SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998
Commission file number 0-16177
ONCOR, Inc.
(Exact name of registrant as specified in its charter)
Maryland 52-1310084
(State of Incorporation) (I.R.S Employer Identification No.)
209 Perry Parkway
Gaithersburg, Maryland 20877
(Address of principal executive offices)
(Zip code)
(301) 963-3500
(Registrant's telephone number, including area code)
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
At October 30, 1998, there were 31,556,489 shares of Common Stock outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Basis of Presentation
The unaudited consolidated balance sheet as of September 30, 1998, the
audited consolidated balance sheet as of December 31, 1997 and the unaudited
consolidated statements of operations for the three month and nine month
periods ended September 30, 1998 and 1997 and of cash flows for the nine month
periods ended September 30, 1998 and 1997 set forth below, have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission (the "Commission"). Certain information and note disclosures
normally included in the annual financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to those rules and regulations. Oncor, Inc. (the "Company") believes
that the disclosures made are adequate to make the information presented not
misleading.
The accompanying financial statements are presented on the basis of a
going concern. The Company is in the process of attempting to sell
substantial portions of its assets, certain of which were sold after September
30, 1998. Many of the assets held for sale are intellectual properties and
have no recorded value on the Company's books. Those assets for sale and with
recorded value, primarily shares held in two publicly traded companies and
excess furniture and laboratory equipment, are recorded at the lower of
unamortized cost or estimated net realizable value. Upon completion of this
process, the Company may sell substantially all of the assets of the business
and cease to be a going concern. Management believes that any accounting and
classification adjustments to the accompanying financial statements necessary
to present such statements on the basis of a company in liquidation would not
be material.
In the opinion of management of the Company, the accompanying
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) that are necessary for a fair presentation of
results for the periods presented. Management suggests that this financial
information be read in conjunction with the Form 10-K, including "Item 1.
Business -- Additional Risk Factors," filed with the Commission for the year
ended December 31, 1997 and the risk factors included in the Company's forms
10-Q for the quarters ended March 31, 1998 and June 30, 1998.
The results for the third quarter and nine months ended September 30,
1998, presented in the accompanying financial statements, are not necessarily
indicative of the results for the entire year.
ONCOR, INC.
CONSOLIDATED BALANCE SHEETS
As of
-----------------------------
Sept. 30, 1998 Dec. 31, 1997
-------------- -------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $734,047 $2,873,765
Short-term investments, at market 90,904 110,547
Restricted cash 1,110,466 2,012,611
Accounts receivable, net of allowance
for doubtful accounts of approxi-
mately $488,000 and $419,000 1,734,419 2,028,239
Receivable from Officer/Director 179,374 296,874
Inventories 2,250,207 3,161,141
Receivable from affiliates - 50,439
Prepaid license 807,257 -
Deferred financing costs - 1,961,538
Investment in unaffiliated company 1,680,000 -
Other current assets 1,075,172 1,075,138
------------- -------------
Total current assets 9,661,846 13,570,292
------------- -------------
NON-CURRENT ASSETS:
Property and equipment, net 3,498,028 4,175,768
Prepaid license and other 680,596 397,801
Investment in and advances to affiliates - 856,064
Intangible assets, net 1,605,000 4,884,234
------------- -------------
Total non-current assets 5,783,624 10,313,867
------------- -------------
Total assets $15,445,470 $23,884,159
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $4,837,725 $3,141,845
Accrued expenses and other current
liabilities 1,390,069 1,697,744
Notes payable 3,980,742 3,013,131
Affiliate stock issuable under warrants - 3,787,500
Current portion of long-term debt 513,038 551,242
------------- -------------
Total current liabilities 10,721,574 12,191,462
------------- -------------
NON-CURRENT LIABILITIES:
Long-term debt 935,000 5,867,079
Deferred rent - 259,351
------------- -------------
Total non-current liabilities 935,000 6,126,430
------------- -------------
Total liabilities 11,656,574 18,317,892
------------- -------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY 2,204,671 2,378,157
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000
shares authorized, 500 shares issued,
entitled to $12,000 per share in
liquidation 5,373,333 -
Common stock, $.01 par value,
50,000,000 shares authorized,
31,556,489 and 27,302,384 issued;
31,477,080 and 27,222,975 outstanding 314,565 273,024
Common stock warrants outstanding 1,190,880 909,630
Additional paid-in capital 150,951,868 137,873,399
Deferred compensation (589,432) (879,020)
Cumulative translation adjustment (1,937,927) (2,184,342)
Accumulated deficit (153,498,550) (132,584,069)
Less - 79,409 shares of common
stock held in treasury, at cost (220,512) (220,512)
------------- -------------
Total stockholders' equity 1,584,225 3,188,110
------------- -------------
Total liabilities and
stockholders' equity $15,445,470 $23,884,159
============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
/TABLE
ONCOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
---------------------------- ----------------------------
GROSS REVENUES:
Product sales $2,220,057 3,030,011 $9,134,195 $9,728,062
Grants and contracts 47,134 96,000 410,235 322,249
------------- ------------- ------------- --------------
Gross revenues 2,267,191 3,126,011 9,544,430 10,050,311
OPERATING EXPENSES:
Direct cost of sales 1,559,909 2,026,705 4,955,077 6,192,328
Amortization of
intangibles 2,084,525 281,073 3,234,316 877,512
Write off of acquired
research & development
projects in process - - 5,726,803 -
Selling, general and
administrative 3,394,857 3,492,996 12,286,980 10,311,101
Research and
development 1,563,424 1,927,846 5,357,284 5,458,537
Clinical and
regulatory 286,555 376,413 863,492 1,488,560
------------- ------------- ------------- --------------
Total operating
expenses 8,889,270 8,105,033 32,423,952 24,328,038
LOSS FROM OPERATIONS (6,622,079) (4,979,022) (22,879,522) (14,277,727)
