SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 for the Quarterly Period ended June 30, 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 Number 0-16614
NeoRx Corporation
(Exact Name of Registrant as Specified in its Charter)
WASHINGTON 91-1261311
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
410 West Harrison Street, Seattle, Washington 98119
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (206) 281-7001
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
--- ---
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of July 9, 1998 there were outstanding 20,995,040 shares of the Company's
Common Stock, $.02 par value.
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
PART I FINANCIAL INFORMATION Page
Item 1. Financial Statements:
Balance Sheets as of June 30, 1998
and December 31, 1997 3
Statements of Operations for the
three and six months ended June 30,
1998 and 1997 4
Statements of Cash Flows for the
three and six months ended June 30,
1998 and 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
of Results of Operations and
Financial Condition 9
Item 5. Other Information 12
Signature 13
2
NEORX CORPORATION
BALANCE SHEETS
(in thousands, except share data)
June 30, December 31,
1998 1997
----------- ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................... $ 1,569 $ 1,949
Short-term investments ....................................................... 33,684 31,760
Prepaids and other ........................................................... 1,275 1,820
--------- ---------
Total current assets ....................................................... 36,528 35,529
--------- ---------
FACILITIES AND EQUIPMENT, at cost:
Leasehold improvements ....................................................... 3,260 3,300
Equipment and furniture ...................................................... 4,590 4,023
--------- ---------
7,850 7,323
Less: accumulated depreciation and amortization .............................. (6,806) (6,642)
--------- ---------
Facilities and equipment, net .............................................. 1,044 681
--------- ---------
OTHER ASSETS ................................................................... 484 111
--------- ---------
Total assets ............................................................... $ 38,056 $ 36,321
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................. $ 760 $ 800
Accrued liabilities .......................................................... 710 911
Current portion of capital leases ............................................ 26 43
--------- ---------
Total current liabilities .................................................. 1,496 1,754
LONG-TERM LIABILITIES:
Convertible subordinated debentures, 9 3/4% .................................. 1,195 1,195
Capital leases, less current portion ......................................... -- 4
--------- ---------
Total liabilities .......................................................... 2,691 2,953
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Series preferred stock, $.02 par value,
3,000,000 shares authorized:
Convertible exchangeable preferred stock, Series 1, 208,240 shares issued
and outstanding at June 30, 1998 and December 31, 1997(entitled in
liquidation to $5,248 at June 30, 1998 and December 31, 1997)
Convertible preferred stock, Series 2, -0- shares issued and outstanding
at June 30, 1998 and 5,167 shares issued and outstanding at December 31,
1997
Convertible preferred stock, Series 3, -0- shares issued and outstanding
at June 30, 1998 and 1,000 shares issued and outstanding at December 31,
1997 ................................................................... 4 4
Common Stock, $.02 par value, 60,000,000 shares authorized, 20,995,040 and
20,707,251 shares issued and outstanding at June 30, 1998 and December 31,
1997, respectively ......................................................... 420 414
Additional paid-in capital ................................................... 163,155 162,612
Accumulated deficit .......................................................... (128,214) (129,662)
--------- ---------
Total shareholders' equity ................................................. 35,365 33,368
--------- ---------
Total liabilities and shareholders' equity ................................. $ 38,056 $ 36,321
========= =========
See accompanying notes to the financial statements.
3
NEORX CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three months Six months
ended June 30, ended June 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
REVENUE ... ............................................ $ 10 $ 5,335 $ 7,548 $ 5,347
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development ............................. 2,259 2,738 4,480 5,390
General and administrative ........................... 1,368 1,080 2,390 1,974
-------- -------- -------- --------
Total operating expenses ........................... 3,627 3,818 6,870 7,364
-------- -------- -------- --------
Income (loss) from operations .......................... (3,617) 1,517 678 (2,017)
OTHER INCOME (EXPENSE):
Investment and interest income ....................... 517 444 1,108 782
Interest expense ..................................... (32) (34) (65) (69)
-------- -------- -------- --------
Net income (loss) ...................................... $ (3,132) $ 1,927 $ 1,721 $ (1,304)
======== ======== ======== ========
Preferred stock dividends .............................. (132) (702) (273) (2,608)
-------- -------- -------- --------
Net income (loss) applicable to
common shares ......................................... $ (3,264) $ 1,225 $ 1,448 $ (3,912)
======== ======== ======== ========
Earnings (loss) per share:
Basic .................................................. $ (.16) $ .07 $ .07 $ (.23)
======== ======== ======== ========
Diluted ................................................ $ (.16) $ .07 $ .07 $ (.23)
======== ======== ======== ========
Shares used in calculation of earnings (loss) per share:
Basic .................................................. 20,895 16,874 20,807 16,701
======== ======== ======== ========
Diluted ................................................ 20,895 17,339 21,554 16,701
======== ======== ======== ========
See accompanying notes to the financial statements.
