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 SEPTEMBER 30, 1999 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO
_______________.
Commission File 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 October 7, 1999 there were outstanding 21,006,964 shares of the Company's
Common Stock, $.02 par value.
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Balance Sheets as of September 30, 1999
and December 31, 1998 3
Statements of Operations for the
three and nine months ended September 30,
1999 and 1998 4
Statements of Cash Flows for the
three and nine months ended September 30,
1999 and 1998 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
of Results of Operations and
Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
Item 5. Other Information 14
Item 6. Exhibits 14
Signature 15
2
NEORX CORPORATION
BALANCE SHEETS
(in thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,294 $ 1,910
Investment securities 17,741 28,242
Prepaid expenses and other current assets 770 857
--------- ---------
Total current assets 20,805 31,009
--------- ---------
FACILITIES AND EQUIPMENT, at cost:
Leasehold improvements 3,283 3,283
Equipment and furniture 5,025 4,886
--------- ---------
8,308 8,169
Less: accumulated depreciation and amortization (7,318) (7,049)
--------- ---------
Facilities and equipment, net 990 1,120
--------- ---------
OTHER ASSETS, NET 246 312
--------- ---------
Total assets $ 22,041 $ 32,441
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,055 $ 756
Accrued liabilities 917 1,192
Deferred revenue -- 250
Current portion of convertible subordinated debentures 1,195 --
Current portion of capital leases -- 4
--------- ---------
Total current liabilities 3,167 2,202
LONG-TERM LIABILITIES:
Convertible subordinated debentures, 9:% (Due June 2000) -- 1,195
--------- ---------
Total liabilities 3,167 3,397
--------- ---------
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 (entitled in
liquidation to $5,248) 4 4
Common stock, $.02 par value, 60,000,000 shares authorized,
21,006,964 shares issued and outstanding 420 420
Additional paid-in capital 163,189 163,189
Accumulated deficit (144,691) (134,637)
Accumulated other comprehensive income (loss) - unrealized
gain (loss) on investment securities (48) 68
--------- --------
Total shareholders' equity 18,874 29,044
--------- --------
Total liabilities and shareholders= equity $ 22,041 $ 32,441
========= =========
See accompanying notes to the financial statements.
3
NEORX CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ----------------------
1999 1998 1999 1998
------- ------- -------- -------
REVENUE $ 3 $ 149 $ 463 $ 7,697
------- ------- -------- -------
OPERATING EXPENSES:
Research and development 3,041 2,648 8,281 7,128
General and administrative 738 953 2,565 3,343
------- ------- -------- -------
Total operating expenses 3,779 3,601 10,846 10,471
------- ------- -------- -------
Loss from operations (3,776) (3,452) (10,383) (2,774)
OTHER INCOME (EXPENSE):
Interest income 297 358 798 1,467
Interest expense (29) (32) (88) (98)
------- ------- -------- -------
Net loss $(3,508) $(3,126) $ (9,673) $(1,405)
======= ======= ======== =======
Preferred stock dividends (127) (127) (381) (400)
------- ------- -------- -------
Net loss applicable to
common shares $(3,635) $(3,253) $(10,054) $(1,805)
======= ======= ======== =======
Loss per share:
Basic and diluted $ (.17) $ (.15) $ (.48) $ (.09)
======= ======= ======== =======
Shares used in calculation of loss per share:
Basic & diluted 21,007 21,004 21,007 20,874
======= ======= ======= =======
See accompanying notes to the financial statements.
