active lupus, which constituted a majority of
patients enrolled in the study. However, when all patients were included in the
analysis the study did not achieve statistical significance, as an unexpectedly
high placebo response rate was observed among those patients with minimal or no
disease activity at baseline. The Company submitted the data package and study
report for this trial to the FDA on September 30, 1997, and has commenced
discussions with the FDA concerning the trial results. The Company currently is
conducting a second Phase III clinical trial for GL701. No assurance can be
given as to the results of these trials, the safety or efficacy of this drug
candidate or, in any event, the ability of Genelabs to obtain regulatory
approval for the commercialization of the drug candidate.
The active ingredient in GL701 is dehydroepiandrosterone ("DHEA"). DHEA is
currently being marketed by others as an over the counter dietary supplement.
The Company believes that DHEA is a drug that is subject to regulation and
approval by the FDA. The Company further believes that in several instances
these supplements do not contain true DHEA, but instead contain related
substances that are not biologically equivalent. 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 selling prices of
GL701.
The Company is continuing limited research and development efforts related to
the hepatitis G virus. While the presence of this virus has been detected in
blood samples contained in the U.S., Europe, Japan and elsewhere, the Company
and its collaborators are still seeking to determine the nature and severity of
any diseases specifically caused by HGV. In order to test for HGV generally in
the blood banks, the Company and its licensors are continuing efforts to develop
a serological assay. To date, no such assay has been introduced.
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 or 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
*10.36 Amendment to Industrial Net Lease Agreement by and between Registrant
and Metropolitan Life Insurance Company dated June 17, 1997.
*10.37 Amendment to Tenancy Agreement for Research Unit(s) at Singapore
Science Park, by and between Technology Parks Private Limited and
Genelabs Diagnostics (Pte.) Ltd. dated July 8, 1997.
*10.38 Registrant's 1995 Stock Option Plan, as amended to date.
*27 Financial Data Schedule.
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* Previously filed.
(b) REPORTS ON FORM 8-K
During the quarter ended September 30, 1997, the Company filed no current
reports on Form 8-K.
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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:
/s/ IRENE A. CHOW
Date: November 7, 1997 -----------------------------------
IRENE A. CHOW
President and Chief Executive
Officer
Principal Accounting Officer:
/s/ MATTHEW M. LOAR
Date: November 7, 1997 -----------------------------------
MATTHEW M. LOAR
Director of Finance and Controller
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