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SECURITIES AND EXCHANGE COMMISSIO
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 2
(Mark One)
[X] AMENDMENT NO. 1 TO THE ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to _______________
Commission file number 0-17085
TECHNICLONE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-3698422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14282 Franklin Avenue, Tustin, California 92780-7017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 838-0500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
(Title of Class)
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $85,481,608 as of July 1, 1997, based upon average
bid and asked prices of such stock.
[Cover page 1 of 2 pages]
Page 1 of 72 Pages
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APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicated by check mark whether the Registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES ____ . NO ____ .
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
27,254,652 shares of Common Stock as of July 1, 1997
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K is incorporated by reference from the
Registrant's Definitive Proxy Statement for its 1997 Annual Meeting.
This Annual Report on Form 10-K includes certain forward-looking
statements, the realization of which may be impacted by certain important
factors discussed in "Additional Factors that May Affect Future Results" under
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
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PART I
ITEM 1. BUSINESS
The Annual Report on Form 10-K contains certain forward-looking
statements, the realization of which may be impacted by certain important
factors. These forward-looking statements involve risks and uncertainties that
could cause actual results to differ materially. See "Additional Factors That
May Affect Future Results" under Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Techniclone Corporation was incorporated in the State of Delaware on
September 25, 1996. On March 24, 1997, Techniclone International Corporation, a
California corporation, (predecessor company incorporated in June, 1981) was
merged with and into Techniclone Corporation, a Delaware corporation
(collectively "Techniclone"). This merger was effected for the purpose of
effecting a change in the Company's state of incorporation from California to
Delaware and making certain changes in the Company's charter documents. The
"Company" refers to Techniclone Corporation, Techniclone International
Corporation, its former subsidiary, Cancer Biologics Incorporated ("CBI"), which
was merged into the Company on July 26, 1994 and its wholly-owned subsidiary
Peregrine Pharmaceuticals, Inc., a Delaware corporation ("Peregrine").
Techniclone acquired all of the issued and outstanding capital stock of
Peregrine as of April 24, 1997.
The Company is engaged in the research and development of new
technologies which can be utilized in the production of monoclonal antibodies
and the production of specific monoclonal antibodies with prospective diagnostic
and therapeutic applications. To date, the Company has been primarily engaged in
the research, development and production of mouse and chimeric hybridoma cell
lines and in the manufacture of monoclonal antibodies derived from these cell
lines for in vivo therapeutic purposes. Products that appear to have commercial
viability include (i) anti-lymphoma antibodies, LYM-1 and LYM-2 and (ii) three
advanced monoclonal antibody technologies for collateral targeting of solid
tumors: Tumor Necrosis Therapy (TNT), Vascular Targeting Agents (VTA), and
Vasopermeation Enhancement Agents (VEA).
In 1985, the Company entered into a research and development agreement
with Northwestern University and its researchers to develop antibodies known as
LYM-1 and LYM-2 (LYM-1 and LYM-2 are collectively referred to herein as the "LYM
Antibodies"). Techniclone holds an exclusive world-wide license to manufacture
and market products using the LYM Antibodies. In clinical studies conducted at
the University of California at Davis, over fifty patients with B-cell lymphoma
were treated with LYM-1 linked to Iodine-131. A significant number of these
patients had significant clinical responses including patients showing complete
and durable responses. None of the patients experienced the acute toxicities
that normally accompany treatment with these radioisotopes.
The Company has begun Phase II/III testing in multi-center clinical
trials of the LYM-1 Antibody in late stage Non-Hodgkins lymphoma patients. The
clinical trials are being sponsored by the Company's marketing partner Alpha
Therapeutic Corporation ("Alpha"), a wholly-owned subsidiary of Green Cross
Corporation. The clinical trials are currently being held at participating
medical centers including M.D. Anderson, The Cleveland Clinic, Cornell
University (N.Y.C.), George Washington University and the University of
Cincinnati. Following the completion of the clinical trials, the Company expects
Alpha to file an application with the FDA to market LYM-1 in the United States.
In connection with the production and sale of the LYM Antibodies, the
Company is obligated to make certain milestone and royalty payments.
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The Company entered into a Stock Subscription Agreement dated as of
August 7, 1992 with David Legere and Legere Enterprises, Ltd., a Nevada limited
partnership (the "Partnership") controlled by David Legere ("Legere"), pursuant
to which Legere purchased an aggregate of 2,000,000 shares of the common stock
of the Company for $1.20 per share, at an aggregate purchase price of
$2,400,000. In February 1994, the Company entered into a Subscription Agreement
with Legere pursuant to which Legere purchased an additional 1,000,000 shares of
the Company's common stock for an aggregate purchase price of $1,500,000. As of
July 1, 1997, the Partnership and affiliates of the Partnership beneficially
owned 3,123,333 shares of common stock, representing approximately 11.5 percent
of the issued and outstanding shares of the Company.
On October 28, 1992, the Company entered into a License Agreement with
Alpha pursuant to which the Company granted Alpha a license for the development
and commercialization of the LYM Antibodies in the United States and certain
other countries. Alpha has paid the Company $150,000 and, unless the Agreement
is terminated, Alpha is required to make future payments to the Company as
follows: (i) $100,000 upon the first European regulatory submission or six
months from the commencement date of United States Phase III clinical trials,
whichever comes first, (ii) $200,000 upon the approval of the first European
regulatory submission, (iii) $500,000 upon the submission of a PLA to the FDA,
and (iv) $100,000 per year as a research and development grant after the
completion of the Phase III LYM-1 clinical trial. The agreement also provides
that Alpha will conduct all remaining development work necessary for FDA/PLA
submission and pay all costs of development and patient costs including
physician fees, hospital fees, material costs and follow-up costs. Under the
Agreement, the Company is responsible for manufacturing the LYM-1 Antibody for
clinical and commercial use and has agreed to sell the LYM-1 product at a fixed
price for the Phase II/III clinical trial. Under the terms of this license
agreement, the right to distribute the Company's product in certain European
countries was dependent upon Alpha beginning clinical trials in Europe within a
specified time period. Alpha did not begin the trial within the specified time
frame and its distribution rights to certain countries were terminated. The
distribution rights to certain European countries were assigned to Biotechnology
Development Ltd., a limited partnership controlled by Edward Legere, a director
and a major shareholder of the Company, in connection with another licensing
agreement.
In October 1993, the Company entered into an agreement which was
amended in March 1995, with Mills Biopharmaceuticals, Inc. ("MBI") for it to
provide radiolabeling services to the Company. At April 30, 1997, MBI was the
Company's sole source for radiolabeling. The radiolabeling service that MBI
provides is to attach the radioactive isotope I131 to the Company's antibodies.
MBI is a small company and can label the LYM-1 antibody for a limited clinical
trial. As the Company expanded its production in anticipation of a larger and
faster Phase III clinical trial, it became apparent that MBI had limited
capacity which could have a detrimental affect on the Company. Accordingly, the
Company began searching for additional sources to radio label its products.
After April 30, 1997, the Company entered into agreements with unrelated
companies to provide research and development for an automated radiolabeling
facility and for these companies to provide limited amounts of radiolabeled
material for clinical trials.
On January 18, 1994, Techniclone and CBI entered into an Agreement and
Plan of Merger (the "Agreement and Plan of Merger") which contemplated the
merger of CBI with and into Techniclone. On June 10, 1994, the shareholders of
the Company approved the merger pursuant to the Agreement and Plan of Merger.
The merger between CBI and the Company was completed on July 26, 1994. The
assets of CBI acquired by the Company consist primarily of research and
development of the TNT antibody technology, which has not been approved by the
FDA. As a result of the merger, the Company incurred an immediate charge to
operations for purchased in-process research and development of approximately
$4,850,000. This amount represents the excess of the fair market value
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of the Company's common stock issued over the net assets acquired of CBI, plus
an additional non-recurring charge relating to CBI stock options assumed by the
Company.
On December 27, 1995, the Company issued 7,700 shares of newly created
Class B Convertible Preferred Stock, at a price of $1,000 per share, and on
December 29, 1995 issued an additional 500 shares of Class B Convertible
Preferred Stock, at a price of $1,000 per share, for an aggregate issuance
consideration of $8,200,000 to sixteen (16) offshore investors pursuant to
Regulation S promulgated under the Securities Act of 1933. The Class B
Convertible Preferred Stock is non-voting. The Class B Convertible Preferred
Stock is convertible into common stock of the Company. The number of shares of
Common Stock issued upon conversion of each share of Class B Convertible
Preferred Stock is determined by (i) taking ten percent (10%) of One Thousand
Dollars ($1,000) pro-rated on the basis of a 365 day year, by the number of days
between the last Closing Date and the date of conversion plus (ii) One Thousand
Dollars ($1,000), (iii) divided by the lower of $3.06875, the fixed conversion
price, or 85% of the average closing bid price for the Company's Common Stock
for the five trading days immediately preceding the conversation date (the
"Conversion Price"). As of April 30, 1997, the Fixed Conversion Price was set at
$3.06875, which was the average closing bid price for the Company's Common Stock
for the five (5) trading days ending on December 8, 1995. Additionally, the
Class B Convertible Preferred Stock has a liquidation preference over other
classes of the Company's stock. This liquidation preference is $1,000 per share
of Class B Convertible Preferred Stock plus 10% per annum pro-rated through any
liquidation date. During the years ended April 30, 1996 and 1997, 1,400 and
4,600, shares respectively, of Class B Convertible Preferred Stock were
converted at the election of the holder to common stock. In connection with
these conversions, the Company issued 469,144 and 1,587,138, respectively,
shares of common stock. As of April 30, 1997, 2,200 shares of Class B
Convertible Preferred Stock with a liquidation preference of $2,497,151, remain
outstanding. These shares are convertible into a minimum of 813,736 shares of
common stock.
The Company was delisted in 1991 for failure to maintain NASDAQ listing
requirements. After the Closing of the Class B Convertible Preferred Stock, the
Company applied for and was granted relisting of its common stock on the NASDAQ
Small Cap market. The listing was effective on April 1, 1996. The Company's
trading symbol is TCLN.
On February 5, 1996, the Company entered into a joint venture with
Cambridge Antibody Technology, Ltd. ("CAT") to develop and market a new class of
products for cancer therapy and diagnosis. The Agreement provides that the
Company and CAT will use the Company's Tumor Necrosis Therapy ("TNT") antibody
and CAT's technology for producing fully human monoclonal antibodies to develop
a human TNT antibody. The Agreement provides that equity in the joint venture
and costs associated with the development of the product will be shared equally
between the Company and CAT. The Company retains exclusive world-wide
manufacturing rights for TNT. It is anticipated that the joint venture will
conduct clinical trials of TNT concurrently in both the United States and
Europe.
On February 29, 1996, the Company entered into a Distribution Agreement
with Biotechnology Development, Ltd. ("BTD"), a limited partnership controlled
by Edward Legere, a director and a major shareholder of the Company, which
provides for BTD to acquire the marketing rights for the LYM Antibodies in
various foreign countries not covered by the Alpha Agreement. The Agreement also
provided for BTD to assume marketing and distribution rights in certain other
European countries if Alpha forfeits or relinquishes its rights to these
countries. During fiscal 1997, the rights to market and distribute LYM
Antibodies in various European countries were forfeited by Alpha and were
assumed by BTD in accordance with the terms of the BTD Distribution Agreement.