OTHER INCOME (EXPENSE):
Investment income 5,437 84,941 115,391 449,287
Interest and other
expenses, net 1,135,817 (1,135,843) 3,798,889 (4,935,696)
Foreign exchange
gain (loss) 19,022 (2,822) 26,304 (27,739)
Equity in net loss of
affiliates 0 (858,560) (1,285,960) (2,975,092)
------------- ------------- ------------- --------------
1,160,276 (1,912,284) 2,654,624 (7,489,240)
Net loss ($5,461,803) ($6,891,306) ($20,224,898) ($21,766,697)
============= ============= ============= ==============
Dividends and
accretion on
convertible
preferred stock - - (689,583) -
------------- ------------- ------------- --------------
NET LOSS APPLICABLE TO
COMMON STOCK ($5,461,803) ($6,891,306) ($20,914,481) ($21,766,967)
============= ============= ============= ==============
BASIC AND DILUTED
NET LOSS PER SHARE ($0.17) ($0.27) ($0.69) ($0.86)
============= ============= ============= ==============
WEIGHTED-AVERAGE COMMON
SHARES OUTSTANDING 31,503,228 25,533,691 30,272,916 25,233,561
============= ============= ============= ==============
The accompanying notes are an integral part of these
consolidated financial statements./TABLE
ONCOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months ended September 30,
-----------------------------------------
1998 1997
-----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($20,224,898) ($21,766,967)
Adjustments to reconcile net loss to
net cash used in operating activities:
Gain on revaluation and exercise
of warrants (6,527,500) -
Gain on sale of research assets (1,974,923) -
Issuance of common stock for interest
and imputed interest of convertible
notes 67,191 2,800,000
Issurance of common stock warrants in
stock of an affiliate for interest - 881,250
Issuance of common stock in
connection with research and
development agreements - 324,374
Write off of acquired research &
development 5,726,803 -
Amortization of deferred financing fees 3,096,331 -
Write down of property and equipment 902,000 -
Amortization of intangible assets 2,084,525 -
Depreciation and amortization 2,364,364 1,913,470
Gain on disposal of assets - (105,488)
Expenses for non-employee stock options 420,838 391,461
Equity in net loss of affiliate
and other 1,285,960 2,995,675
Changes in operating assets
and liabilities:
Accounts receivable 360,539 399,044
Inventories 7,336 (50,126)
Other current assets 285,427 (1,271,860)
Deposits and other non-current assets (294,347) 87,442
Accounts payable 1,381,125 (485,548)
Accrued expenses and other
liabilities (320,703) 2,213,890
Deferred rent (259,351) 389,142
------------- -------------
Net cash used in operating
activities (11,619,283) (11,284,241)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (403,690) (566,038)
Proceeds from sale of research assets 3,105,000 -
Cash acquired in Codon acquisition 52,044 -
Purchases of investments 19,643 (202,142)
------------- -------------
Net cash provided by (used in)
investing activities 2,772,997 (768,180)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock 4,965,000 -
Proceeds from exercise of options in
affiliate 927,500 -
Exercise of stock options and warrants 37,500 37,634
Change in restricted funds 1,011,441 3,410,069
Payment on bank loans (1,095,920) (614,465)
Loan to unconsolidated affiliate (674,415) (1,290,239)
Proceeds from borrowings and issuance
of warrants 1,522,615 2,052,420
------------- -------------
Net cash provided by financing
activities 6,693,721 3,595,419
------------- -------------
------------- -------------
EFFECT OF CHANGE IN EXCHANGE RATE ON CASH 12,847 (779,801)
------------- -------------
Net decrease in cash and cash
equivalents (2,139,718) (9,236,803)
CASH AND CASH EQUIVALENTS, beginning of
the period 2,873,765 13,058,657
------------- -------------
CASH AND CASH EQUIVALENTS, end of the
period $734,047 $3,821,854
============= =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In February 1998, the Company exchanged approximately 1,650,013
shares of common stock for all the remaining shares of Codon
Pharmaceuticals, Inc.
The accompanying notes are an integral part of these
consolidated financial statements.
/TABLE
ONCOR, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998
(Unaudited)
1. Basis of Presentation
The accompanying financial statements are presented on the basis of a
going concern. The Company is in the process of attempting to sell
substantial portions of its assets, certain of which were sold after September
30, 1998. Most of the assets held for sale are intellectual properties and
have no recorded value on the Company's books. Those assets for sale and
recorded value, primarily shares held in two publicly traded companies and
excess furniture and laboratory equipment, are recorded at the lower of
unamortized cost or estimated net realizable value. Upon completion of this
process, the Company may sell substantially all of the assets of the business
and cease to be a going concern. Management believes that any accounting and
classification adjustments to the accompanying financial statements necessary
to present such statements on the basis of a company in liquidation would not
be material.
2. Cash Equivalents and Investments
Cash of approximately $1.0 million is held in escrow at September 30,
1998 pursuant to legal proceedings brought by a former employee in France.
Approximately $0.6 million of such amount was released from escrow after
September 30, 1998.
3. Divestiture of Operating Business Assets
On April 9, 1998, the Company completed a transaction with Vysis, Inc.
in which Oncor conveyed to Vysis $0.5 million in cash and full rights and
title to its non-oncology genetics probe assets ("Genetics Assets"), including
primarily inventory and intellectual property, in exchange for two licenses to
patents owned or licensed to Vysis. In addition, the parties agreed to settle
all legal action between them with respect to a suit brought by Vysis against
the Company in September, 1995. The licenses have primary terms of two years
and may be renewed thereafter for the remainder of the lives of patents for a
cash payment of $1.5 million. The Company recorded as an intangible asset the
value of the licenses acquired in an amount of $1.7 million equal to the net
book value of the assets conveyed. Accordingly, no gain or loss was
recognized in the disposition of the Genetics Assets. The intangible asset is
being amortized ratably over the primary period of the licenses. The sales of
the product lines associated with the Genetics Assets had sales to parties
outside the consolidated group of approximately $2.4 million in 1997.