4
NEORX CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 1999 1998
------- ------ ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,508) $ (3,126) $ (9,673) $ (1,405)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 88 90 269 265
(Increase) decrease in prepaid
expenses and other assets (203) 393 153 542
Increase (decrease) in accounts
payable 293 - 299 (40)
Decrease in accrued liabilities (86) 19 (402) (97)
Decrease in deferred revenue - - (250) -
------- ------ ------- -------
Net cash used in operating activities (3,416) (2,624) (9,604) (735)
------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment
securities 5,544 23,274 26,219 57,095
Purchases of investment securities (1,129) (20,377) (15,834) (56,122)
Facilities and equipment purchases (102) (75) (139) (602)
Other - 7 - 19
------- ------- ------- -------
Net cash provided by investing
activities 4,313 2,829 10,246 390
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations - (11) (4) (32)
Proceeds from stock options and warrants
exercised - 35 - 482
Preferred stock dividends - - (254) (256)
------- ------- ------- -------
Net cash provided by (used in)
financing activities - 24 (258) 194
------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 897 229 384 (151)
CASH AND CASH EQUIVALENTS:
Beginning of period 1,397 1,569 1,910 1,949
-------- ------- ------- -------
End of period $ 2,294 $ 1,798 $ 2,294 $ 1,798
======== ======= ======= =======
See accompanying notes to the financial statements.
5
NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 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, 1998.
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 September 30,
1999 and the results of its operations and cash flows for the three and
nine month periods ended September 30, 1999 and 1998.
The results of operations for the three and nine month periods ended
September 30, 1999 are not necessarily indicative of the expected
operating results for the full year.
Note 2. Shareholders' Equity
Changes in shareholders' equity from December 31, 1998 to September 30,
1999 are as follows (in thousands):
Balance December 31, 1998 $29,044
Preferred stock dividends (381)
Net loss (9,673)
Accumulated other comprehensive
loss - unrealized loss on
investment securities (116)
-------
Balance September 30, 1999 $18,874
=======
6
NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 3. Loss per share
The following is a reconciliation of the numerator and denominator of the basic
and diluted loss per share computations for the three and nine months ended
September 30, 1999 and 1998 (in thousands, except per share data):
Three months Nine months
ended September 30, ended September 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- ------- -------- -------
Net loss $ (3,508) $(3,126) $ (9,673) $(1,405)
Less: preferred
stock dividends (127) (127) (381) (400)
-------- ------- -------- -------
Net loss applicable
to basic & diluted
loss per share $( 3,635) $(3,253) $(10,054) $(1,805)
======== ======= ======== =======
Weighted average shares-
basic & diluted 21,007 21,004 21,007 20,874
======== ======= ======== =======
Basic & diluted
loss per share $ (.17) $ (.15) $ (.48) $ (.09)
======= ======= ======== =======
The numerator and denominator of the basic and diluted loss per share
calculations for all periods ended September 30, 1999 and 1998 were the same, as
including the effect of options to purchase additional shares of Common Stock
would have been antidilutive. Excluded for the three and nine month periods
ended September 30, 1999 were 3,667,690 shares of Common Stock issuable under
stock options. Excluded for the three and nine month periods ended September 30,
1998 were 1,289,859 shares of Common Stock issuable under stock options.
7
NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
In addition, shares issuable upon conversion of the Company's Convertible
Subordinated Debentures and its Series 1 Preferred Stock are not included in
the calculation of diluted EPS for the three and nine month periods ended
September 30, 1999 and 1998 because the effect of including such shares would
have been antidilutive.
Note 4. Comprehensive Loss
The Company's total comprehensive loss for the quarters ended September 30,
1999 and 1998 was $(3,520,000) and $(3,126,000), respectively. Comprehensive
loss for the quarter ended September 30, 1999 consisted primarily of net loss.
Comprehensive loss for the quarter ended September 30, 1998 consisted of net
loss. The Company's total comprehensive loss for the nine months ended
September 30, 1999 and 1998 was $(9,789,000) and $(1,405,000), respectively.
Comprehensive loss for the nine months ended September 30, 1999 consisted
primarily of net loss. Comprehensive loss for the nine months ended September
30, 1998 consisted of net loss.
8
NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
This discussion contains "forward-looking statements" which 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 similar expressions are used to identify forward-looking
statements, but their absence does not mean the statement is not forward
looking. Many factors could affect the Company's actual results, including those
factors described under "Factors Affecting Forward Looking Statements",
contained in the Company's Annual Report on Form 10-K filed with the Commission.