Under the terms of the Distribution Agreement, the Company retains all
manufacturing rights to the
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LYM Antibodies and will supply LYM Antibodies to BTD at preset prices.
Additionally, the Company has the right under an Option Agreement to repurchase
the marketing rights to the LYM Antibodies through July 1998 at its sole
discretion. The repurchase price under the option, if exercised by the Company,
would include a cash payment of $4,500,000, the issuance of 1,000,000 stock
options at an option price of $5.00 per share with a five year term, and royalty
payments ranging from two percent to five percent of related sales.
On April 25, 1997, the Company entered into a 5% Preferred Stock
Investment Agreement and a Registration Rights Agreement with eleven (11)
investors pursuant to which the Company sold 12,000 shares of 5% Adjustable
Convertible Class C Preferred Stock (the "Class C Stock") for an aggregate
purchase price of $12,000,000. The Company filed a Certificate of Designation
with the Delaware Secretary of State on April 23, 1997 creating the 5%
Adjustable Convertible Class C Preferred Stock. In connection with the issuance
of the Class C Stock, the Company paid Cappello & Laffer Capital Corp., the
placement agent, a non-accountable expense allowance of $100,000 and a $720,000
commission and issued a Warrant to purchase 1,200 shares of Class C Stock at
$1,000 per share.
The Company intends to use the proceeds of the Class C Preferred Stock
offering to manufacture product for the completion of clinical trials of the
LYM-1 antibody, conduct Phase I clinical trials for the TNT antibody, continue
pre-clinical development of additional Company products, construct facilities
and use any remaining proceeds for general corporate and working capital
purposes.
Commencing on September 26, 1997, the Class C Stock is convertible at
the option of the holder into a number of shares of common stock of the Company
determined by dividing $1,000 plus all accrued but unpaid dividends by the
Conversion Price. The Conversion Price is the average of the lowest trading
price of the Company's common stock for the five consecutive trading days ending
with the trading day prior to the conversion date reduced by 13 percent starting
on November 26, 1997, 20 percent starting on January 26, 1998, 22.5 percent
starting on March 26, 1998, 25 percent starting on May 26, 1998, and 27 percent
starting on July 26, 1998 and thereafter. After March 24, 1998, the Conversion
Price will be the lower of the Conversion Price as calculated in the preceding
sentence or the average of the Closing Price of the Company's common stock for
the thirty (30) trading days including and immediately preceding March 24, 1998
(the "Conversion Cap"). In addition to the common stock issued upon conversion
of the Class C Stock, warrants to purchase one-fourth of the number of shares of
common stock issued upon the conversion will be issued to the converting
investor. The Warrants are exercisable at 110 percent of the Conversion Cap
through April 2002.
The holders of the Class C Stock do not have voting rights except as
provided under Delaware law.
The holders of the Class C Stock are entitled to receive dividends at
the rate of $50.00 per share per annum. The payment of the Class C dividend
commences on September 30, 1997 and thereafter is paid at the end of each
calendar quarter. The dividends are to be paid in Class C Stock valued at $1,000
per share (fractional shares to be paid in cash) or, at the option of the
Company with ten days advance notice to the Holders of the Class C Stock, in
cash. Subject to certain conditions contained in the Certificate of Designation,
the Class C Stock is subject to mandatory redemption upon certain events as
defined in the Certificate of Designation and mandatory conversion at any time
after April 25, 1998. The following events may constitute a "redemption event":
(i) if the Company's stock is suspended from trading for ten trading days in any
nine month period, (ii) the Registration Statement required to be filed by the
Company pursuant to the Registration Rights Agreement has not been declared
effective by the 180th day following the Closing Date, or after being declared
effective cannot be utilized by the holders of the Class C Stock for more than
30 days in any twelve month period,
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(iii) the Company fails after notice to remove any restrictive legend on any
conversion shares issued to a holder of Class C Stock, (iv) the Company fails to
issue shares of Common Stock to any holder of Class C Stock upon conversion, (v)
if Mr. Lon Stone shall cease to be an officer or director of the Company within
18 months of the Closing Date, or (vi) 50% or more of the Common Stock is
directly or indirectly owned or controlled by a single individual, entity or
their affiliates. From and after the date of a redemption event, each holder of
Class C Stock has the option to require the Company to purchase such holder's
shares of Class C Stock for an amount in cash equal to the "redemption amount"
as defined in the Certificate of Designation. The Company may in lieu of the
payment of the redemption amount issue Common Stock for the events specified in
items (i) and (ii) above where the delay or inability is caused by a stop order
threatened or issued or similar action taken by the SEC or its staff, or for
events specified in items (v) and (vi) above. Should a redemption event occur,
it is the Company's intention to redeem the Class C Stock through the issuance
of the Company's common stock.
On January 20, 1997, the Company entered into a Stock Exchange
Agreement (the "Agreement") with the shareholders of Peregrine Pharmaceuticals,
Inc., a privately-held Delaware corporation ("Peregrine"), pursuant to which the
shareholders of Peregrine agreed to exchange all of the issued and outstanding
capital stock of Peregrine for 5,000,000 shares of common stock of the Company.
On April 24, 1997, the Company entered into a First Amendment to Stock Exchange
Agreement (the "Amendment") with the shareholders of Peregrine, pursuant to
which the Company agreed to amend certain provisions of the Stock Exchange
Agreement and to issue an additional 80,000 shares of its common stock in
exchange for all of the issued and outstanding capital stock of Peregrine as set
forth in the Amendment. The Amendment provides that the major stockholders of
Peregrine agree to a one year lock-up of the Company's common stock issued to
them in the exchange. As part of the Amendment, during the lock-up period
Sanderling is permitted to sell up to 275,000 shares, Saunders is permitted to
sell up to 275,000 shares, Jennifer Lobo is permitted to sell up to 90,000
shares and Philip Thorpe is permitted to sell up to 50,000 shares. The Amendment
also provides for the Company to sell Sanderling $550,000 of its common stock at
a purchase price of $3.82 per share. This sale of stock to Sanderling was
completed in July of 1997.
The purchase price for Peregrine was determined by negotiation.
Peregrine is a development stage enterprise with minimal assets. In negotiating
the purchase price, the Board of Directors of the Company and Peregrine did not
use a traditional valuation formula of book value or earnings, instead the Board
of Directors relied upon the prospective value of the technology owned and being
developed by Peregrine, primarily Vascular Targeting Agents ("VTA's"). VTA's act
by destroying the vasculature of solid tumors. VTA's are multifunctional
molecules that target the capillaries and blood vessels of solid tumors. Once
there, these agents block the flow of oxygen and nutrients to the underlying
tissue by creating a blood clot to the tumor. Within hours of the clots
formation, the tumor begins to die and necrotic regions are formed. Since every
tumor in excess of 2mm in size forms an expanding vascular network during tumor
growth, VTA's could be effective against all types of solid tumors. After
evaluating the technology, the Company's Scientific Advisory Committee advised
the Company that, in their opinion, the Peregrine VTA's were the only viable
competition for the Company's TNT product. After development of the VTA
technology, the Company intends to use the VTA technology in conjunction with
TNT. In addition, the Company obtained a fairness opinion with respect to the
purchase price paid.
The Company believes that the development of the VTA's into a
commercially viable product candidate will be a lengthy and costly process.
Prior to approval by the U.S. Food and Drug Administration ("FDA") of any new
drug product, the product must undergo several pre-clinical and clinical trials
and must demonstrate safety and efficacy levels acceptable to the FDA. While the
Company believes that the Peregrine technologies have the potential to be very
successful, no
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assurance can be given that the technologies will be developed into successful
commercially viable products. As a result of the uncertainty of clinical trials
and the FDA process, the Company is unable to predict the timing and remaining
costs which will be necessary to develop the Peregrine technologies into
commercially viable products. The Company has reviewed the drug development
process and costs for many other Companies and the timing ranges from a couple
of years to more than ten years with costs ranging from several million dollars
to several hundred million dollars. The Company will be required to enter into a
cost sharing agreement or obtain additional funds to complete the development of
the Peregrine technologies. While the Company believes it may be able to raise
the funds to develop the Peregrine technologies, the Company will be actively
seeking a joint venture arrangement, a licensing agreement or some other
agreement to help finance the cost of the development of Peregrine's
technologies.
No assurance can be given that the VTA technology development efforts,
including clinical trials, will be successful, that regulatory approvals can be
obtained or that the VTA technology can be successfully marketed if such
development efforts are completed.
All preconditions to the closing of the Stock Exchange Agreement as
amended were completed and the related agreements were signed on April 24, 1997;
therefore, the Company accounted for the transaction in the year ended April 30,
1997. The purchase price of approximately $27,154,000, which includes the fair
market value of the common stock exchanged and the net liabilities assumed,
represents the amount paid for acquired technologies and related intangible
assets. As of the effective date of the acquisition, the purchase price of the
Peregrine acquisition was charged to operations as "purchased in-process
research and development" with a corresponding credit to additional paid-in
capital. The purchase price was charged to operations as Peregrine's
technologies have not reached technological feasibility and the technology has
no known future alternative uses other than the possibility for treating cancer
patients.
During the year ended April 30, 1997, the Company acquired land and a
building located at 14272 Franklin Avenue, Tustin, California 92780 for a
purchase price of $1,524,663. This 24,201 square foot building is adjacent to
the Company's existing 23,570 square foot building that was purchased in April
1996 for $1,555,620. The Company entered into two Promissory Notes (the Notes)
aggregating $2,040,000 in original principal amount (the "Notes") with Imperial
Thrift and Loan Association in connection with the acquisition of its facility
located at 14282 Franklin Avenue, Tustin, California and the adjacent facility
located at 14272 Franklin Avenue, Tustin, California. The Notes are secured by
Deeds of Trust, Assignments of Leases and Rents and Commercial Security
Agreements. The Notes provide for aggregate monthly payments, including
interest, of $21,470 per month with interest calculated at LIBOR plus 4.250
percent. Pursuant to the terms of the Notes, the interest rate cannot be greater
than 14.5% nor less than 9.5%.
The Company's offices and laboratories are located at 14282 Franklin Avenue,
Tustin, California 92780-7017, and its telephone number is (714) 838-0500.
CANCER AND CONVENTIONAL CANCER TREATMENTS
Cancer is a family of more than one hundred diseases that can be
categorized into two broad groups: (i) non-solid tumor cancers such as
hematological or blood-borne malignancies, including lymphomas and leukemias,
and (ii) solid tumor cancers, such as lung, prostate, breast and colon cancers.
All cancers are generally characterized by a breakdown of the cellular
mechanisms that regulate cell growth and cell death in normal tissues.
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Blood-borne cancers involve a disruption of the developmental processes
of blood cell formation, preventing these cells from functioning normally in the
blood and lymph systems. While chemotherapy is the primary treatment for
blood-borne malignancies, many such malignancies are radiosensitive and some
localized lymphomas can be treated with conventional external beam radiation
therapy. However, conventional external beam radiation therapy cannot be used in
the treatment of most blood-borne malignancies because the levels of radiation
necessary to destroy diseases that are disseminated within the body would result
in damage to the bone marrow of the patient, leading to life-threatening
suppression of the immune system, and other serious side effects.