On June 30, 1998, the Company completed the sale of its Research
Products Assets, including primarily inventory, laboratory equipment and
intellectual property, to Intergen Company for cash consideration of $3.1
million, all of which was paid at closing or shortly thereafter. The Company
recorded to non-operating income a gain on the disposition of the Research
Products Assets in the amount of $2.0 million. The Research Products Assets
had sales to parties outside the consolidated group of approximately $3.1
million in 1997.
On September 29, 1998, pursuant to a plan of merger between Oncormed,
Inc. (Oncormed) and Gene Logic, Inc. (Gene Logic), the Company exchanged
900,000 shares representing all its shares in Oncormed for approximately
420,000 shares of common stock in Gene Logic. The Company recorded a gain on
this transaction of approximately $1.7 million representing the estimated net
realizable value of the Gene Logic shares. These shares are subject to
certain trading restrictions; however, the Company expects to dispose of the
shares within one year; consequently, the Company's investment is classified
as a current asset.
4. Adjustment to Intangible Assets
During the third quarter of 1998, the Company determined to seek to sell
a portion or all of its interest in Appligene-Oncor, SA. (Appligene). Based
upon initial discussions with potential purchasers and term sheets received,
management revalued the goodwill arising out of its acquisition of Appligene
to approximately $1.6 million, recording an impairment charge to income in the
approximate amount of $1.8 million.
5. Other Income and Expenses
Other income and expenses include the following:
Income (Expense)
For Three Months Ended For Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
Amortization to expense of beneficial
conversion feature of convertible
debt and preferred stock issues - (1,166,222) (73,500) (4,790,152)
Financing expenses associated with the
acquisition and amendment of secured
credit facility (3,684,793) - (5,805,288) -
Gain on exercise of warrants in
an affiliated company and
adjustment of the related
liability to issue such warrants 3,637,604 6,593,854 -
Gain on collection of note payable
previously written off 500,000 - 500,000 -
Gain on exchange of stock in affiliated
company pursuant to a merger
agreement 1,680,000 - 1,680,000 -
Gain on sale of Research Products Assets - - 1,974,923 -
Write down of property and equipment (902,000) - (902,000) -
Other, net (94,994) 30,379 (169,100) (145,544)
Total other income and expense 1,135,817 1,135,843) 3,798,889 (4,935,696)
On September 30, 1998, the Company received notice that the holders and
guarantors of its $4.0 million secured note payable declared the Company to be
in default of the note agreement and demanded acceleration of repayment of the
notes which was previously due on October 31, 1998. Accordingly, the Company
charged to financing expense in the third quarter of 1998 approximately $3.7
million, representing the entire balance of deferred financing costs arising
out of the placement of the notes.
In the third quarter of 1998, the Company collected $0.5 million in full
satisfaction for the early extinguishment of its note, originally for $0.7
million, from Oncormed, Inc. Pursuant to the equity method of accounting, the
Company had completely written off the note against its proportionate share of
Oncormed's losses. As a result, the entire proceeds from the early
extinguishment were recorded as other income.
On September 29, 1998, pursuant to a plan of merger, the Company
exchanged all of its shares held in Oncormed common stock for 420,000 shares
of common stock in Gene Logic, Inc., a publicly traded company. Pursuant to
the equity method of accounting, the Company had completely written off the
its investment in Oncormed against its proportionate share of Oncormed's
losses. The Company recorded the Gene Logic stock as investment and a credit
to other income for the fair value of the stock received on the date of
acquisition.
As noted above, the Company recorded a gain to other income on the
divestiture of its Research Products Assets.
In August, 1998, warrant holders exercised options to acquire 1,100,000
shares of Oncormed common stock from Oncor at exercise prices of $0.75 to
$1.00 per share. The Company recorded a gain on the exercise in the amount of
approximately $1.0 million. In addition, the Company recognized the deferred
gain recorded upon the granting of the warrants and adjusted to reflect the
current market price of Oncormed stock thereafter, in the amount of
approximately $2.6 million.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition, including a
discussion of issues surrounding the extreme financial difficulties facing the
Company and the substantial uncertainties as to the future on-going operation
of the Company's business and as to the value of the equity interests of the
holders of Common Stock in the Company. The shares in the common stock of the
Company may have minimal or no value upon the resolution of these issues.
The discussion should be read in conjunction with the consolidated
financial statements of the Company and notes thereto found elsewhere in this
Form 10-Q, and the audited consolidated financial statements of the Company
and notes thereto, which were included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997. This Report contains
certain statements of a forward-looking nature relating to future events or
the future financial performance of the Company. Readers are cautioned that
such statements are only predictions and that actual events or results may
differ materially. In evaluating such statements, readers should specifically
consider the various factors identified in this Report and in the Company's
other public filings which could cause actual results to differ materially
from those indicated by such forward-looking statements, including the matters
set forth under the caption "Additional Risk Factors."
Overview
Financial Condition
As of November 16, 1998, the Company currently had immediate obligations
to (1) repay a $4 million note payable, which is secured by substantially all
of the assets of the Company, (2) satisfy its trade and other unsecured
obligations in an amount in excess of $3 million and (3) meet the claim for
redemption of its preferred shareholders which, if valid, would be in an
amount in excess of $6 million. The Company has no cash reserves with which
to contribute to the satisfaction of these obligations and, therefore, is in
the process of attempting to sell or find strategic partners for substantial
portions or all of its assets to meet these obligations.