These risk factors, among others, could cause results to differ materially from
those presently anticipated by the Company. 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 publicly release
the results of any revisions to these forward-looking statements that may be
made to reflect events or circumstances after the date of this report or to
reflect the occurrence of unanticipated events.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1998.
Revenues for the quarter ended September 30, 1999 were $3,000 compared to
$149,000 for the quarter ended September 30, 1998. For the nine months ended
September 30, 1999 revenues were $463,000 compared to $7,697,000 for the nine
months ended September 30, 1998. For the nine months ended September 30,
1999, the Company recorded $463,000 of revenue from the licensing of
non-strategic patent technologies to Theseus, LTD. 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-Registered Trademark- cancer
therapy product. Janssen terminated this agreement on December 29, 1998.
Total operating expenses for the quarter ended September 30, 1999 increased 5%
to $3,779,000 from $3,601,000 in the quarter ended September 30, 1998, and for
the nine month period increased 4% to $10,846,000 from $10,471,000. Research and
development expenses for the quarter ended September 30, 1999 increased 15% to
$3,041,000 from $2,648,000 for the same time period in 1998. Research and
development expenses for the nine months ended September 30, 1999 increased 16%
to $8,281,000 from $7,128,000 in 1998. The increase in research and development
expenses for the
9
NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)
three-month period in 1999 is primarily the result of an agreement with The Dow
Chemical Company for the grant of an exclusive license for technology used in
NeoRx's Skeletal Targeted Radiotherapy ("STR") project. The increase in research
and development costs for the nine months ended September 30, 1999 results from
the Dow agreement and increased supplies and patient costs for the Company's STR
project.
The Company currently receives reimbursement payments for research and
development expenses from non-strategic patent technologies, but no longer
receives expense reimbursements related to the Avicidin-Registered Trademark-
and Biostent-Registered Trademark- programs. Reimbursed research and
development expenses totaled $90,000 and $381,000 for the quarters ended
September 30, 1999 and 1998. Reimbursed research and development expenses
totaled $236,000 and $1,801,000 for the nine months ended September 30, 1999
and 1998.
General and administrative expenses for the quarter ended September 30, 1999
decreased 23% to $738,000 from $953,000 for the quarter ended September 30,
1998. General and administrative expenses for the nine months ended September
30, 1999 decreased 23% to $2,565,000 from $3,343,000. General and administrative
expenses for the quarter and the nine months ended September 30, 1999 decreased
principally due to decreased expenses for personnel and outside consulting
services.
Interest income for the quarter ended September 30, 1999 decreased to $297,000
from $358,000 for the same time period in 1998, and decreased to $798,000 from
$1,467,000 for the nine months ended September 30, 1999 and 1998. These
decreases are due to the decrease in funds available for investment and lower
interest rates.
LIQUIDITY AND CAPITAL RESOURCES.
Cash and investment securities as of September 30, 1999 were $20,035,000
compared to $30,152,000 at December 31, 1998. The balance of cash and investment
securities decreased primarily as a result of the 1999 year-to-date net loss.
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 the fourth quarter of 2000.
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, 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 arrangements with
corporate collaborators, public or private equity financing, 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 administrative programs,
dispose of assets or technology, or cease operations.
IMPACT OF YEAR 2000.
The Year 2000 Problem, which is pervasive and complex, is the result of computer
programs being written with two digits instead of four to define the applicable
year. The issue is whether computer systems will properly recognize a date using
"00" as the year 2000 instead of the year 1900. Systems that do not properly
recognize date-sensitive information could generate erroneous data or cause a
system to fail.
Readiness
The Company has conducted a study of its information technology computer systems
and believes that the Year 2000 problem does not pose significant operational
problems to its information technology systems. The majority of the Company's
software and computer equipment has been purchased within the last five years
from third-party vendors who have already provided upgrades intended to bring
their products into Year 2000 compliance. Based on this study, the Company has
initiated a project to take all necessary and reasonable steps to get the
mission-critical systems and operations Year 2000 compliant in a timely manner.