In solid tumor cancers, malignant tumors invade and disrupt nearby
tissues and can also spread throughout the body or "metastasize." The impact of
these tumors on vital organs such as the lungs and the liver frequently leads to
death. Surgery is used to remove solid tumors that are accessible to the surgeon
and can be effective if the cancer has not metastasized. Conventional radiation
therapy also can be employed to irradiate a solid tumor and surrounding tissues
and is a first-line therapy for inoperable tumors, but side effects are a
limiting factor in treatment. Conventional external beam radiation therapy is
used frequently in conjunction with surgery either to reduce the tumor mass
prior to surgery or to destroy tumor cells that may remain at the tumor site
after surgery. While surgery and radiation therapy are the primary treatments
for solid tumors, chemotherapy is often used as a primary therapy for inoperable
or metastatic cancers.
Chemotherapy, which typically involves the intravenous administration
of drugs designed to destroy malignant cells, is used for the treatment of both
solid tumors and blood-borne malignancies. Chemotherapeutic drugs generally
interfere with cell division and are therefore more toxic to rapidly dividing
cancer cells. Since cancer cells can often survive the effect of a single drug,
several different drugs usually are given in a combination therapy designed to
overwhelm the ability of cancer cells to develop resistance to chemotherapy.
Combination chemotherapy is used widely as first-line therapy for leukemias and
lymphomas and has had considerable success in the treatment of some forms of
these cancers. Nevertheless, partial and even complete remissions obtained
through chemotherapy often are not durable, and the cancer may reappear and/or
resume its progression within a few months or years of treatment. The relapsed
patient's response to subsequent therapy typically becomes shorter and shorter
with each successive treatment regimen as the cancer becomes resistant to
chemotherapy. Eventually, patients may become "refractory" to chemotherapy,
meaning that the length of their response, if any, to treatment is so brief that
the treating physician concludes that further chemotherapy regimens would be of
little or no benefit. Chemotherapeutic drugs are not sufficiently specific to
cancer cells to avoid affecting normal cells, especially those cells that are
growing rapidly. As a result, patients often experience side effects such as
nausea, vomiting, hair loss, anemia and fatigue, as well as life-threatening
side effects such as immune system suppression. In cases of certain severe
blood-borne malignancies and metastatic solid tumor cancers, bone marrow
transplants may be performed to treat patients who typically have exhausted all
other treatment options. Transplants generally are performed in connection with
regimens of aggressive chemotherapy and/or radiation therapy.
NON-HODGKINS LYMPHOMA
Non-Hodgkins B-cell lymphomas are blood borne cancers of the immune
system which currently afflict approximately 240,000 patients in the United
States. More than 52,000 new cases are expected to be diagnosed in 1997.
Non-Hodgkins lymphomas are generally classified into one of three groups: low,
intermediate or high grade. The Company is initially pursuing clinical
development of its LYM-1 antibody for intermediate and high grade Non-Hodgkins
B-cell lymphoma.
Non-Hodgkins lymphomas are usually widely disseminated and
characterized by multiple tumors at various sites throughout the body. Treatment
usually consists of chemotherapy and often
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results in a limited number of durable remissions. Lymphomas typically become
more aggressive upon relapse and tend to progress from low to intermediate or
high grade during the disease cycle. The majority of patients in remission will
relapse and ultimately die either from their cancer or complications of standard
therapy. Fewer patients achieve additional remissions following relapse and
those remissions are generally of shorter duration as the tumors become
increasingly resistant to subsequent courses of chemotherapy. Therapeutic
product development efforts for these cancers have focused on both improving
treatment results and minimizing the toxicities associated with standard
treatment regimens. Immunotherapies with low toxicity and demonstrated efficacy
can be expected to reduce treatment and hospitalization costs associated with
therapy side effects or peripheral infections, which can result from the use of
chemotherapy and radiation therapy.
EMERGING METHODS OF CANCER TREATMENT
Scientific progress in recent years has yielded a number of promising
cancer treatment approaches. These approaches generally are designed to enhance
the specificity and potency of cancer therapeutics, to improve overall efficacy
and to reduce side effects. The Company believes that one of the most promising
of these approaches is the use of monoclonal antibody technologies in the
development of anti-tumor targeting agents for cancer therapy.
MONOCLONAL ANTIBODY TECHNOLOGY
ANTIBODIES. Antibodies are protein molecules produced by certain white
blood cells, known as lymphocytes, in the blood, spleen and lymph nodes, which
are part of the immune system in humans and certain animals, in response to the
presence of foreign substances (antigens) in the body. Each antibody recognizes
and binds to one or a very few specific sites on a specific antigen. This
quality, known as specificity, is the basis for using antibodies to diagnose
diseases or deliver drugs to disease sites, and to detect subtle differences
between malignant and normal cells. Once a lymphocyte comes in contact with an
invading antigen, it begins to generate identical offspring cells (clones)
producing identical antibodies that bind to the antigen. Each of these
antibodies recognizes and binds in exactly the same way to the antigen. This
binding process sets in motion a complex series of events which normally permits
the body to eliminate the antigen.
In a healthy person or animal, hundreds of millions of antibodies are
produced as a defense mechanism when the body is invaded by antigens. Different
lymphocytes will, however, recognize an invading antigen in slightly different
ways. As a result, the clones produced by each lymphocyte will produce
antibodies which bind to different sites on the antigen. Each antibody carries a
genetically determined sequence of seven to eleven amino acids; this chemical
sequence creates a unique site for recognizing and attaching to a corresponding
antigen. Changing any amino acid in the chemical sequence could produce a
different antibody which would recognize and bond with different antigens.
THERAPEUTIC APPLICATIONS. Cancer therapy utilizing monoclonal
antibodies, whether used alone or conjugated with other substances that attack
cancerous cells, directly attack the cancerous cells, leaving healthy cells
unharmed. Consequently, cancer therapies based upon monoclonal antibodies have
the potential for more effective treatments without the harmful side effects
associated with most cancer therapies. Research in this area has indicated that
certain monoclonal antibodies are effective in the treatment of certain types of
cancers, including lymphoma. In limited clinical trials, the Company's LYM-1
antibody appears to be an effective treatment for lymphoma, a form of cancer of
the lymph nodes and blood lymphocytes.
Research has also indicated that many monoclonal antibodies have
greater potential for fighting cancers and other diseases in the body when
conjugated with drugs, biologics, toxins or isotopes.
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Because of the great specificity of monoclonal antibodies, they can deliver the
conjugated drug, biological, toxin or isotope directly to the selected target
cells without clinically significant toxicity to other cells in the body. The
conjugated monoclonal antibody binds to its target cell, which internalize the
conjugated drug, biological, toxin or isotope, causing cell death.
TECHNICLONE'S MONOCLONAL ANTIBODY PRODUCTION. Monoclonal antibodies are
produced by the Company using a technology first developed in England in 1975,
by isolating an antibody-producing hybridoma in a tissue culture medium where it
will produce identical hybridoma cells, called clones. Each hybridoma grown in
this manner will secrete the same type of antibody, which can then be harvested.
Because the antibodies grown in this manner are all derived from the same parent
lymphocyte, they are called monoclonal antibodies. The Company's business
strategy has been directed toward development of monoclonal antibodies from
mouse and human hybridomas, which offer the opportunity for producing large
quantities of an antibody that recognizes and bonds to a specific antigen.
Hybridomas are created through the fusion of an antibody-secreting lymphocyte
cell with a cancerous (myeloma) cell. These hybrid cells exhibit the vigorous
growth and multiplication characteristics of the myeloma cell and the
antibody-secreting characteristic of the lymphocyte cell and are easily grown in
culture media.
CHIMERIC ANTIBODIES. Chimeric antibodies are constructed from portions
of murine antibodies and human antibodies which are linked together. A chimeric
antibody consists mostly of human protein, with a small amount of murine protein
carrying the specificity site. Like fully human antibodies, chimerics are
regarded as less foreign to the human body than whole murine antibodies and are
suited to multiple treatments in-vivo. Techniclone has prepared chimerics of
LYM-1 and TNT at its research laboratories. Preliminary clinical studies are
encouraging and formal trials of chimeric TNT are planned to begin in 1998. The
chimeric TNT study will be carried out jointly by Cambridge Antibody Technology,
Ltd. in England and by Techniclone in the United States.
HUMAN ANTIBODIES. In February 1996, Techniclone entered into a joint
venture with Cambridge Antibody Technology, Ltd. ("CAT") whereby CAT will use
its patented technologies to develop a fully human monoclonal antibody of the
Company's Tumor Necrosis Therapy ("TNT") antibody. Fully human antibodies are
more compatible with the human immune system and thus should be able to avoid
most of the immune response and bodily rejection complications which may be
encountered in using murine or chimeric antibodies for cancer therapy. A human
TNT antibody has been completed by CAT, human TNT clinical studies are expected
to be carried out jointly by CAT and Techniclone in England and in the United
States in 1998.
TECHNICLONE'S APPROACHES TO CANCER THERAPY
Techniclone's scientific team has formulated a comprehensive new
approach to the treatment of cancerous tumors. For non-solid tumor therapy
(hemotological malignancies, including lymphomas and leukemias) the Company has
developed a direct tumor targeting agent LYM-1, which is currently in a Phase
II/III clinical trial in the U.S. for treatment of intermediate and high grade
Non-Hodgkins B-cell lymphoma.
Direct tumor targeting for solid tumors (lung, prostate, breast,
pancreatic, brain and colon cancers) has historically been proven to be
ineffective since: (i) cell-surface antigens are unstable and modulate, causing
the antigen target on the solid tumor to disappear; (ii) the same cell-surface
antigen used as the antibody target will frequently be expressed on normal,
healthy, cells as well, causing unacceptable levels of toxicity and adverse side
effects during therapy; and (iii) cell-surface antigens vary greatly from tumor
type to tumor type requiring the development of a different antibody targeting
system for each cancer type.
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To solve the problems associated with direct tumor targeting for solid
tumors, Techniclone has concentrated its development efforts on an indirect
targeting approach by targeting anatomical structures essential for tumor growth
and the by-products of tumor growth, most notably necrotic tissue. This
therapeutic strategy of the indirect targeting of structures and cell types,
rather than directly targeting of the cancer cell itself, as a means to treat
solid tumor cancers is broadly described as "collateral targeting". The Company
holds fundamental patents for three of the most important new classes of
compounds to have emerged in the field of collateral targeting, Tumor Necrosis
Therapy (TNT), Vascular Targeting Agents (VTA) and Vasopermeation Enhancement
Agents (VEA).
The Company believes that the use of collateral (indirect) targeting
agents for solid tumor therapy might solve some of the problems associated with
conventional chemotherapy and radiation therapy, and problems encountered in the
early industry testing of direct targeting approaches to solid tumor therapy.
The main advantage of collateral targeting agents is that the tumor structures
targeted appear to be common to all solid tumors, such that one targeting agent
may be effective for all solid tumor types. Additionally, since collateral
targeting agents target the non-mutable components of the tumor, the potential
for the development of drug resistance by the tumor is reduced.
LYM-1, ONCOLYM(TM)
Techniclone's first proprietary monoclonal antibody cancer therapy
product LYM-1 (which will be marketed by Alpha under the tradename
"Oncolym(TM)"), is now in a Phase II/III multi-center clinical trial being
conducted by the Company's marketing partner, Alpha. LYM-1 (Oncolym(TM)) is
designed as a therapy against Non-Hodgkins B-cell lymphoma cancer. Techniclone's
Oncolym(TM) antibody is linked to a radioactive isotope, and the combined
molecule is injected into the blood stream of the cancer patient where it
recognizes and bonds to the cancerous lymphoma tumor sites, thereby delivering
the radioactive isotope to the tumor site, with minimal adverse effect on
surrounding healthy tissue.
