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 MARCH 31, 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 April 12, 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 MARCH 31, 1999
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Balance Sheets as of March 31, 1999
and December 31, 1998 3
Statements of Operations for the
three months ended March 31,
1999 and 1998 4
Statements of Cash Flows for the
three months ended March 31,
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
Signature 14
2
NEORX CORPORATION
BALANCE SHEETS
(in thousands, except share data)
MARCH 31, DECEMBER 31,
1999 1998
--------- ----------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 769 $ 1,910
Investment securities 26,296 28,242
Prepaid expenses and other current assets 779 857
--------- ---------
Total current assets 27,844 31,009
--------- ---------
FACILITIES AND EQUIPMENT, at cost:
Leasehold improvements 3,283 3,283
Equipment and furniture 4,917 4,886
--------- ---------
8,200 8,169
Less accumulated depreciation and amortization (7,142) (7,049)
--------- ---------
Facilities and equipment, net 1,058 1,120
--------- ---------
OTHER ASSETS, NET 307 312
--------- ---------
TOTAL ASSETS $ 29,209 $ 32,441
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 751 $ 756
Accrued liabilities 1,068 1,192
Deferred revenue - 250
Current portion of capital leases - 4
--------- ---------
Total current liabilities 1,819 2,202
LONG-TERM LIABILITIES:
Convertible subordinated debentures, 9 3/4% (Due June 2000) 1,195 1,195
--------- ---------
Total liabilities 3,014 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 at March 31,
1999 and December 31, 1998, respectively 420 420
Additional paid-in capital 163,189 163,189
Accumulated deficit (137,472) (134,637)
Accumulated other comprehensive income - unrealized gain
on investment securities 54 68
--------- ---------
Total shareholders' equity 26,195 29,044
--------- ---------
Total liabilities and shareholders' equity $ 29,209 $ 32,441
--------- ---------
--------- ---------
See accompanying notes to the financial statements.
3
NEORX CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
THREE MONTHS
ENDED MARCH 31,
----------------------------
1999 1998
--------- ---------
REVENUE $ 413 $ 7,538
-------- --------
OPERATING EXPENSES:
Research and development 2,496 2,221
General and administrative 850 1,022
-------- --------
Total operating expenses 3,346 3,243
-------- --------
Income (loss) from operations (2,933) 4,295
OTHER INCOME (EXPENSE):
Interest income 255 591
Interest expense (30) (33)
-------- --------
Net income (loss) $ (2,708) $ 4,853
-------- --------
-------- --------
Preferred stock dividends (127) (141)
-------- --------
Net income (loss) applicable to
common shares $ (2,835) $ 4,712
-------- --------
-------- --------
Earnings (loss) per share:
Basic $ (.13) $ .23
-------- --------
-------- --------
Diluted $ (.13) $ .22
-------- --------
-------- --------
Shares used in calculation of
earnings (loss) per share:
Basic 21,007 20,719
-------- --------
-------- --------
Diluted 21,007 21,583
-------- --------
-------- --------
See accompanying notes to the financial statements.
4
NEORX CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
THREE MONTHS
ENDED MARCH 31,
------------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,708) $ 4,853
Adjustments to reconcile net income
(loss)to net cash provided by
(used in) operating activities:
Depreciation and amortization 93 86
Decrease in prepaid expenses
and other current assets 83 477
Decrease in accounts payable (5) (7)
(Decrease) increase in accrued liabilities (251) 260
Decrease in deferred revenue (250) -
---------- -----------
Net cash provided by (used in) operating
activities (3,038) 5,669
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment
securities 13,304 18,133
Purchases of investment securities (11,372) (24,412)
Facilities and equipment purchases (31) (261)
Other - 6
---------- -----------
Net cash provided by (used in)
investing activities 1,901 (6,534)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations (4) (10)
Proceeds from stock options exercised - 38
---------- -----------
Net cash provided by (used in) financing
activities (4) 28
---------- -----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS
(1,141) (837)
CASH AND CASH EQUIVALENTS:
Beginning of period 1,910 1,949
---------- -----------
End of period $ 769 $ 1,112
---------- -----------
---------- -----------
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 March 31, 1999 and the results of
operations and cash flows for the three month periods ended March 31, 1999 and
1998.