The project includes confirming the Year 2000 preparedness of significant third
parties.
11
NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)
It is estimated that this project is 75% complete at September 30, 1999 and will
be completed by December 1999.
Costs
The total costs of the Year 2000 efforts are estimated to be $44,000. This
reflects the costs of updating research and development equipment and computer
hardware and software. The assessment of the costs of the Year 2000 compliance
effort, and the timetable for the planned completion of the internal Year 2000
modifications, are management's estimates. The estimates were based on numerous
assumptions as to future events. There can be no guarantee that these estimates
will prove accurate, and actual results could differ materially from those
estimated if these assumptions prove inaccurate. Additionally, there can be no
guarantee that significant third parties will successfully and timely convert
their systems.
Risks
The Company anticipates that its largest Year 2000 risks are in activities
involving research and development equipment and significant suppliers,
including clinical research organizations. If Year 2000 problems exist in these
areas, it could take longer for the Company to bring a product to market, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company is addressing the Year 2000
issue with its key third-party suppliers. As of September 30, 1999,
approximately 75% of key third-party suppliers have confirmed their Year 2000
readiness. The Company's review of its Year 2000 risks has not uncovered any
high-risk issues that would delay its efforts to bring its products to market.
Therefore, a contingency plan to address high-risk issues has not been
developed.
12
NEORX CORPORATION
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to the impact of interest rate changes and changes in the
market values of its investments.
INTEREST RATE RISK
The Company's exposure to market rate risk for changes in interest rates relates
primarily to the Company's debt securities included in its investment portfolio.
The Company does not have any derivative financial instruments. The Company
invests in debt instruments of the U.S. Government and its agencies and
high-quality corporate issuers. Investments in both fixed rate and floating rate
interest earning instruments carry a degree of interest rate risk. Fixed rate
securities may have their fair market value adversely impacted due to a rise in
interest rates, while floating rate securities may produce less income than
expected if interest rates fall. Due in part to these factors, the Company's
future investment income may fall short of expectations due to changes in
interest rates or the Company may suffer losses in principal if forced to sell
securities which have declined in market value due to changes in interest rates.
At September 30, 1999, the Company owned government debt instruments in the
amount of $8.0 million and corporate debt securities in the amount of $9.0
million. The Company's exposure to losses as a result of interest rate changes
is managed through investing primarily in securities with maturities of one year
or less.
INVESTMENT RISK
The Company has received equity instruments under licensing agreements. These
investments are included in investment securities and are accounted for at fair
value with unrealized gains and losses reported as a component of comprehensive
income (loss) and classified as accumulated other comprehensive income (loss)-
unrealized gain (loss) on investment securities in shareholders' equity. Such
investments are subject to significant fluctuations in fair market value due to
the volatility of the stock market. At September 30, 1999, the Company owned
such corporate equity securities with a carrying value of approximately
$700,000.
13
NEORX CORPORATION
Item 5. Other Information
LICENSE AGREEMENT BETWEEN NEORX CORPORATION AND THE DOW CHEMICAL COMPANY
As a result of its exercise of its option rights, the Company entered into an
agreement with The Dow Chemical Company ("Dow") under which Dow granted the
Company an exclusive license to use Dow's technology and patent rights to make,
use and sell in all areas of the world, except Australia, the STR product
containing holmium-166 currently under development by the Company. The Company
made an up-front payment to Dow and is obligated to make certain milestone and
royalty payments to Dow under the agreement.
Item 6. Exhibits
Exhibit
Number Exhibit
- ------ -------
10.39 License Agreement Between NeoRx
Corporation and The Dow Chemical Company
14
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: November 12, 1999 By: /s/ Richard L. Anderson
------------------------------
Richard L. Anderson
President, Chief Operating Officer,
Secretary
(Principal Financial and
Accounting Officer)
15