In Phase II trials of Non-Hodgkin's lymphoma patients treated with
LYM-1 (Oncolym(TM)) at varying dose levels, fifty-six percent (56%) of the trial
participants had complete or partial (greater than 50% tumor shrinkage)
remissions of their tumors. It should be noted that these Phase II clinical
trial results were achieved with terminal patients whose disease was progressing
despite conventional chemotherapy and who were diagnosed as having a life
expectancy of from two to six months.
The Phase II/III clinical trial of the LYM-1 (Oncolym(TM)) antibody is
being conducted using patients with characteristics similar to those patients
enrolled in the early stages of the trials. The Phase II/III clinical trial is
being conducted at several clinical sites with the expectation that the study
will ultimately be expanded to include a total of twenty sites with an
enrollment of up to 130 patients. The initial clinical sites include New York
Hospital-Cornell University Medical Center, MD Anderson Cancer Center,
University of Cincinnati Medical Center, Cleveland Clinical Foundation, and The
George Washington University Medical Center.
COLLATERAL TARGETING AGENTS FOR SOLID TUMOR THERAPY. Techniclone has
developed two advanced monoclonal antibody technologies for collateral targeting
of solid tumors for cancer therapy and acquired one collateral targeting
technology with the acquisition of Peregrine. Tumor Necrosis Therapy ("TNT") and
Vascular Targeting Agents ("VTA") are possible stand-alone or combined cancer
therapy technologies, but when used in combination with Vasopermeation
Enhancement Agents ("VEA"), these technologies form a complete three pronged
platform which is designed to eradicate most solid tumors.
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TUMOR NECROSIS THERAPY (TNT). The TNT antibody targets necrotic tissue
(dead cells) which is found at the interior of solid cancerous tumors. Targeting
the necrotic area of the cancerous tumor with TNT, enables it to deliver toxic
payloads (such as radioisotopes or chemotherapy drugs) to surrounding viable
cancer cells for therapeutic effect. The TNT delivery system could be the basis
for a class of new products effective across the entire spectrum of solid tumor
types, including brain, lung, colon, breast, prostate and pancreatic cancers.
VASCULAR TARGETING AGENTS (VTA). Vascular Targeting Agents act by
destroying the vasculature of solid tumors. VTA's are multifunctional molecules
that target the capillaries and blood vessels of solid tumors. Once there, these
agents block the flow of oxygen and nutrients to the underlying tissue by
creating a blood clot to the tumor. Within hours of the clots formation, the
tumor begins to die and necrotic regions are formed. Since every tumor in excess
of 2mm in size forms an expanding vascular network during tumor growth, VTA's
could be effective against all types of solid tumors. Techniclone's scientists
are doing preliminary studies on vascular targeting agents. The VTA technology
was acquired in April of 1997 through the Company's acquisition of Peregrine
Pharmaceuticals, Inc.
VASOPERMEATION ENHANCEMENT AGENTS (VEA). Vasopermeation Enhancement
Agents use vasoactive compounds (molecules that cause tissues to become more
permeable) linked to monoclonal antibodies to increase the vasoactive
permeability at the tumor site and act to increase the concentration of killing
agents at the core of the tumor. Vasopermeation Enhancement Agents are
administered to a cancer patient by pretreating the patient with a
vasoconjugate, such as Interleukin-2 (IL-2) linked to a monoclonal antibody, a
few hours prior to delivery of a therapeutic agent. The antibody side of this
vasoconjugate may be targeted either against antigens which are unique to the
tumor vessel walls or antigens inside the tumor itself. The vasoconjugate
affects the walls of the tumor vessel and causes an immediate increase in vessel
permeability thereby causing these tissues to become a "sink" for other
compounds that are subsequently given intravenously. This increased state of
permeability creates a window of opportunity for several hours, allowing any
therapeutic drug injected into the patient during that time to enter the tumor
in greatly enhanced concentrations. In pre-clinical studies, Techniclone's
scientists were able to increase the uptake of drugs or isotopes within a tumor
by 200% to 400% if a vasoactive agent was given several hours prior to the
therapeutic treatment. The therapeutic drug can be a chemotherapy drug,
radiolabeled antibody or other cancer fighting agent. This enhancement of toxic
drug dosing is achieved by altering the physiology and, in particular, the
permeability of the blood vessels and capillaries that serve the tumor. As the
tumor vessels become more permeable, the amount of therapeutic treatment
reaching the tumor cells increases.
PRODUCTS
The Company's plans for future growth have focused on the development
of two product groups: direct targeting agents for non-solid tumor therapy and
collateral targeting agents for solid tumor therapy. These therapeutic products
are intended for use by hospital pharmacies and radiologists in treating
cancers. The Company is currently developing LYM-1, TNT, and VTA and VEA
products for this market.
LICENSE AGREEMENTS. On October 28, 1992, the Company entered into a
License Agreement with Alpha pursuant to which the Company granted Alpha a
license for the development and commercialization of the LYM Antibodies in the
United States and certain other countries. Under the License Agreement, Alpha
paid the Company $150,000 and, unless the Agreement is terminated, Alpha is
required to make fixed payments to the Company as follows: (i) $100,000 upon the
first European
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regulatory submission or six (6) months from the commencement date of United
States Phase III clinical trials, whichever comes first, (ii) $200,000 upon the
approval of the first European regulatory submission, (iii) $500,000 upon the
submission of a PLA to the FDA, and (v) $100,000 per year as a research and
development grant after the completion of the Phase III LYM-1 clinical trial.
The Agreement also provides that Alpha conduct all remaining development work
necessary for FDA/PLA submission and pay all costs of development and patient
costs including physician fees, hospital fees, material costs and follow-up
costs. Under the Agreement, the Company is responsible for manufacturing the LYM
Antibodies for clinical and commercial use. Under the terms of this license
agreement, the right to distribute the LYM Antibodies in certain European
countries was dependent upon the distributor beginning clinical trials in Europe
within a specified time period. Alpha did not begin the trial within the
specified time frame and its European distribution rights were assigned in
connection with another licensing agreement.
On February 5, 1996, the Company entered into a joint venture with
Cambridge Antibody Technology, Ltd. ("CAT") to develop and market a new class of
products for cancer diagnosis and therapy. The Agreement provides that the
Company and CAT will develop a monoclonal antibody based upon CAT's patented
technology for producing fully human monoclonal antibodies and the Company's
Tumor Necrosis Therapy ("TNT"). The Agreement provides that equity in the joint
venture and costs associated with the development of the product will be shared
equally between the Company and CAT. The Company retains exclusive world-wide
manufacturing rights. It is anticipated that the joint venture will conduct
clinical trials of TNT in both the United States and Europe.
On February 29, 1996, the Company entered into a Distribution Agreement
with Biotechnology Development, Ltd. ("BTD"), a limited partnership controlled
by Edward Legere, a director and a major shareholder of the Company, which
provides for BTD to acquire the marketing rights for the LYM Antibodies in
various foreign countries not covered by the Alpha Agreement. The Agreement also
provides for BTD to assume marketing and distribution rights in certain European
countries if Alpha forfeits or relinquishes its rights to these countries.
During fiscal 1997, the right to market and distribute the LYM Antibodies
product in various European countries was forfeited by Alpha and was assumed by
BTD in accordance with the terms of the BTD Distribution Agreement. Under the
terms of the Distribution Agreement, the Company retains all manufacturing
rights to the LYM Antibodies and will supply the LYM Antibodies to BTD at preset
prices. Additionally, the Company has the right under an Option Agreement to
repurchase the marketing rights to LYM Antibodies through July 1998 at its sole
discretion. The repurchase price under the option, if exercised by the Company,
would include a cash payment of $4,500,000, the issuance of 1,000,000 stock
options at an option price of $5.00 per share with a five year term, and royalty
payments ranging from two percent to five percent of related sales.
Peregrine has entered into several license agreements in order to
acquire all of the rights which it deems necessary to proceed with its vascular
targeting agent technology. Under the terms of these agreements the Company must
make fixed payments as well as contingent payments which must be paid on the
earlier to occur of an event concerning the technology, e.g., commencement of a
Phase I Study, or a calendar date fixed by the agreements. When the Company or
its sublicensees (if any) are selling products using the licensed product,
royalties of up to ten percent (10%) must be paid pursuant to these license
agreements.
COMPETITION
The Company's competitive position is based on its proprietary
technology and know-how, U.S. patents covering the LYM Antibodies and its
collateral targeting agent technologies for therapy of human cancers. The
Company has a number of worldwide patents issued and pending. The Company
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plans to compete on the basis of the advantages of its technologies, the quality
of its products, and its commitment to research into innovative technologies.
Various other companies, many of which have larger financial resources
than the Company, are currently engaged in research and development of
monoclonal antibodies and in cancer prevention and treatment. However, none of
these companies have achieved market dominance. Nevertheless, there can be no
assurance that such companies, other companies or various other academic and
research institutions will not develop and market monoclonal antibody products
or other products to prevent or treat cancer prior to the introduction of, or in
competition with, the Company's present or future products. In addition, there
are many firms with established positions in the diagnostic and pharmaceutical
industries which may be better equipped than the Company to develop monoclonal
antibody technology or other products to prevent or treat cancer and to market
their products. Accordingly, the Company plans, whenever feasible, to enter into
joint venture relationships with these larger firms for the development and
marketing of specific products and technologies so that the Company's
competitive position might be enhanced.
The Company's first product is LYM-1 (Oncolym) which is a treatment for
intermediate and high grade Non-Hodgkins lymphoma. The Company's two principal
competitors for the Non-Hodgkins lymphoma market are Coulter Pharmaceutical,
Inc. and IDEC Pharmaceuticals Corporation, who are currently testing monoclonal
antibody based products for the low grade lymphoma market.
Coulter is developing a Non-Hodgkins lymphoma murine sub-class
monoclonal antibody treatment, known as "B-1 Therapy" which is currently in
Phase II/III clinical trials. The Coulter antibody targets the CD-20 antigen
which is found on B cells and is labeled with Iodine-131, a radioisotope.
Coulter is pursuing clinical development of its antibody for low-grade
Non-Hodgkins lymphomas.
IDEC is developing a Non-Hodgkins lymphoma monoclonal antibody which
targets the CD-20 antigen. This non-radiolabeled antibody is designed to
activate the patients' own immune system. IDEC completed its Phase III clinical
trials of this antibody and submitted BLA's to the FDA in February 1997. This
treatment is intended for relapsed low grade Non-Hodgkins lymphoma.
The Company believes that its product development programs will be
subject to significant competition from companies utilizing alternative
technologies as well as to increasing competition from companies that develop
and apply technologies similar to the Company's technologies. Other companies
may succeed in developing products earlier than the Company, obtaining approvals
for such products from the FDA more rapidly than the Company or developing
products that are safer and more effective than those under development or
proposed to be developed by the Company. There can be no assurance that research
and development by others will not render the Company's technology or potential
products obsolete or non-competitive or result in treatments superior to any
therapy developed by the Company, or that any therapy developed by the Company
will be preferred to any existing or newly developed technologies.