The Company believes its greatest value can best be obtained without
filing for voluntary bankruptcy or court-supervised reorganization. However,
there is a possibility that creditors may force the Company into involuntary
bankruptcy or that the Company may reach alternative conclusions and elect to
file for bankruptcy. Under any such circumstance, there may be minimal or no
value remaining to the common shareholders at the conclusion of this effort.
These matters are further discussed under Liquidity and Capital Resources
found elsewhere in this Management's Discussion and Analysis.
Acquisition of Remaining Shares of Codon
Effective February 28, 1998, the Company acquired all remaining
outstanding shares of Codon Pharmaceuticals, Inc., formerly known as
OncorPharm, Inc. ("Codon"). As a result of this transaction, Codon's
operating expenses and losses have been and will continue to be included in
the operating results of the Company from the effective date of the
acquisition. Codon substantially ceased operations as of October 1998.
Strategic Repositioning of the Company
During the second quarter of 1998, the Company entered into transactions
for the disposition of its two largest operating units: the non-oncology
genetics probe business (the "Genetics Assets") and the Research Products
Assets. These dispositions are described below. Together, sales of the
product lines associated with these assets comprised more than 42% of the
consolidated sales of the Company in 1997. The Company's remaining sources of
product
revenues are from sales generated by (1) its European operation, and (2) its
oncology-based genetic products. In the aggregate, sales of these remaining
products were $8.5 million in 1997.
Genetics Assets
On April 9, 1998, the Company completed a transaction with Vysis, Inc.
in which Oncor conveyed to Vysis $0.5 million in cash and full rights and
title to its non-oncology genetics probe assets, including primarily inventory
and intellectual property, in exchange for two licenses to patents owned or
licensed to Vysis. In addition, the parties agreed to settle all legal action
between them arising out of a suit brought by Vysis against the Company in
September, 1995. The licenses have primary terms of two years and may be
renewed thereafter for the remainder of the lives of patents for an additional
cash payment of $1.5 million. The Company recorded as an intangible asset the
value of the licenses acquired in an amount of $1.7 million equal to the net
book value of the assets conveyed. Accordingly, no gain or loss was
recognized in the disposition of the Genetics Assets. The intangible assets
are being amortized ratably over the primary period of the licenses. The
sales of the product lines associated with the Genetics Assets had sales to
parties outside the consolidated group of approximately $2.4 million in 1997.
Research Products Assets
On June 30, 1998, the Company competed the sale of its Research Products
Assets, including primarily inventory, laboratory equipment and intellectual
property, to Intergen Company for cash consideration of $3.2 million, all of
which was paid at closing or shortly thereafter. The Company recorded to
non-operating income a gain on the disposition of the Research Products Assets
in
the amount of $2.0 million. The sales of the product lines associated with
Research Products Assets had sales to parties outside the consolidated group
of approximately $3.1 million in 1997.
Results of Operations
As discussed in "Overview Financial Condition" above, the Company may
not continue on-going operations in the near future. Management cannot
predict the outcome of the uncertainty surrounding the future operations of
the business; therefore, the analysis set forth below under Results of
Operations should not be viewed as indicative of the future results of the
operations, if any, of the company and management is unable to make any
comments with respect thereto. Most or all of the operating results analyzed
below are related to or impacted by corporate assets which have been sold
after September 30, 1998 or are actively for sale at the date of filing this
Form 10-Q.
Net product sales decreased in the third quarter and first nine months
of 1998 by 27% and 6%, respectively, compared to the corresponding periods of
the preceding year. The declines were due to the aforementioned dispositions
of operations in North America more than offsetting increased sales in Europe
derived from the addition of new lines of products acquired for resale.
Contract and grant revenues decreased in the third quarter and increased
in the first nine months of 1998 by 25% and 35%, respectively, compared to the
corresponding periods of the preceding year. The decline in the third quarter
was due to the expiration of grants not renewed. The increase in the nine
months was due to the aforementioned consolidation of Codon in February 1998
and the inclusion of its grant revenues.
Net sales margins declined from 33% to 30% in the third quarter and
increased from 36% to 46% for the nine months of 1998 compared to the
corresponding periods of the preceding year. The decline in margin in the
third quarter was due to spreading fixed manufacturing costs over a
substantially lower manufacturing base, due to the aforementioned
divestitures, and, to a lesser extent, to amortizing product licenses
acquired. The improvement in margins in the nine months was attributable to
(1) an elimination of low margin products offered in Europe and the United
States, (2) non-recurring inventory valuation adjustments in the second
quarter and first half of 1997 and (3) sales of INFORM in 1998 at higher
margins than those for other products of the Company, in the aggregate, more
than offsetting the aforementioned unfavorable effects recognized in the third
quarter.
Amortization of intangible assets represents the amortization and
adjustment of goodwill arising from the acquisition of Appligene. In the
third quarter of 1998, the Company took an additional impairment charge of
approximately $1.8 million to reduce the carrying value of the goodwill to its
estimated realizable value.
Research projects in progress represent the write off of acquired
research in progress in the first quarter of 1998 resulting from the
aforementioned acquisition of all of the remaining shares of common stock of
Codon, not previously owned by the Company.
Selling, general and administrative expenses remained flat in the third
quarter and increased 19% in the nine months of 1998, respectively, compared
to the corresponding periods of the preceding year. In the third quarter of
1998, selling expenses in North America declined due to the effects of the
aforementioned dispositions more than offsetting the higher expenses
associated with marketing the Company's breast cancer diagnostic test approved
for sale by the FDA at the end of 1997. Selling expenses in Europe increased
in the third quarter and nine months due to the addition of field sales
personnel in the United Kingdom. General and administrative expenses in the
third quarter and nine month periods increased due primarily to the inclusion
of Codon.
In the nine months of 1998, selling expenses increased in North America
as the expenses of the launch of the diagnostic product more than offset the
reductions in expense associated with the dispositions.