4
NEORX CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three months Six months
ended June 30, ended June 30,
-------------------- ---------------------
1998 1997 1998 1997
--------- -------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) ...................... $ (3,132) $ 1,927 $ 1,721 $ (1,304)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ...... 89 100 175 196
(Increase) decrease in prepaids
and other assets ................. (328) (125) 149 (60)
(Decrease) in accounts payable ..... (33) (364) (40) (217)
(Decrease) in accrued liabilities .. (376) (169) (116) (153)
-------- -------- -------- --------
Net cash provided by (used in) operating
activities ........................... (3,780) 1,369 1,889 (1,538)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of short-
term investments ..................... 15,687 18,669 33,821 25,565
Purchases of short-term investments .... (11,332) (32,379) (35,745) (36,894)
Facilities and equipment purchases ..... (266) (119) (527) (261)
Other .................................. 6 6 12 12
-------- -------- -------- --------
Net cash provided by (used in)
investing activities ................. 4,095 (13,823) (2,439) (11,578)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock ..... -- 2,661 -- 2,661
Proceeds from sale of preferred stock .. -- 1,970 -- 11,460
Repayments of capital lease obligations (11) (14) (21) (27)
Proceeds from stock options and warrants
exercised ............................. 409 8 447 135
Preferred stock dividends .............. (256) (255) (256) (255)
-------- -------- -------- --------
Net cash provided by financing
activities ........................... 142 4,370 170 13,974
-------- -------- -------- --------
Net increase (decrease) in cash
and cash equivalents
457 (8,084) (380) 858
Cash and cash equivalents:
Beginning of period .................... 1,112 11,887 1,949 2,945
-------- -------- -------- --------
End of period .......................... $ 1,569 $ 3,803 $ 1,569 $ 3,803
======== ======== ======== ========
See accompanying notes to the financial statements.
5
NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The interim financial statements contained herein have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. These financial statements should be read
in conjunction with the Company's annual report on Form 10-K for the year ended
December 31, 1997.
Certain reclassifications were made to the 1997 financial statements to make
them comparable with the 1998 presentation.
In the opinion of management, the interim financial statements reflect all
adjustments, consisting only of normal recurring accruals necessary to present
fairly the Company's financial position as of June 30, 1998 and the results of
operations and cash flows for the three and six month periods ended June 30,
1998 and 1997.
The results of operations for the three and six month periods ended June 30,
1998 are not necessarily indicative of the expected operating results for the
full year.
2. Shareholders' Equity
Changes in shareholders' equity from December 31, 1997 to June 30, 1998 were as
follows (in thousands):
Balance December 31, 1997 $33,368
Common stock issued 549
Preferred stock dividends (273)
Net income 1,721
-------
Balance June 30, 1998 $35,365
=======
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NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
During the quarter, the Company issued 138,422 shares of Common Stock in
exchange for 5,167 shares of Series 2 Convertible Preferred Stock ("Series 2
Preferred Stock") and 1,000 shares of Series 3 Convertible Preferred Stock
("Series 3 Preferred Stock"). Dividends of $101,240 were also paid on the Series
2 Preferred Stock by issuing 21,038 shares of Common Stock. As of June 30, 1998,
no Series 2 Preferred Stock or Series 3 Preferred Stock remain outstanding.