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and other
countries is a significant factor in the Company's ongoing research and
development activities and in the production and marketing of its products. The
amount of time and expense involved in obtaining necessary regulatory approval
depends upon the type of product. The procedure for obtaining FDA regulatory
approval for a new human pharmaceutical product, such as the LYM Antibodies,
TNT, VTA, and VEA, involves
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many steps, including laboratory testing of those products in animals to
determine safety, efficacy and potential toxicity, the filing with the FDA of a
Notice of Claimed Investigational Exemption for Use of a New Drug prior to the
initiation of clinical testing of regulated drug and biologic experimental
products, and clinical testing of those products in humans. The Company has
filed a Notice of Claimed Investigational Exemption for Use of a New Drug with
the FDA for the production of LYM-1 as a material intended for human use, but
has not filed such a Notice with respect to any other in vivo products. The
regulatory approval process is administered by the FDA's Center for Biologics
Research and Review and is similar to the process used for any new drug product
intended for human use.
The pre-marketing clinical testing program required for approval of a
new drug or biologic typically involves a three-phase process. Phase I consists
of testing for the safety and tolerance of the drug with a small group of
patients, and also yields preliminary information about the effectiveness of the
drug and dosage levels. Phase II involves testing for efficacy, determination of
optimal dosage and identification of possible side effects in a larger patient
group. Phase III clinical trials consists of additional testing for efficacy and
safety with an expanded patient group. After completion of clinical studies, a
Product License Application is submitted to the FDA for product marketing
approval and for licensing of the product manufacturing facilities. In
responding to such an application, the FDA could grant marketing approval,
request clarification of data contained in the application or require additional
testing prior to approval. The Company has not, to date, filed a Product License
Application for any therapeutic products.
If approval is obtained for the sale of such new drug, FDA regulations
will also apply to the manufacturing process and market activities for the
product and may require post-marketing testing and surveillance programs to
monitor the effects of the product. The FDA may withdraw product approvals if
compliance with regulatory standards, including labeling and advertising, is not
maintained or if unforeseen problems occur following initial marketing. The
National Institute of Health has issued guidelines applicable to the research,
development and production of biological products, such as the Company's
products. Other federal agencies and congressional committees have indicated an
interest in implementing further regulation of biotechnology applications. The
extent of future regulation cannot be predicted, but could affect the
manufacture, marketing and sale of the Company's products.
In addition, the Company is subject to regulation under state and
federal laws and regulations regarding occupational safety, laboratory
practices, the use and handling of radioactive isotopes, environmental
protection and hazardous substance control, and other regulations. The Company's
products may also be subject to import laws in other countries and food and drug
laws in various states in which the products are or may be sold and subject to
the export laws of the agencies of the United States government.
The Company believes that it is in compliance with all applicable laws
and regulations including those relating to the handling and disposal of
hazardous and toxic wastes.
PATENTS AND TRADE SECRETS
The Company has relied on the internal achievements of the Company, as
well as the direct sponsorship of university researchers, for development of its
basic technologies. The Company believes it will continue to learn, on a timely
basis, of advances in the biological sciences which might complement or enhance
its existing expertise. It intends to pursue opportunities to license its basic
technologies and any advancements or enhancements, as well as to pursue the
incorporation of its technologies in the development of its own products.
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The Company has applied for several patents either directly or as a
cosponsor/licensee. The Company treats particular variations in the production
of monoclonal antibodies and related technologies as trade secrets. Patent
protection may, however, be significant in the case of newly-developed
antibody-based technologies. The Company intends to pursue patent protection for
inventions related to antibody-based technologies that it cannot protect as
trade secrets. Techniclone, as licensee, cosponsored the patent applications for
the LYM Antibodies through its licensing agreements with Northwestern
University. United States Letters patents for LYM-1 and LYM-2 were issued in
February 1988.
The Company's TNT technologies are covered by a United States patent
issued in August 1989 for diagnostic and therapeutic monitoring, and by a United
States patent issued in May 1991 for all therapeutic applications. The foreign
counterparts of these patents have been issued by the European Patent Office and
are still pending in several Asian countries. A third patent application for TNT
imaging and therapeutic applications is pending in the United States.
For its Vasopermeation Enhancement Agents (VEA) technology, Techniclone
holds an exclusive world-wide license from the University of Southern California
(USC) that covers all uses of the Vasopermeation Enhancement technology and all
related patents that may issue. USC has filed patent applications covering the
Vasopermeation Enhancement technology in the United States, Europe, Japan,
Canada and Australia. The United States patent application was filed in October
1988 and is currently pending. This patent covers all aspects of attaching
vasoactive compounds to immunoreactive fragments for the purpose of enhancing
the uptake of therapeutic drugs or diagnostic agents. The European patent
application for Vasopermeation Enhancement was allowed in June 1995.
Techniclone's Modified Antibody Technology is covered by a U.S. patent
issued in March 1993. The European patent application for Modified Antibody
Technology was allowed in June 1996. Asian patent applications for Modified
Antibody Technology are pending as is a second United States patent application
covering further uses of the technology.
Through the acquisition of Peregrine Pharmaceuticals, Inc. in April
1997, the Company has gained access to numerous patents and patent applications
covering the field of vascular targeting. These technologies are licensed from
the University of Texas Southwestern Medical Center at Dallas, Texas, Beth
Israel Hospital, the Scripps Institute and Johnson & Johnson. These patents and
patent applications cover the following areas of vascular targeting:
(i) the generic concept of targeting the tumor vasculature;
(ii) the generic concept of clotting tumor blood vessels using human
coagulation proteins;
(iii) the generic concept of targeting complexes comprising a
protein that is produced by a cancer cell but acts on a tumor endothelial cell;
(iv) the use of targeting vascular endothelial growth factor (VEGF)
as a means to target a solid tumor; and
(v) most of the known ways to kill a tumor endothelial cell,
including the use of cytotoxic agents, radioisotopes and toxins.
In general, the patent position of a biotechnology firm is highly
uncertain and no consistent policy regarding the breadth of allowed claims has
emerged from the actions of the U.S. Patent Office with respect to biotechnology
patents. Accordingly, there can be no assurance that the Company's
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patents, if issued, will provide protection against competitors with similar
technology, nor can there be any assurance that such patents will not be
infringed upon or designed around by others.
International patents relating to biologics are numerous and there can
be no assurance that current and potential competitors have not filed or in the
future will not file patent applications or receive patents relating to products
or processes utilized or proposed to be used by the Company. In addition, there
is certain subject matter which is patentable in the United States and not
generally patentable outside of the United States. Statutory differences in
patentable subject matter may limit protection the Company can obtain on some of
its products outside of the United States. These and other issues may prevent
the Company from obtaining patent protection outside of the United States which
may have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company knows of no third party patents which are infringed by its
present activities or which would, without infringement or license, prevent the
pursuit of its business objectives. However, there can be no assurances that
such patents have not been or will not be issued and, if so, whether the Company
will be able to obtain licensing arrangements on reasonable terms.
The Company also intends to continue to rely upon trade secrets and
improvements, unpatented proprietary know-how, and continuing technological
innovation to develop and maintain its competitive position in research and
diagnostic products. To this end, the Company places restrictions in its
agreements with third parties which restrict their right to use and disclose any
of the Company's proprietary technology which they are licensed to use. In
addition, the Company has internal non-disclosure safeguards, including
confidentiality agreements with all of its employees. There can be no assurance
that others may not independently develop similar technology or that the
Company's secrecy will not be breached.
MANUFACTURING
RAW MATERIALS. The Company uses various common raw materials in the
manufacture of its products and in the development of its technologies. These
raw materials are generally available from several alternate distributors of
laboratory chemicals and supplies. The Company has not experienced any
significant difficulty in obtaining these raw materials and does not consider
raw material availability to be a significant factor in its business. The
Company uses purified materials with strict requirements for sterility and
pyrogenicity.
PRODUCTION
The Company's LYM-1 (Oncolym(TM)) antibody is produced for use in the
Phase II/III clinical trials at Techniclone's GMP pilot facility in Tustin,
California. The Company has commenced design efforts to expand this facility to
handle commercial production requirements. The Company will install additional
bioreactors and other equipment adequate to meet short term commercial demand of
its LYM-1 production. Centralized product testing and process controls in this
facility permit the Company to maintain uniformity and quality control of its
antibodies while utilizing economies of scale in its manufacturing processes.
Once the LYM-1 (Oncolym(TM)) antibody has passed stringent quality
control and outside testing, it is shipped to Oklahoma City, Oklahoma for
radiolabeling, (the process of attaching the radioactive agent, Iodine-131, to
the antibody). From the Oklahoma facility, the labeled LYM-1 (Oncolym(TM)) is
shipped overnight to the nuclear medicine department of medical centers and
hospitals for use in treating patients the next day.
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The Company has also constructed a pilot production facility for the
manufacturing of TNT antibody in Tustin, California. This facility is currently
being expanded and validated for FDA licensing of clinical trial production
material. This facility will be able to produce sufficient quantities of the TNT
antibody to supply to the European and United States clinical trial sites in
connection with the proposed Phase I clinical trials expected to commence in
late 1997 and in 1998.
MARKETING
The Company has begun Phase II/III testing in multi-center clinical
trials of the LYM-1 (Oncolym(TM)) antibody in late stage Non-Hodgkins lymphoma
patients. The clinical trials are being sponsored by Alpha at participating
medical centers including M.D. Anderson, The Cleveland Clinic, Cornell
University (N.Y.C.), George Washington University and the University of
Cincinnati. Following the completion of clinical trials, the Company expects
Alpha to file an application with the FDA to market LYM-1 (Oncolym(TM)) in the
United States.
On February 29, 1996, the Company entered into a Distribution Agreement
with Biotechnology Development, Ltd. ("BTD"), a limited partnership controlled
by Edward Legere, a director and a major shareholder of the Company, which
provides for BTD to acquire LYM-1 antibody technology marketing rights in
various foreign countries, not covered by the Alpha License Agreement and
provided for the right for BTD to assume marketing and distribution rights in
certain European countries from Alpha should it forfeit or relinquish its rights
under the Alpha Agreement. During fiscal 1997, the right to market and
distribute LYM-1 product in various European countries was forfeited by Alpha
and was assumed by BTD in accordance with the terms of the BTD Distribution
Agreement. Under the terms of the Distribution Agreement, the Company retains
all manufacturing rights to LYM-1 and will supply LYM-1 to BTD at preset prices.
Additionally, the Company has the right under an Option Agreement to repurchase
the marketing rights to LYM-1 through July 1998 at its sole discretion. The
repurchase price under the option, if exercised by the Company, would include a
cash payment of $4,500,000, the issuance of 1,000,000 stock options at an option
price of $5.00 per share with a five year term, and royalty payments ranging
from two percent to five percent of related sales.
EMPLOYEES
As of July 1, 1997, the Company employed 44 full-time employees, which
included 5 Ph.D. level persons, 28 technical and support employees, and 11
administrative employees. The Company believes its relationships with its
employees are good. The Company expects to add a significant number of new
employees during the year ending April, 30 1998 to expand its corporate
operations.