Research and development expenses decreased in the third quarter and
first nine months of 1998 by 19% and 2%, respectively, compared to the
corresponding periods of the preceding year. The declines were due to the
reductions in personnel and programs associated with the aforementioned
dispositions, more than offsetting the effects of the inclusion of Codon.
Clinical and regulatory expenses decreased in the third quarter and
first nine months of 1998 by 24% and 42%, respectively, compared to the
corresponding periods of the preceding year. The declines were due to the
high level of effort expended in 1997 in pursuit of the approval of the
Company's breast cancer diagnostic test, with no corresponding effort in 1998.
Other income and expenses include the following:
Income (Expense)
For Three Months Ended For Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
Amortization to expense of beneficial
conversion feature of convertible
debt and preferred stock issues - (1,166,222) (73,500) (4,790,152)
Financing expenses associated with the
acquisition and amendment of secured
credit facility (3,684,793) - (5,805,288) -
Gain on exercise of warrants in
an affiliated company and
adjustment of the related
liability to issue such warrants 3,637,604 6,593,854 -
Gain on collection of note payable
previously written off 500,000 - 500,000 -
Gain on exchange of stock in affiliated
company pursuant to a merger
agreement 1,680,000 - 1,680,000 -
Gain on sale of Research Products Assets - - 1,974,923 -
Write down of property and equipment (902,000) - (902,000) -
Other, net (94,994) 30,379 (169,100) (145,544)
Total other income and expense 1,135,817 1,135,843) 3,798,889 (4,935,696)
Liquidity and Capital Resources
The Company currently has immediate obligations to (1) repay a $4
million note payable, which is secured by substantially all of the assets of
the Company, (2) satisfy its trade and other unsecured obligations in an
amount in excess of $3 million and (3) meet the redemption request, if valid,
of its preferred shareholders in an amount in excess of $6 million. The
Company has no cash reserves with which to contribute to the satisfaction of
these obligations and, therefore, is in the process of attempting to sell or
find strategic partners for substantial portions or all of its assets to meet
these obligations.
The Company had no significant cash reserves at September 30, 1998. The
composition of cash balances was as follows (dollars in thousands):
Unrestricted cash available for operations of the parent company $0.3
Unrestricted cash available for operations of European subsidiaries $0.5
Cash held in escrow pending the resolution of related legal matters $1.0
The cash held in escrow represented the total amounts at issue in
separate actions filed by Appligene's former President against each of Oncor
(for $0.6) and Appligene (for $0.4). In October, 1998, an arbitration
tribunal awarded $0.5 to Oncor and $0.1 to the plaintiff in full resolution of
the claims against Oncor. The remainder of the funds in escrow relate to
claims against Appligene, which are expected to be resolved by the courts
prior to the end of 1998.
In the absence of any significant cash balances available for operations
of the parent company, such operations have been significantly reduced.
Beginning in September, 1998, cash proceeds to fund operations have been
generated by the collection of customer accounts receivable, collection of a
note receivable at a discount prior to maturity, release of escrowed funds and
the sale of excess furniture and laboratory equipment.
The Company expects to continue to fund near-term operations with cash
from operations and proceeds from the sale of additional assets. With the
receipt of all payments and the sale of each asset, the Company must reach
agreement with the secured lenders as to the portion, if any, of the resulting
proceeds which is available to fund operations. The remainder of such
proceeds is applied against the outstanding balance due on the note. The note
holders may elect at any time to apply all of the proceeds of any or all asset
sales to the note until the full balance of the note is extinguished. Such
action would result in the Company immediately ceasing all operations due to
lack of available funds for operation.
While the Company is using its best efforts to obtain maximum value for
the sale of assets, it is possible that the success, if any, of these efforts
will not be sufficient to fund the Company for the foreseeable future. In the
event that the Company is unable to meet all its obligations without selling
substantially all of its key assets, the Company will likely be forced into
the complete termination of its business operations.
Requested Redemption of Series A
Convertible Preferred Stock
On August 7, 1998 and August 11, 1998, the Company received requests
from the holders of its Series A Convertible Preferred Stock (the "Preferred
Stock"), which had an aggregate original issuance amount equal to $5.0
million, to have their shares of Preferred Stock redeemed and to have accrued
interest and penalties paid in cash. The total amount at issue is in excess
of $6 million. The Company believes that there are certain legal and
financial impediments to the satisfaction of these requests, even if
determined to be valid. In the event the Company is unable to obtain the
funds necessary to redeem the Preferred Stock, the non-payment of such
redemption amounts would have a material and adverse effect on the Company's
business, results of operations and financial condition.
Additional Risk Factors
As discussed above, there are substantial risks that the Company will
cease operations at any time, possibly within the next several months, and
that the residual value available to the common stockholders may be minimal,
if any. However, if the Company is to continue as an on-going operation, it
will be subject to substantial additional risks, as follows below.
History of Operating Losses
Oncor has not been profitable since its inception in July 1983. For the
quarter ended September 30, 1998, the Company incurred net losses of
approximately $5.5 million and as of that date, the accumulated deficit of the
Company was $153 million. If the Company is to continue operations, it expects
to incur additional losses in future periods.
Additional Financing Requirements and
Access to Capital Funding
If the Company continues in operation, it will be subject to risks
associated with additional financing requirements and access to capital
funding. The Company expects that its current liquid resources may not be
sufficient to fund operations after the satisfaction of its obligations.
No Assurance of Continued Listing of Common Stock
If the Company continues in operation, it will be subject to risks
associated with no assurance of continued listing of its Common Stock. The
Company is in the process of being delisted from the American Stock Exchange
and expects to be listed thereafter on the Over-the- Counter Bulletin Board.
Such market will likely provide substantially less liquidity and market
support for the shareholders of the Company and materially and adversely
affect the ability, if any, of the Company to raise additional equity capital
in the future.