Note 3. Earnings (loss) per share:
The following is a reconciliation of the numerator and denominator of the basic
and diluted earnings (loss) per share computations for the three months and six
months ended June 30, 1997 and 1998:
Three months Six months
ended June 30, ended June 30,
-------------------- ---------------------
1998 1997 1998 1997
--------- -------- --------- --------
Net Income (loss)...... $ (3,132) $ 1,927 $ 1,721 $ (1,304)
Less: Preferred
stock dividends ...... (132) (702) (273) (2,608)
-------- -------- -------- --------
Net Income (loss)
applicable to basic
& diluted earnings
(loss) per share ..... $ (3,264) $ 1,225 $ 1,448 $ (3,912)
======== ======== ======== ========
Weighted average
shares - basic ....... 20,895 16,874 20,807 16,701
Dilutive effect of
options & warrants ... -- 465 747 --
-------- -------- -------- --------
Weighted average
shares - diluted ..... 20,895 17,339 21,554 16,701
======== ======== ======== ========
Basic earnings (loss)
per share ............ $ (.16) $ .07 $ .07 $ (.23)
======== ======== ======== ========
Diluted earnings (loss)
per share ............ $ (.16) $ .07 $ .07 $ (.23)
======== ======== ======== ========
The numerator and denominator of the basic and diluted loss per share
calculations for the three months ended June 30, 1998 were the same, because
including the effect of options and warrants to purchase an additional 2,354,856
shares of Common Stock would have been antidilutive. Options to purchase
1,608,690 additional shares
7
NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
of Common Stock were outstanding during the three months ended June 30, 1997 but
were not included in the computation of diluted earnings per share because the
options' average exercise price of $7.12 was greater than the average market
price of the common shares of $4.25. Warrants to purchase an additional
1,033,727 shares of Common Stock were outstanding during the three months ended
June 30, 1997 but were also not included in the computation of diluted earnings
per share because the warrants' average exercise price of $13.63 was greater
than the average market price of the common shares of $4.25. Options to purchase
942,589 additional shares of Common Stock were outstanding during the six months
ended June 30, 1998 but were not included in the computation of diluted earnings
per share because the options' average exercise price of $8.60 was greater than
the average market price of the common shares of $5.55. The numerator and
denominator of the basic and diluted loss per share calculations for the six
months ended June 30, 1997 were the same, because including the effect of
options and warrants to purchase an additional 1,747,622 shares of Common Stock
would have been antidilutive.
Shares issuable upon conversion of the Company's Convertible Subordinated
Debentures, Series 1 Preferred Stock, Series 2 Preferred Stock and Series 3
Preferred Stock are not included in the calculation of diluted EPS for the three
and six month periods ended June 30, 1998 and 1997 because the effect of
including such shares would have been antidilutive.
8
NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition
This discussion contains forward-looking statements that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those projected. The words "believe", "expect", "intend", "anticipate", and
variations of such words and similar expressions identify forward-looking
statements, but their absence does not mean the statement is not forward
looking. Factors that could affect the Company's actual results include, among
other things, results of research and development activities, clinical trials,
expenses associated with expanding marketing and manufacturing capabilities,
competitive and technological developments, and the timing, cost, and successful
continuation of the Company's collaborative relationships. Reference is made to
the Company's Annual Report on Form 10-K filed with the Commission for a more
detailed description of such factors. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this report. The Company undertakes no obligation to update publicly any
forward-looking statement to reflect new information, events or circumstances
after the date of this report or to reflect the occurrence of unanticipated
events.
QUARTER AND SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO QUARTER AND SIX MONTHS
ENDED JUNE 30, 1997.
Revenues for the three months ended June 30, 1998 were $10,000 compared to
$5,335,000 for the three months ended June 30, 1997. For the six months ended
June 30, 1998 revenues were $7,548,000 compared to $5,347,000 for the six months
ended June 30, 1997.
In January 1998, the Company received a $7,000,000 milestone payment from
Janssen Pharmaceutica NV ("Janssen"), a subsidiary of Johnson & Johnson, Inc.,
reflecting Janssen's decision to begin Phase II trials of Avicidin(R) cancer
therapy product. In the second quarter of 1997 the Company received $4,000,000
in revenue from Schwarz Pharma for marketing rights to NeoRx's Biostent product
and $4,000,000 for 698,702 unregistered shares of NeoRx's common stock. The
excess amount received over the fair market value of the Common Stock of
$1,333,000 was recorded as revenue.
In May 1998 DuPont gave one year's notice of termination of its license
agreement with the Company for the Verluma(R) lung cancer imaging product.
Royalties collected for Verluma in 1998 and 1997 were insignificant and the
Company believes that termination of the licensing agreement with Dupont will
not have a material impact on future revenues.
9
NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition (continued)
Total operating expenses for the quarter ended June 30, 1998 decreased 5% to
$3,627,000 from $3,818,000 in the quarter June 30, 1997, and for the six month
period decreased 7% to $6,870,000 from $7,364,000. Research and development
expenses for the quarter ended June 30, 1998 decreased 17% to $2,259,000 from
$2,738,000 for the same time period in 1997. Research and development expenses
for the six months ended June 30, 1998 decreased 17% to $4,480,000 from
$5,390,000. The decrease in research and development expenses both for the
quarter and for the six months is a result of increased research and development
reimbursements. The Company receives expense reimbursements related to the
Avicidin(R) and Biostent(R) programs. Reimbursed research and development
expenses totaled $1,420,000 for the six months ended June 30, 1998. In the first
half of 1997, the Company's research and development expense reimbursements
totaled $94,000.