The foregoing contains forward-looking statements that involve risks
and uncertainties that could cause actual results to differ materially. See
"Additional Factors That May Affect Future Results" under Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
19
<PAGE> 20
ITEM 2. PROPERTIES
The Company's research and manufacturing operations are located in a
23,570 square foot Company-owned office and laboratory space at 14282 Franklin
Avenue, Tustin, California 92780-7017. The Company manufactures its LYM and TNT
Antibodies at this facility. During the year ended April 30, 1997, the Company
acquired land and a building located at 14272 Franklin Avenue, Tustin,
California 92780 from for a purchase price of $1,524,663. This 24,201 square
foot building is adjacent to the Company's existing building that was purchased
in April 1996. The Company makes combined monthly mortgage and common area
maintenance payments of approximately $13,000 for each building. Monthly rental
income from tenants is approximately $13,000.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings in which the Company is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to 1991, the Company was listed on NASDAQ. In 1991 the Company
was delisted because it did not meet the financial standards established by
NASDAQ. Prior to April 1, 1996, Techniclone's common stock was traded
intermittently in the over-the-counter market. Since April 1, 1996,
Techniclone's common stock has been traded on the NASDAQ Small Cap market. The
following table shows the high and low bid and asked prices for Techniclone's
common stock for each quarter in the last two fiscal years. Prices shown
represent quotations by dealers, without retail markup, markdown or commissions
and may not reflect actual transactions.
<TABLE>
<CAPTION>
Bid Asked
----------------- ------------------
Quarter ended: High Low High Low
- -------------- ---- ----- ---- -----
<S> <C> <C> <C> <C>
April 30, 1995 2.00 0.50 4.00 1.25
July 31, 1995 1.25 0.688 1.375 0.813
October 31, 1995 3.063 0.688 3.125 0.875
January 31, 1996 5.375 2.625 5.50 2.813
April 30, 1996 7.813 5.125 7.938 5.313
July 31, 1996 6.75 3.25 6.813 3.50
October 31, 1996 5.25 3.25 5.438 3.375
January 31, 1997 6.75 3.313 6.875 3.50
April 30, 1997 6.125 4.625 6.25 4.75
</TABLE>
As of July 1, 1997, the number of holders of record of the Company's
common stock was 5,756.
The Company has a limited operating history and only nominal revenues
to date. No dividends have been declared or paid by the Company. The Company
intends to employ all available funds for the development of its business and,
accordingly, does not intend to pay any cash dividends in the foreseeable
future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been extracted from the
consolidated financial statements of the Company for each of the five years in
the period ended April 30, 1997. The consolidated financial statements for each
of the five years in the period ended April 30, 1997 have been audited by the
Company's independent public accountants. These financial summaries should be
read in conjunction with the information contained for each of the three years
in the period ended April 30, 1997, included in the consolidated financial
statements and notes thereto, Management's Discussion and Analysis of Results of
Operations and Financial Condition, and other information provided elsewhere
herein.
21
<PAGE> 22
SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED APRIL 30,
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------- -------------
(As Restated) (As Restated)
<S> <C> <C> <C> <C> <C>
REVENUES
Net product sales and royalties $ 34,990 $ 4,400 $ -- $ 4,824 $ 26,632
Licensing fees ................ 120,000 56,375 7,265 3,000,000 --
Interest and other income ..... 13,773 8,591 126 138,499 319,709
------------ ------------ ------------ ------------ ------------
Total revenues ................ 168,763 69,366 7,391 3,143,323 346,341
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales ................. 9,670 1,680 -- 2,580 24,940
Research and development ...... 579,447 1,315,898 1,357,143 1,679,558 2,886,931
General and administrative ....
Unrelated entities ....... 453,200 914,142 547,133 947,816 3,046,873
Affiliates ............... 136,641 212,594 137,326 170,659 266,628
Interest ...................... 31,724 30,467 27,833 17,412 147,852
Purchased in-process research
and development ............. 4,849,591 27,154,402
------------ ------------ ------------ ------------ ------------
Total costs and expenses ...... 1,210,682 2,474,781 6,919,026 2,818,025 33,527,626
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) ............. $ (1,041,919) $ (2,405,415) $ (6,911,635) $ 325,298 $(33,181,285)
============ ============ ============ ============ ============
Net income (loss) before
preferred stock accretion and
dividends ................... $ (1,041,919) $ (2,405,415) $ (6,911,635) $ 325,298 $(33,181,285)
Preferred stock accretion and
dividends:
Accretion of Class B Preferred
Stock Discount .............. (5,327,495)
Imputed dividends for Class B
Convertible Preferred Stock . (560,467) (536,263)
Imputed dividends for Class C
Convertible Preferred Stock . (8,218)
------------ ------------ ------------ ------------ ------------
Net Loss Applicable to Common
Stock (Note 2) .............. $ (1,041,919) $ (2,405,415) $ (6,911,635) $ (5,562,664) $(33,725,766)
============ ============ ============ ============ ============
Weighted Average Shares
Outstanding (Note 2) ........ 12,211,176 13,563,829 15,794,811 18,466,359 21,429,858
============ ============ ============ ============ ============
Net Loss per Share (Note 2) ... $ (0.09) $ (0.18) $ (0.44) $ (0.30) $ (1.57)
============ ============ ============ ============ ============
</TABLE>
CONSOLIDATED BALANCE SHEET DATA
APRIL 30,
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------- -------------
(As Restated) (As Restated)
<S> <C> <C> <C> <C> <C>
Working Capital (deficit) .... $ (156,289) $ (499,059) $ (934,121) $ 7,460,514 $ 10,618,012
Total Assets ................. 951,660 848,036 856,657 10,775,757 18,701,470
Long-Term Debt ............... 302,131 258,500 258,500 987,032 1,970,065
Accumulated Deficit .......... (8,768,928) (11,174,343) (18,085,978) (23,648,642 (57,374,408)
Stockholders' Equity (Deficit) 314,381 (60,905) (600,441) 8,964,677 14,568,009
</TABLE>
- ----------------------
See footnote 12 to the consolidated financial statements for each of the three
years in the period ended April 30, 1997, for a description of the restatement
of the consolidated financial statements.
22
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Techniclone Corporation is engaged in research and development of new
technologies using monoclonal antibodies and the production of specific
antibodies with prospective research, diagnostic and therapeutic applications.
The Company's activities are primarily focused on innovative tumor targeting
systems that permit the destruction or treatment of cancerous tumors. As shown
in the accompanying consolidated financial statements, the Company incurred
losses during fiscal 1997 and 1995 and has an accumulated deficit at April 30,
1997.
GOING CONCERN
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
consolidated financial statements, the Company experienced a loss of
approximately $33,181,000, including a noncash charge aggregating approximately
$27,154,000 relating to the acquisition of Peregrine (purchased in-process
research and development), during the year ended April 30, 1997 and had an
accumulated deficit of approximately $57,374,000 at April 30, 1997. During the
fiscal year ended April 30, 1997, the Company received significant funding
through the issuance of preferred stock. As a result of the sale of the
preferred stock, the Company had a cash balance of approximately $12,229,000 at
April 30, 1997.
Historically, the Company has relied on third party and investor funds
to fund its operations and clinical trials and will need to receive additional
funds to fund future operations and clinical trials. Management expects to
receive additional funds from the sale of additional equity in the future. There
can be no assurances that this funding will be received. If the Company does not
receive additional funding, it will be forced to scale back operations and this
would have a material adverse effect on the Company. The Company's continuation
as a going concern is dependent on its ability to generate sufficient cash flow
to meet its obligations on a timely basis, to obtain additional financing as may
be required and, ultimately, to attain successful operations. Management
believes that the cash and cash equivalents aggregating approximately
$12,229,000 as of April 30, 1997 are sufficient to support the Company's
estimated operations and other cash needs through April 30, 1998.
YEAR ENDED APRIL 30, 1997 COMPARED TO YEAR ENDED APRIL 30, 1996
The Company incurred a net loss of approximately $33,181,000 for the
year ended April 30, 1997 as compared to the net income of approximately
$325,000 for the prior year ended April 30, 1996. The change from net income in
1996 to a net loss of approximately $33,181,000 for 1997 is primarily
attributable to a decrease in licensing fee revenue of approximately $3,000,000
and approximately $27,154,000 charged to earnings in connection with the
acquisition of the outstanding capital stock of Peregrine Pharmaceuticals, Inc.
The purchase price, including net liabilities assumed, aggregating approximately
$27,154,000 represents the amount paid for acquired technologies and related
intangible assets. The purchase price of the Peregrine acquisition has been
charged to operations, as of the effective date of the acquisition, as purchased
in-process research and development with a corresponding credit to additional
paid-in capital. The purchase price was charged to operations as Peregrine's
technologies have not reached technological feasibility and the technology had
no known future alternative uses other than the possibility for treating cancer
patients.
23
<PAGE> 24
The increase in the net loss is also attributable to an increase in
other costs and expenses of approximately $3,555,000 which amount is partially
offset by an increase in revenues, other than licensing fees, of approximately
$203,000. The increase in total costs and expenses is primarily attributable to
increases in activity by the Company associated with the expansion of its
facilities, expansion of clinical trial activities for the LYM-1 and TNT
antibody technologies and increases in administrative and operational personnel
in preparation for the scale-up of the manufacturing process for production of
the LYM-1 antibodies to be used in the Phase II/III clinical trials. The Company
expects to continue to incur significant expenses during the next fiscal year as
it further expands clinical trials for its LYM-1 and TNT antibody technologies.
Total revenues of approximately $346,000 for the year ended April 30,
1997 decreased approximately $2,797,000 (89%) compared to the total revenues of
approximately $3,143,000 for the prior year ended April 30, 1996. This decrease
resulted from a decrease in licensing fee revenue of $3,000,000, partially
offset by an increase in interest and other income of approximately $181,000 and
an approximate $22,000 increase in sales of antibodies and other products in
comparison to the prior year ended April 30, 1996. Rental income increased as a
result of the Company's purchase of a second building in October 1996, that is
partially leased to tenants. Interest income increased during the current year
due to increases in cash available for investment from the sale of Class B
Convertible Preferred Stock in December 1995. Management expects that rental
income will approximate $120,000 for the year ending April 30, 1998 and that
interest income will increase as a result of funds received from the sale of the
5% Adjustable Convertible Class C Preferred Stock in April 1997.
On April 25, 1997, the Company entered into a 5% Preferred Stock
Investment Agreement and a Registration Rights Agreement with eleven (11)
investors pursuant to which the Company sold 12,000 shares of 5% Adjustable
Convertible Class C Preferred Stock (the "Class C Stock") for an aggregate
purchase price of $12,000,000. In connection with the issuance of the Class C
Stock, the Company paid Cappello & Laffer Capital Corp., the placement agent, a
non-accountable expense allowance of $100,000 and a commission of $720,000
representing six percent of the purchase price of the Class C Stock, and issued
a warrant to purchase 1,200 shares of Class C Stock at $1,000 per share.