Requested Redemption of Series A
Convertible Preferred Stock
The Company is subject to risks associated with the requested redemption
of Series A convertible preferred stock. On August 7, 1998 and August 11,
1998, the Company received requests from the holders of its Series A
Convertible Preferred Stock (the "Preferred Stock"), which had an aggregate
original issuance amount equal to $5.0 million, to have their shares of
Preferred Stock redeemed. The Company believes that there are certain legal
and financial impediments to the satisfaction of these requests, even if
determined to be valid. In the event that such redemption request is
ultimately held to be valid, and the Company is unable to obtain the funds
necessary to redeem the Preferred Stock, the non-payment of such redemption
amounts would have a material and adverse effect on the Company's business,
results of operations and financial condition.
Year 2000 Systems Compliance
If the Company continues in operation, it will be subject to risks
associated with year 2000 system compliance. While the Company has been
notified that its most important operating systems are year 2000 compliant,
there can be no assurance that problems with respect to such compliance may
occur which could have a material adverse affect on the operations of the
business.
Recent Disposition of Non-Strategic Assets
If the Company continues in operation, it will be subject to risks
associated with the recent disposition of productive assets. The Company has
recently completed the sale or other conveyance of its two non-strategic asset
groups: the research products assets and the non-oncology genetic probe
systems assets. As a result, the scope of the Company's business (including
its revenue base) and its number of products has been reduced significantly
and could be further reduced. The disposal of each of these asset groups has
resulted in a significant decrease in the number of employees in the Company
and in the number of patents and trademarks owned by the Company. There can
be no assurance that the disposition of these asset groups will not have a
material adverse effect on the business, financial condition and results of
operations of the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations Overview Strategic
Repositioning of the Company."
Risk Associated with the INFORM Her-2/neu Gene-Based Test System
If the Company continues in operation, it will be subject to risks
associated with the INFORM Her-2/neu Gene-Based Test System. Although the
Premarket Approval ("PMA") for the Oncor INFORM HER-2/neu Gene Detection
System was approved for marketing by the U.S. Food and Drug Administration
(the "FDA") in December 1997, there can be no assurance that the Company will
be capable of manufacturing the test system in commercial quantities at
reasonable costs or marketing the product successfully, that the test system
will be accepted by the medical diagnostic community, or that the market
demand for the test system will be sufficient to allow profitable sales. In
addition, product approvals may be withdrawn if compliance with regulatory
standards is not maintained or if substantial problems occur after the product
reaches the market.
No Assurance of Regulatory Approvals; Government Regulation
If the Company continues in operation, it will be subject to risks
associated with no assurance of government regulatory approvals. The Company
had expected to pursue FDA approval or clearance of certain existing products
and products under development. There can be no assurance that the Company
will receive regulatory approval or clearance for any of its products
currently under development or, even if it does receive regulatory approval or
clearance for a particular product, that the Company will ever recover its
costs in connection with obtaining such approval or clearance. The timing of
regulatory decisions is not within the control of the Company. The failure of
the Company to receive requisite approval or clearance, or significant delays
in obtaining such approval or clearance, could have a material and adverse
effect on the business, financial condition and results of operations of the
Company.
Approval or clearance by the FDA requires lengthy, detailed and costly
laboratory procedures, clinical testing procedures and application preparation
and defense efforts to demonstrate a product's efficacy and safety (or
equivalence to a marketed product in the case of a 510(k) submission) before a
product can be sold for diagnostic use. Even if such regulatory approval or
clearance is obtained for a product, its manufacturer and its manufacturing
facilities are subject to continual review and periodic inspections by the FDA
and other regulatory agencies. The regulatory standards for manufacturing are
applied stringently by the FDA. Discovery of previously unknown problems with
a product, manufacturer or facility may result in restrictions on such product
or manufacturer, including costly recalls or even withdrawal of the product
from the market. Furthermore, approval may entail ongoing requirements for
postmarketing studies. Failure to maintain requisite manufacturing standards
or discovery of previously unknown problems could have a material and adverse
effect on the Company's business, financial condition or results of
operations.
Patents and Proprietary Rights
If the Company continues in operation, it will be subject to risks
associated with patents and proprietary rights. The Company's success will
depend in large part on its, and its licensors', ability to obtain patents,
defend their patents, maintain trade secrets and operate without infringing
upon the proprietary rights of others, both in the United States and in
foreign countries. The patent position of firms relying upon biotechnology is
highly uncertain in general and involves complex legal and factual questions.
To date there has emerged no consistent policy from the courts regarding the
breadth of claims allowed in biotechnology patents or the degree of protection
afforded under such patents. The Company relies on certain patents and
pending U.S. and foreign patent applications relating to various aspects of
its products. These patents and patent applications are either owned by the
Company or rights under them are licensed to the Company. There can be no
assurance that patents will issue as a result of any such pending applications
or that, if issued, such patents will be sufficiently broad to afford
protection against competitors with similar technology. In addition, there
can be no assurance that any patents issued to the Company, or for which the
Company has license rights, will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company.
The commercial success of the Company will also depend upon avoiding the
infringement of patents issued to competitors and others and upon maintaining
the technology licenses upon which certain of the Company's current products
are, or any future products under development might be, based. Litigation,
which could result in substantial cost to the Company, may be necessary to
enforce the Company's patent and license rights or to determine the scope and
validity of others' proprietary rights. If competitors of the Company prepare
and file patent applications in the United States that claim technology also
claimed by the Company, the Company may have to participate in interference
proceedings declared by the U.S. Patent and Trademark Office ("PTO") to
determine the priority of invention, which could result in substantial cost to
the Company, even if the outcome is favorable to the Company. An adverse
outcome could subject the Company to significant liabilities to third parties
and require the Company to license disputed rights from third parties or cease
using the technology. A U.S. patent application is maintained under
conditions of confidentiality while the application is pending in the PTO, so
that the Company cannot determine the inventions being claimed in pending
patent applications filed by its competitors in the PTO. Further, U.S.
patents do not provide any remedies for infringement that occurred before the
patent is granted.