General and administrative expenses for the quarter ended June 30, 1998
increased 27% to $1,368,000 from $1,080,000 for the quarter ended June 30, 1997.
General and administrative expenses for the six months ended June 30, 1998
increased 21% to $2,390,000 to from $1,974,000. General and administrative
expenses for the quarter and the six months ended June 30, 1998 increased
principally due to increased expenses for personnel and outside consulting
services. These costs were added to support increased research and product
development activities.
Investment and interest income for the quarter increased to $517,000 from
$444,000 for the same time period in 1997, and increased to $1,108,000 from
$782,000 for the six months ended June 30,1998 and 1997, respectively. Interest
income increased due to higher average cash balances, which resulted from
milestone payments and equity proceeds.
LIQUIDITY AND CAPITAL RESOURCES.
Cash and short-term investments as of June 31, 1998 were $35,253,000 compared to
$33,709,000 at December 31, 1997. The second quarter balance of cash and
short-term investments increased due to the receipt of a $7,000,000 milestone
payment from Janssen in January 1998, reflecting Janssen's decision to begin
Phase II trials of Avicidin(R) cancer therapy product.
The Company expects that its capital resources and interest income will be
sufficient to finance its currently anticipated working capital and capital
requirements at least through 1999.
10
NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition (continued)
The Company's working capital and capital requirements will depend upon numerous
factors, including results of research and development activities, clinical
trials, expenses associated with expanding marketing and manufacturing
capabilities, competitive and technological developments and the timing, cost
and successful continuation of the Company's collaborative relationships. The
Company will need to raise substantial additional funds to conduct research and
development activities, preclinical studies and clinical trials necessary to
bring its potential products to market, and to establish marketing and
manufacturing capabilities. The Company intends to seek additional funding
through public or private equity financing, arrangements with corporate
collaborators, out-licensing certain technologies, or other sources.
Adequate funds may not be available when needed or on terms acceptable to the
Company. If funding is insufficient at any time in the future, the Company will
be forced to delay, reduce or eliminate some or all of its research and
development activities, clinical studies and trials, and manufacturing and
administrative programs, dispose of assets or technology, or cease operations.
IMPACT OF YEAR 2000.
The "Year 2000 Problem" is pervasive and complex, as virtually every computer
operation will be affected in some way by the rollover of the two-digit year
value to 00. This issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize date sensitive information could generate erroneous data or
cause a system to fail.
In 1997 the Company initiated the installation of a new accounting system that
is compliant with the Year 2000 requirements, and is currently evaluating other
systems for Year 2000 concerns. The Company has not initiated formal
communications with its significant suppliers and corporate partners to
determine the extent to which the Company is vulnerable to those third parties'
failure to resolve their own Year 2000 issue. There can be no guarantee that the
systems of other companies on which the Company relies will be converted in a
timely manner, or that another company's failure to convert would not have a
material adverse effect on the Company. The Company does not anticipate that it
will incur significant operating expenses or be required to invest heavily in
11
NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition (continued)
computer systems improvement to be Year 200 compliant. However, significant
uncertainty exists concerning the potential costs and effects associated with
Year 2000 compliance. Any Year 2000 compliance problem of either the Company or
its suppliers and collaborative partners could have a material adverse effect on
the Company's business, financial condition and results of operations.
Item 5. Other Information
In accordance with the Company's Bylaws, a shareholder proposing to transact
business at the Company's annual meeting must provide written notice of such a
proposal, in the manner provided by the Company's Bylaws, not fewer than 60 or
more than 90 days prior to the date of such annual meeting (or, if the Company
provides less than 70 days notice of such meeting, no later than 10 days after
the date of the Company's notice). In addition, if the Company receives notice
of a shareholder proposal after February 23, 1999, the persons named as proxies
in such proxy statement will have discretionary authority to vote on such
shareholder proposal.
12
NEORX CORPORATION
SIGNATURE
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.
NeoRx Corporation
(Registrant)
Date: August 11, 1998 By: /s/Richard L. Anderson
----------------------
Richard L. Anderson
Senior Vice President,
Finance and Operations,
(Principal Financial and
Accounting Officer)
13