Commencing on September 26, 1997, the Class C Stock is convertible at
the option of the holder into a number of shares of common stock of the Company
determined by dividing $1,000 plus all accrued but unpaid dividends by the
Conversion Price. The Conversion Price is the average of the lowest trading
price of the Company's common stock for the five consecutive trading days ending
with the trading day prior to the conversion date reduced by 13 percent starting
on November 26, 1997, 20 percent starting on January 26, 1998, 22.5 percent
starting on March 26, 1998, 25 percent starting on May 26, 1998, 27 percent
starting on the July 26, 1998 and thereafter. At any time after March 24, 1998,
the Conversion Price will be the lower of the Conversion Price as calculated in
the preceding sentence or the average of the Closing Price of the Company's
common stock for the thirty (30) trading days including and immediately
preceding March 24, 1998 (the "Conversion Cap"). In addition to the common stock
issued upon conversion of the Class C Stock, warrants to purchase one-fourth of
the number of shares of common stock issued upon the conversion will be issued
to the converting investor. The warrants are exercisable at 110 percent of the
Conversion Cap through April 2002.
The holders of the Class C Stock do not have voting rights except as
provided under Delaware law.
The holders of the Class C Stock are entitled to receive dividends at
the rate of $50.00 per share per annum. The payment of the Class C dividend
commences on September 30, 1997 and
24
<PAGE> 25
thereafter is paid at the end of each calendar quarter. The dividends are to be
paid in Class C Stock valued at $1,000 per share (fractional shares to be paid
in cash) or, at the option of the Company with ten days advance notice to the
Holders of the Class C Stock, in cash. Subject to certain conditions contained
in the Certificate of Designation, the Class C Stock is subject to mandatory
redemption upon certain events as defined in the Certificate of Designation and
mandatory conversion at any time after April 25, 1998. The following events may
constitute a "redemption event": (i) if the Company's stock is suspended from
trading for ten trading days in any nine month period, (ii) the Registration
Statement required to be filed by the Company pursuant to the Registration
Rights Agreement has not been declared effective by the 180th day following the
Closing Date, or after being declared effective cannot be utilized by the
holders of the Class C Stock for more than 30 days in any twelve month period,
(iii) the Company fails after notice to remove any restrictive legend on any
conversion shares issued to a holder of Class C Stock, (iv) the Company fails to
issue shares of Common Stock to any holder of Class C Stock upon conversion, (v)
if Mr. Lon Stone shall cease to be an officer or director of the Company within
18 months of the Closing Date, or (vi) 50% or more of the Common Stock is
directly or indirectly owned or controlled by a single individual, entity or
their affiliates. From and after the date of a redemption event, each holder of
Class C Stock has the option to require the Company to purchase such holder's
shares of Class C Stock for an amount in cash equal to the "redemption amount"
as defined in the Certificate of Designation. The Company may in lieu of the
payment of the redemption amount issue Common Stock for the events specified in
items (i) and (ii) above where the delay or inability is caused by a stop order
threatened or issued or similar action taken by the SEC or its staff, or for
events specified in items (v) and (vi) above. Should a redemption event occur,
it is the Company's intention to redeem the Class C Stock through the issuance
of the Company's common stock.
The Company intends to use the proceeds of the offering for
continuation of the clinical trials of the LYM-1 (Oncolym(TM)) antibody, initial
clinical trials of the TNT antibody, pre-clinical development of the Company's
other products, construction of facilities and for general corporate and working
capital purposes.
On January 20, 1997, the Company entered into the Stock Exchange
Agreement with the stockholders of Peregrine pursuant to which the stockholders
of Peregrine agreed to exchange all of the issued and outstanding capital stock
of Peregrine for 5,000,000 shares of common stock of the Company. On April 24,
1997, the Company entered into the Amendment with the stockholders of Peregrine,
pursuant to which the Company agreed to amend certain provisions of the Stock
Exchange Agreement and to issue an additional 80,000 shares of its common stock
in exchange for all of the issued and outstanding capital stock of Peregrine as
set forth in the Amendment. The Amendment provides that the major shareholders
of Peregrine will have a one year lock-up on the sale of substantially all of
the Techniclone shares issued to them. The Amendment permits Sanderling to sell
up to 275,000 shares, Saunders to sell up to 275,000 shares, Jennifer Lobo to
sell up to 90,000 shares and Philip Thorpe to sell up to 50,000 shares during
the lock-up period. The Amendment also provides that the Company will sell
Sanderling $550,000 worth of its common stock at a purchase price of $3.82 per
share. The sale of stock to Sanderling was completed in July, 1997.
The purchase price for Peregrine was determined by arms-length
negotiation. Peregrine is a development stage enterprise with minimal assets. In
negotiating the purchase price, the Board of Directors of the Company and
Peregrine did not use a traditional valuation formula of book value or earnings
instead relying upon the prospective value to the Company of the technology
owned and being developed by Peregrine Although Peregrine had only expended
$2,600,000 directly related to obtaining technology rights, licenses and
development of its technologies through
25
<PAGE> 26
December 31, 1996, the technologies were considered very valuable to
Techniclone. The value of these technologies were due to the compatibility of
Peregrine's technologies with Techniclone's, adding a very important compliment
to Techniclone's array of drug therapies. In addition, with the technologies
that Peregrine possessed, the Company believed that Peregrine would be a
formidable competitor in the future and that the acquisition of Peregrine was
critical to Techniclone's future success. Peregrine is developing Vascular
Targeting Agents ("VTA's"). VTA's act by destroying the vasculature of solid
tumors. VTA's are multifunctional molecules that target the capillaries and
blood vessels of solid tumors. Once there, these agents block the flow of oxygen
and nutrients to the underlying tissue by creating a blood clot to the tumor.
Within hours of the clots formation, the tumor begins to die and necrotic
regions are formed. Since every tumor in excess of 2mm in size forms an
expanding vascular network during tumor growth, VTA's could be effective against
all types of solid tumors. After evaluating the technology, the Company's
Scientific Advisory Committee advised management that the Peregrine VTA's were
the only viable competition for the Company's TNT product. After development of
the VTA technology, the Company intends to use the VTA technology in conjunction
with TNT.
Due to the uncertainties of the development process and the specialized
nature of Peregrine's technologies, the Company is not able to estimate the
nature, amount and timing of the remaining efforts necessary to complete the
technology acquired from Peregrine into a commercially viable project. Prior to
approval by the FDA of any new drug product, the product must undergo several
preclinical and clinical trials and must demonstrate safety and efficacy levels
acceptable to the FDA. The technologies acquired from Peregrine are highly
specialized, and to the best of the Company's knowledge, there are no similar
technologies in the marketplace. Additionally, the Company has not completed the
development process for any of its products and therefore it is difficult to
base any estimates on historical costs. The Company has reviewed the drug
development process and costs for many other Companies and the timing ranges
from a couple of years to more than ten years with costs ranging from several
million dollars to several hundred million dollars.
All of the preconditions to the closing of the Stock Exchange
Agreement, as amended, were completed and the related agreements were signed on
April 24, 1997; therefore, the Company accounted for the transaction in the year
ended April 30, 1997. The approximate purchase price of $27,154,000 including
net liabilities assumed represents the amount paid for acquired technologies and
related intangible assets. The purchase price of the Peregrine acquisition has
been charged to operations, as of the effective date of the acquisition, as
purchased in-process research and development with a corresponding credit to
additional paid-in capital. The purchase price was charged to operations as
Peregrine's technologies have not reached technological feasibility and the
technology had no known future alternative uses other than the possibility for
treating cancer patients.
The Company has had no significant product sales revenue during the
year ended April 30, 1997; however the Company expects revenues to increase due
to the clinical trials of the LYM-1 (Oncolym(TM)) antibody.
The Company's total costs and expenses increased approximately
$30,710,000 for the year ended April 30, 1997 in comparison to the year ended
April 30, 1996. The majority of the increase of approximately $27,154,000
relates to purchased in-process research and development expense associated with
the purchase of the common stock of Peregrine in April 1997. The Company
acquired all of the outstanding stock of Peregrine in exchange for 5,080,000
shares of the Company's common stock and assumed net liabilities of
approximately $484,000. The purchase price of approximately $27,154,000 which
includes the fair value of the stock exchanged and the net liabilities assumed
was
26
<PAGE> 27
charged to operations as purchased in-process research and development on the
effective date of the acquisition as the related technologies have not reached
technological feasibility and the technology had no known future alternative
uses other than the possibility for treating cancer patients.
Cost of sales increased approximately $22,000 in comparison to the
prior year coinciding with increases in the sale of antibodies and other
products. Research and development expenses increased approximately $1,207,000
(or 72%) for the year ended April 30, 1997 in comparison to the year ended April
30, 1996. This increase in research and development expenses during the year
ended April 30, 1997 resulted from the Company's activities during the year
ended April 30, 1997 in conducting the Phase II/III clinical trials of the LYM-1
(Oncolym(TM)) antibody and the Company's activities in preparing for Phase I
clinical trials of the TNT antibody. During the year ended April 30, 1997, the
Company increased its TNT development costs by approximately $246,000, in
comparison to the prior year ended April 30, 1996. Also, during the year ended
April 30, 1997, research and development costs relating to the LYM-1
(Oncolym(TM)) antibody increased by approximately $961,000 due to an approximate
$654,000 increase in salaries and consulting fees related to clinical trial
support activities. Management anticipates research and development costs will
continue to increase as the LYM-1 Oncolym clinical trials continue and the
Company expands it efforts related to TNT clinical trials.
General and administrative expenses incurred by the Company increased
approximately $2,195,000 (or 196%) during the year ended April 30, 1997 in
comparison to the prior year ended April 30, 1996. The increase in general and
administrative expenses during the year ended April 30, 1997 resulted primarily
from increased administrative, payroll and consultant costs and expanded public
relations activities. Interest expense increased approximately $130,000 during
the year ended April 30, 1997 in comparison to the year ended April 30, 1996 due
to higher levels of interest bearing debt outstanding during the year as a
result of the purchase of the Company's facility in April 1996 and the purchase
of the adjacent facility in October 1996. Borrowings for each of the facilities
amounted to $1,020,000. Management believes that general and administrative
costs will increase during the year ending April 30, 1998.
YEAR ENDED APRIL 30, 1996 COMPARED TO YEAR ENDED APRIL 30, 1995
The Company's net income of approximately $325,000 for the year ended
April 30, 1996 represented an increase of approximately $7,237,000 compared to
the net loss of approximately $6,912,000 for the prior year ended April 30,
1995. This increase in the net income in the 1996 year was primarily
attributable to a $4,101,000 decrease in total costs and expenses and an
increase of $3,136,000 in total revenues. The decrease in total costs and
expenses was primarily attributable to a decease in an aggregate charge to
earnings of approximately $4,850,000 which occurred during the year ended April
30, 1995 (representing the excess of the purchase price over the net tangible
assets acquired or costs related to purchased in-process research and
development in connection with the acquisition of the remaining minority
interest of Cancer Biologics Incorporated ("CBI") by the Company.)
Total revenues for the year ended April 30, 1996 increased
approximately $3,136,000 compared to the total revenues of $7,000 for prior year
ended April 30, 1995. This increase resulted from increases in sales of
antibodies and other products of approximately $4,800, licensing fee revenue of
$2,993,000 and interest income of approximately $138,000, in comparison to the
prior year ended April 30, 1995. Licensing fee revenues increased during the
year ended April 30, 1996 primarily from the result of an increase in licensing
fees from Biotechnology Development Ltd. relating to the Company's LYM-1
(Oncolym(TM)) antibody. On February 29, 1996 the Company entered into a
27
<PAGE> 28
Distribution Agreement with Biotechnology Development, Ltd. ("BTD"), a limited
partnership controlled by a member of the Board of Directors of the Company and
a major shareholder of the Company, which provides for BTD to acquire the LYM
antibody technology marketing rights for certain European countries and other
geographic areas not covered by its existing license agreement with Alpha
Therapeutic Corporation in exchange for the payment of $3,000,000 by BTD to the
Company. Under the terms of the Distribution Agreement, the Company retains all
manufacturing rights to the LYM antibodies and will supply the LYM antibodies to
BTD at preset prices. Additionally, the Company has the option under an Option
Agreement to repurchase the marketing rights to the LYM antibodies for a thirty
month period. The repurchase price, if repurchase is elected by the Company at
its sole discretion, includes a combination of cash, stock options and royalty
payments to be made to BTD, the amount of which depends on when the repurchase
option is elected by the Company.