The Company has been notified that its sub-licensor for a certain
amplification technology considers the Company in default of its sublicense
and considers the sublicense terminated. The Company disagrees with these
conclusions and is considering its remedies. There can be no assurance as to
the outcome in this matter.
On April 27, 1998, the Company received a summons and complaint in
connection with a lawsuit entitled Key Technology, Inc. v. Oncor, Inc. in the
Superior Court of the State of Washington for the County of Walla Walla. The
complaint alleges breach of contract and fraud in connection with a June 1996
asset purchase agreement between Key Technology and the Company relating to
the sale of the Company's I300 video inspection system to Key Technology,
and seeks damages against the Company of $1.5 million. A failure to
successfully defend against or settle that suit would likely result in damages
being assessed against the Company and could have a material adverse effect on
the Company's financial condition and results of operation.
The Company currently has certain licenses from third parties and in the
future may require additional licenses from other parties to develop,
manufacture and market commercially viable products effectively. There can be
no assurance that such licenses will be obtainable on commercially reasonable
terms, if at all, that the patents underlying such licenses will be valid and
enforceable or that the proprietary nature of the patented technology
underlying such licenses will remain proprietary.
The Company relies substantially on certain technologies that are not
patentable or proprietary and are therefore available to the Company's
competitors. The Company also relies
on certain proprietary trade secrets and know-how that are not patentable.
Although the Company has taken steps to protect its unpatented trade secrets
and know-how, in part through the use of confidentiality agreements with its
employees, consultants and certain of its contractors, there can be no
assurance that these agreements will not be breached, that the Company would
have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently developed or discovered by
competitors.
Uncertainties Relating to Product Development
If the Company continues in operation, it will be subject to risks
associated with uncertainties relating to product development. The Company's
actively marketed products other than the INFORM HER-2/neu Gene Detection
System have not been approved by the FDA and may be sold only for research
purposes in the United States and certain other countries. The Company has
undertaken to seek FDA approval for certain of these products, and may in the
future undertake to seek such approval or clearance for other products, and
substantial additional investment, laboratory development, clinical testing,
controlled manufacturing and FDA approval or clearance will be required prior
to the commercialization of such products for diagnostic purposes. There can
be no assurance that the Company will be successful in developing such
existing or future products, that such products will prove to be efficacious
in clinical trials, that required regulatory approvals or clearances can be
obtained for such products, that such products, if developed and approved,
will be capable of being manufactured in commercial quantities at reasonable
costs, will be marketed successfully or will be accepted by the medical
diagnostic community, or that market demand for such products will be
sufficient to allow profitable operations.
International Sales and Foreign Exchange Risk
If the Company continues in operation, it will be subject to risks
associated with international sales and foreign exchange risk. The Company
anticipates that a significant amount of its sales will take place in European
countries and Japan and likely will be denominated in currencies other than
the U.S. dollar. These sales may be adversely affected by changing economic
conditions in foreign countries and by fluctuations in currency exchange
rates. Any significant decline in the applicable rates of exchange could have
a material adverse effect on the Company's business, financial condition and
results of operations. Additional risks inherent in the Company's
international business activities generally include unexpected changes in
regulatory requirements, tariffs and other trade barriers, lack of acceptance
of products in foreign markets, longer accounts receivable payment cycles,
difficulties in managing international operations, potentially adverse tax
consequences, restrictions on repatriation of earnings and the burdens of
complying with a wide variety of foreign laws. There can be no assurance that
such factors will not have a material adverse effect on the Company's future
international revenues and, consequently, on the Company's business, financial
condition and results of operations.
Limited Manufacturing Experience
If the Company continues in operation, it will be subject to risks
associated with limited manufacturing experience. The Company's ability to
conduct clinical trials on a timely basis, to obtain regulatory approvals or
clearances and to commercialize its products will depend in part upon its
ability to develop and maintain facilities to manufacture its products, either
directly or through third parties, at a competitive cost in accordance with
the FDA's prescribed current GMP and other regulatory requirements. Any
failure to maintain manufacturing facilities in accordance with the FDA's GMP
requirements could result in the inability of the Company to manufacture its
products and may limit the Company's ability to deliver its products to its
customers, which would have a material and adverse effect on the Company's
business, financial condition and results of operations. No assurance can be
given that the Company will be able to maintain GMP facilities or engage third
parties to do so at a cost acceptable to the Company.
The Company has only limited experience in manufacturing products on a
commercial basis. No assurance can be given that manufacturing or quality
control problems will not arise if the Company increases production of its
products, or if additional facilities are required in the future.
Limited Marketing and Distribution Experience
If the Company continues in operation, it will be subject to risks
associated with limited marketing and distribution experience. The Company
markets and sells its products for research purposes and, once approved or
cleared by the appropriate regulatory authority, for diagnostic use, through
its direct sales forces in both Europe and the United States and indirectly
through third parties in the Pacific Rim and other areas. The Company only
has limited experience in sales, marketing, training and distribution. In
order to market its products directly, the Company must maintain a sales force
with technical expertise and an understanding of the Company's products.
There can be no assurance that the Company will be able to maintain such a
sales force or that the Company's direct sales and marketing efforts will be
successful. In addition, the Company's products compete with the products of
many other companies that currently have extensive and well-funded marketing
and sales operations. There can be no assurance that the Company's training,
marketing and sales efforts will compete successfully against such other
companies. To the extent the Company enters arrangements with third parties,
any revenues received by the Company will be dependent on the efforts of such
third parties, and there can be no assurance that such efforts will be
successful.