The results of operations for the three-month period ended March 31, 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 March 31, 1999 were as
follows (in thousands):
Balance December 31, 1998 $29,044
Preferred stock dividends (127)
Net loss (2,708)
Accumulated other comprehensive
income - unrealized loss on
investment securities (14)
---------
Balance March 31, 1999 $26,195
---------
---------
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NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
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 ended
March 31, 1999 and 1998 (in thousands, except per share data):
Three months
ended March 31,
-------------------
1999 1998
Net income (loss) $ (2,708) $ 4,853
Less: Preferred
stock dividends (127) (141)
---------- ---------
Net income (loss)
applicable to basic
earnings(loss) per share $ (2,835) $ 4,712
Dilutive effect of options,
warrants and convertible
preferred stock, Series 2
and Series 3 - 14
---------- ---------
Net income (loss)
applicable to diluted
earnings(loss) per share $ (2,835) $ 4,726
---------- ---------
---------- ---------
Weighted average
shares - basic 21,007 20,719
Dilutive effect of options,
warrants and convertible
preferred stock, Series 2
and Series 3 - 864
---------- ---------
Weighted average
shares - diluted 21,007 21,583
---------- ---------
---------- ---------
Basic earnings (loss)
per share $ (.13) $ .23
---------- ---------
---------- ---------
Diluted earnings (loss)
per share $ (.13) $ .22
---------- ---------
---------- ---------
The numerator and denominator of the basic and diluted loss per share
calculations for the three months ended March 31, 1999 were the same, as
including the effect of options to purchase 3,316,867 shares of Common Stock
would have been antidilutive. Outstanding options to purchase 943,824 shares of
Common Stock at March 31, 1998 were excluded from the calculation because the
options average
NOTES TO FINANCIAL STATEMENTS (Continued)
exercise price of $8.61 was greater than the average market price of the common
shares of $5.44.
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NEORX CORPORATION
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 loss per share for the three months ended March 31, 1999
and 1998 because the effect of including such shares would have been
antidilutive.
Note 4. Comprehensive Income/(Loss)
The Company's total comprehensive income (loss) for the quarters ended March
31, 1999 and 1998 was $(2,722,000) and $4,853,000, respectively. Comprehensive
loss for the quarter ended March 31, 1999 consisted essentially of net loss.
Comprehensive income for the quarter ended March 31, 1998 consisted of net
income.
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NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
This discussion contains "forward-looking statements" that are within the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995, 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 " Risk 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.
QUARTER ENDED MARCH 31, 1999 COMPARED TO QUARTER ENDED MARCH 31, 1998.
Revenues for the three months ended March 31, 1999 were $413,000 compared to
$7,538,000 for the three months ended March 31, 1998. In the first quarter of
1999, the Company recorded $0.4 million of revenue from the licensing of
non-strategic patent technologies received from Theseus, LTD. In January
1998, the Company received a $7,000,000 milestone payment from Janssen
Pharaceutica 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 March 31, 1999 increased 3% to
$3,346,000 from $3,243,000 for the quarter ended March 31,1998. Research and
development expenses for the quarter ended March 31, 1999 increased 12% to
$2,496,000 from $2,221,000 for the same time period in 1998, the result of the
need for increased supplies for the Company's STR and Chemotides projects
combined with decreased research and development reimbursements.
The Company currently receives reimbursed 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 $106,000 and $562,000 for the quarters ended March 31, 1999
and 1998, respectively.
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NEORX CORPORATION
General and administrative expenses for the quarter ended March 31, 1999
decreased 17% to $850,000 from $1,022,000 for the quarter ended March 31, 1998
primarily due to decreased expenses for outside consulting services and
personnel-related expenses.
Interest income for the quarter decreased to $255,000 from $591,000 and interest
expense was $30,000 and $33,000 for the three months ended March 31, 1999 and
1998, respectively. The decrease in interest income for the current quarter is
due to the decrease in funds available for investment and lower interest rates.
LIQUIDITY AND CAPITAL RESOURCES.
Cash and investment securities as of March 31, 1999 were $27,065,000 compared to
$30,152,000 at December 31, 1998. The first quarter 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 second quarter of 2000.
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.
Overview
The Year 2000 Problem is pervasive and complex, as virtually every
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NEORX CORPORATION
computer operation will be affected in some way by the rollover of the
two-digit year value to 00. The 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.
Readiness
The Company has undertaken an initial review 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. The Company
plans to survey by mid-year 1999 its research and development equipment and
significant suppliers, including clinical research organizations, to determine
any additional needed Year 2000 solutions.
Costs
At this time, the Company cannot determine the full cost of correcting any
potential year 2000 problems. Based upon the Company's initial review of its
computer systems, the Company estimates that the cost to replace older,
non-compliant computers and software is immaterial. The full estimated cost of
correcting the Year 2000 problem will be known by mid-year 1999 after the
Company completes its survey of its research and development equipment and
significant suppliers.
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.
Contingency
After the Company completes its survey of Year 2000 issues by mid-year 1999, it
will establish a contingency plan to address any "high-risk" issues that could
delay its efforts to bring products to market.
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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 March 31, 1999, the Company owns government debt instruments in the amount of
$8.0 million and corporate debt securities in the amount of $17.6 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 and classified as accumulated other comprehensive income - 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 March 31, 1999, the Company owned such
corporate equity securities in the amount of $700,000.
12
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: May 10, 1999 By: /s/ Richard L. Anderson
---------------------------------------
Richard L. Anderson
President, Chief Operating Officer,
Secretary
(Principal Financial and
Accounting Officer)
13