Competition and Technological Change
If the Company continues in operation, it will be subject to risks
associated with competition and technological change. The diagnostic and
biotechnology industries are subject to intense competition and rapid and
significant technological change. Competitors of the Company in the United
States and in foreign countries are numerous and include, among others,
diagnostic, health care, pharmaceutical, biotechnology and chemical companies,
academic institutions, government agencies and other public and private
research organizations. Many of these competitors have substantially greater
financial and technical resources and production and marketing capabilities
than the Company. There can be no assurance that these competitors will not
succeed in developing technologies and products that are more effective,
easier to use or less expensive than those that have been or are being
developed by the Company or that would render the Company's technology and
products obsolete and noncompetitive. The Company also competes with various
companies in acquiring technology from academic institutions, government
agencies and research organizations. In addition, many of the Company's
competitors have significantly greater experience than the Company in
conducting clinical trials of new diagnostic products and in obtaining FDA and
other regulatory approvals of products for use in health care. Accordingly,
the Company's competitors may succeed in obtaining regulatory approval for
products more rapidly than the Company.
Restricted Use of the Company's Products
If the Company continues in operation, it will be subject to risks
associated with restricted use of the Company's products. The sale,
distribution and use of the Company's FDA approved breast cancer product in
the United States is restricted to prescription use in that the users of the
product must be trained and demonstrated proficient in the use of the product
and the results of the proficiency testing provided as part of the Company's
training program must be provided in the Company's Annual Reports to the FDA.
The Company's products sold in the United States for research purposes, only,
must be labeled accordingly. The FDA imposes distribution requirements and
procedures on companies selling products for research purposes only, including
the requirement that the seller receive specified certifications from its
customer as to the customer's intended use of the product. As a result of
these requirements, the Company's research products can only be sold in the
United States to a limited number of customers for limited use and can only be
sold for broader commercial use with FDA approval or clearance or pursuant to
recent Analyte Specific Reagent regulations for which no clinical claims can
be made. No assurance can be given that the Company will receive FDA approval
or clearance for its research products or that it will be able to sell its
approved products in larger quantities.
Attraction and Retention of Key Personnel
If the Company continues in operation, it will be subject to risks
associated with attracting and retaining key personnel. The Company's
ability to successfully develop marketable products and to maintain a
competitive position will depend in large part on its ability to attract and
retain highly qualified scientific and management personnel. The Company is
highly dependent upon the principal members of its management, scientific
staff, and Medical and Science Advisory Boards. Competition for such
personnel and advisors is intense, and the Company's ability to attract and
retain such personnel is adversely affected by the current financial condition
of the Company; therefore, there can be no assurance that the Company will be
able to continue to attract and retain such personnel.
Uncertainty Related to Health Care Reform
Measures and Third-Party Reimbursement
If the Company continues in operation, it will be subject to risks
associated with uncertainty related to health care reform measures and
third-party reimbursement. Political, economic and regulatory influences are
likely to lead to fundamental change in the health care industry in the United
States. In the past year, the U.S. FDA Modernization Act ("FDAMA") was
approved, bringing many changes to FDA regulations and codifying some current
practices. In addition, numerous proposals for comprehensive reform of the
nation's health care system have been introduced in Congress over the past
year. In addition, certain states are considering various health care reform
proposals. The Company anticipates that Congress and state legislatures will
continue to review and assess alternative health care delivery
systems and payment methodologies, and that public debate of these issues will
likely continue in the future. Due to uncertainties regarding the ultimate
features of reform initiatives and their enactment and implementation, the
Company cannot predict which, if any, reforms will be adopted, when they may
be adopted, or what impact they may have on the Company. The Company's
ability to earn sufficient returns on its products may also depend in part on
the extent to which reimbursement for the costs of such products will be
available from government health administration authorities, private health
insurers and other organizations. Third-party payors are increasingly
challenging the price and cost effectiveness of medical products and services.
Significant uncertainty exists as to the reimbursement status of newly
approved health care products, and there can be no assurance that adequate
reimbursement will be available or sufficient to allow the Company to sell its
products on a competitive basis.
Product Liability
If the Company continues in operation, it will be subject to risks
associated with product liability. The testing, marketing and sale of health
care products could expose the Company to the risk of product liability
claims. A product liability claim could have a material and adverse effect on
the business, results of operations or financial condition of the Company.
The Company currently maintains product liability insurance coverage of $5.0
million per occurrence. There can be no assurance, however, that the
insurance policy will respond to any specific claim, that this coverage will
be adequate to protect the Company against future product liability claims or
that product liability insurance will be available to the Company in the
future on acceptable terms, if at all.
Environmental Risks
If the Company continues in operation, it will be subject to risks
associated with potential environmental claims. The manufacturing and
research and development processes of the Company involve the controlled use
of hazardous materials. The Company is subject to federal, state and local
laws and regulations governing the use, manufacture, storage, handling and
disposal of such materials and certain waste products. Although the Company
believes that its activities currently comply with the standards prescribed by
such laws and regulations, the risk of accidental contamination or injury from
these materials cannot be eliminated. In the event of such an accident, the
Company could be held liable for any damages that result and any such
liability could exceed the resources of the Company. In addition, there can
be no assurance that the Company will not be required to incur significant
costs to comply with environmental laws and regulations in the future.
Item 6. Exhibits and Reports on Form 8-K.
a. The following exhibits are filed as part of this report on Form 10-Q.
27.1 Financial Data Schedule.
b. Reports on Form 8-K.
None.
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.
ONCOR, INC.
(Registrant)
Date: November 16, 1998 /s/ Jose J. Coronas
Jose J. Coronas, Chairman and
Acting Chief Executive Officer
Date: November 16, 1998 /s/ Cecil Kost
Cecil Kost, President and Chief
Operating Officer
Date: November 16, 1998 /s/ John L. Coker
John L. Coker, Vice President
of Finance and Administration,
Chief Financial Officer