On December 27, 1995, the Company issued 7,700 shares of newly created
Class B Convertible Preferred Stock, at a price of $1,000 per share, and on
December 29, 1995 issued an additional 500 shares of Class B Convertible
Preferred Stock, at a price of $1,000 per share, for an aggregate issuance
consideration of $8,200,000 to sixteen (16) offshore investors pursuant to
Regulation S promulgated under the Securities Act of 1933. The Class B
Convertible Preferred Stock is non-voting. The Class B Convertible Preferred
Stock is convertible into common stock of the Company. Additionally, the Class B
Convertible Preferred Stock has a liquidation preference over other classes of
the Company's stock. This liquidation preference is $1,000 per share of Class B
Convertible Preferred Stock plus 10% per annum pro-rated through any liquidation
date. The Company received $7,137,544 in net proceeds from the sale of the Class
B Convertible Preferred Stock after payment of offering commissions and expenses
and legal fees. In connection with the placement of the Class B Preferred Stock,
the Company paid to Swartz Investments, Inc., commissions of $656,000 and a
non-accountable expense allowance of $246,000. In addition, the Company issued
to Swartz Investments, Inc. two five year warrants to purchase an aggregate of
267,210 shares of the Company's common stock at an exercise price of $3.06875.
The common stock issuable on exercise of the warrant and on conversion of the
Class B Convertible Preferred Stock (if not otherwise freely tradable) is
subject to registration pursuant to a Registration Rights Agreement.
The Company's total costs and expenses decreased approximately
$4,101,000 (or 59%) for the year ended April 30, 1996 in comparison to the year
ended April 30, 1995. Cost of sales increased approximately $3,000 in comparison
to the prior year and sales of antibodies and other products increased
approximately $3,000. Research and development expenses increased approximately
$454,000 (or 37%) for the year ended April 30, 1996 in comparison to the year
ended April 30, 1995. This increase in research and development expenses during
the year ended April 30, 1996 resulted from the Company's activities during the
year ended April 30, 1996 in preparing for the Phase II/III clinical trials of
the LYM-1 antibody. During the year ended April 30, 1996, the Company increased
its TNT development costs by approximately $63,000, in comparison to the prior
year ended April 30, 1995. Also, during the year ended April 30, 1996, research
and development costs relating to the LYM-1 (Oncolym(TM)) antibody increased by
approximately $391,000 due to an approximate $286,000 increase in salaries and
related costs for clinical trial preparation and an approximate $105,000
increase in expenses incurred in supporting the efforts of Mills
Biopharmaceuticals, Inc. ("MBI") to complete and obtain Nuclear Regulatory
Commission licensing for its Oklahoma LYM-1 (Oncolym(TM)) antibody labeling
facility. Management anticipates the Company will have additional capital
requirements and expenses related to development and clinical trials of its
antibodies.
28
<PAGE> 29
General and administrative expenses incurred by the Company increased
approximately $434,000 (or 63%) during the year ended April 30, 1996 in
comparison to the prior year ended April 30, 1995. The increase in general and
administrative expenses during the year ended April 30, 1996 resulted primarily
from increased administrative, payroll and consulting costs associated with
clinical trial preparation and expanded public relations activities. Interest
expense decreased approximately $10,000 during the year ended April 30, 1996 in
comparison to the year ended April 30, 1995 due to lower levels of interest
bearing debt outstanding during the year.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1997, the Company had approximately $12,589,000 in cash,
investments and receivables and working capital of approximately $10,618,000.
The Company raised net proceeds of approximately $273,000 from the sale of
common stock and net proceeds of approximately $11,069,000 from the sale of the
Class C Preferred Stock during the year ended April 30, 1997.
The Company entered into two separate promissory notes aggregating
$2,047,000 at April 30, 1997 (the "Notes"). The Notes were issued during fiscal
years 1996 and 1997 in connection with the acquisition of its facility located
at 14282 Franklin Avenue, Tustin, California and the adjacent facility located
at 14272 Franklin Avenue, Tustin, California. The Notes are secured by Deeds of
Trust, Assignments of Leases and Rents and Commercial Security Agreements, which
pledge all of the assets of the Company. The Notes provide for aggregate monthly
payments of $21,470 per month including interest. The Notes bear interest at
LIBOR plus 4.250 percent. Pursuant to the terms of the Notes the interest cannot
be less than 9.5% nor greater than 14.5%. The interest rate at April 30, 1997
was 9.5%.
The Company has experienced negative cash flows from operations since
its inception and expects negative cash flow to continue in the foreseeable
future. The Company expects that negative cash flow will increase, as the
Company increases its activities associated with, the production of the LYM-1
antibody for Phase III trials, increased research development and clinical trial
costs associated with the Company's collateral targeting agents, (TNT, VTA and
VEA) and other products, expansion of its manufacturing and administrative
facilities and increased personnel requirements. As a result of increased
expenditure of funds, the Company believes that it will be necessary to raise
additional capital to continue operations, continue its research and development
efforts and to provide for future clinical trials.
The Company is discussing the possibility of raising additional funds
with various investment banking firms and private investors and is pursuing
potential licensors for certain of its products. However, as of April 30, 1997,
the Company had not entered into any firm commitments for additional funds or
new licensing arrangements and there can be no assurances that the Company will
be successful in raising such funds or negotiating licensing arrangements on
terms acceptable to it or at all. The Company believes that the cash on hand at
April 30, 1997, will be sufficient to meet it's obligations and to continue
operations through at least April 30, 1998.
NEW ACCOUNTING STANDARDS
During fiscal year 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The adoption of
SFAS No. 121 did not have a significant impact on the Company's financial
position or results of operations. In accordance with SFAS No. 121, long-lived
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<PAGE> 30
assets to be held are reviewed for events or changes in circumstances, which
indicate that their carrying value may not be recoverable.
The Company also adopted SFAS No. 123, "Accounting for Stock-Based
Compensation" during fiscal year 1997. The new standard defines a fair value
method of accounting for stock option and other equity instruments. Under the
fair value method, compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the service period, which is
usually the vesting period. Pursuant to SFAS No. 123, the Company has elected to
continue to use Accounting Principles Board Opinion No. 25 for measurement of
employee stock based transactions and provide pro forma information as if the
employee stock based transactions occurring subsequent to April 30, 1995, had
been accounted for on the fair value method (See Note 8 to the Consolidated
Financial Statements).
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share". Under SFAS No. 128, the Company will be required
to disclose basic earnings (loss) per share and diluted earnings (loss) per
share for all periods for which an income statement is presented. The Company
will be required to adopt this standard for the period ending January 31, 1998.
The Company believes the adoption of this standard will have no effect on the
basic or diluted earnings per share for periods in which the company incurs
losses, will result in an increase in basic earnings per share as compared with
primary earnings per share in periods with income and will have no effect on the
fully diluted earnings per share in periods with income.
CAPITAL COMMITMENTS
At April 30, 1997, the Company had commitments to acquire additional
assets of approximately $783,000 to expand its office and production facilities
and to purchase equipment necessary for the increased production of LYM-1. The
funds to fulfill these commitments will be obtained through available working
capital and/or through capital equipment financing that may be obtained in the
future.
The Company has an agreement with an unrelated entity to advance funds
to cover substantially all operating expenses of the entity and to purchase
certain property and equipment for the entity's operations in exchange for the
entity providing radiolabeling services for the Company. The radiolabeling
services consist of attaching radioactive isotopes to the Company's LYM-1
antibodies prior to product shipment for the LYM-1 clinical trials. The
agreement provides for repayment of advances from future revenues of the entity
receivable through the discounting of radiolabeling services. Due to the
uncertainty of recoverability of the advances made for operations, the operating
advances have been expensed as incurred. Under the agreement, approximately
$118,000, $227,000 and $246,000 were advanced and expensed as research and
development in fiscal 1995, 1996 and 1997, respectively, of which $13,950 was
offset against radio-labeling purchases in fiscal 1997. Additionally, as of
April 30, 1997, the Company has purchased equipment with an aggregate cost of
approximately $289,000 and net book value of approximately $76,000 for use by
the unrelated entity. Should the Company discontinue use of this entity for its
radiolabeling services, the entity would be required to purchase the equipment
at its then carrying value or return the equipment to Techniclone. The agreement
is cancelable by either party upon sixty days notice.
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ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
FUTURE OPERATING RESULTS. Future operating results may be impacted by a
number of factors that could cause actual results to differ materially from
those stated herein. These factors include worldwide economic and political
conditions, industry specific factors, the Company's ability to maintain access
to external financing sources and its financial liquidity, the Company's ability
to timely develop and produce commercially viable products at competitive
prices, the availability and cost of components of those products, and the
Company's ability to manage expense levels.
EARLY STAGE OF DEVELOPMENT. Since its inception, the Company has been
engaged in the development of drugs and related therapies for the treatment of
people with cancer. The Company's product candidates are generally in early
stages of development, with only one in clinical trials. Revenues from product
sales have been insignificant and there have been no revenues from product
royalties. Additionally, products resulting from the Company's research and
development efforts, if any, are not expected to be available commercially for
at least the next year. No assurance can be given that the Company's product
development efforts, including clinical trials, will be successful, that
required regulatory approvals for the indications being studied can be obtained,
that its products can be manufactured at acceptable cost and with appropriate
quality or that any approved products can be successfully marketed.
NEED FOR ADDITIONAL CAPITAL. At April 30, 1997, the Company had
approximately $12,229,000 in cash. It has significant commitments for
expenditures for building improvements, equipment, furniture and fixtures and
expects these expenditures to increase in the future. The Company has
experienced negative cash flows from operations since its inception and expects
the negative cash flow from operations to continue for the foreseeable future.
The Company expects that the monthly negative cash flow will increase as a
result of increased activities with the Phase II/III clinical trials for LYM-1
(Oncolym(TM)) and as a result of significantly increased research, development
and clinical trial costs associated with the Company's other products, including
Tumor Necrosis Therapy ("TNT") and Vascular Targeting Agent ("VTA"). As a result
of the increased expenditure of funds, the Company believes that it will be
necessary for the Company to raise additional capital to sustain research and
development and provide for future clinical trials. The Company must raise
additional equity funds in order to continue its operations until it is able to
generate sufficient additional revenue from the sale and/or licensing of its
products. There can be no assurance that the Company will be successful in
raising such funds on terms acceptable to it or at all, or that sufficient
additional capital will be raised to research and develop the Company's
additional products. The Company is discussing the possibility of raising
additional funds with various investment banking firms and private investors,
but as of April 30, 1997, the Company had not entered into any firm commitments
for additional funds. If the initial results from the Phase II/III clinical
trials of LYM-1 (Oncolym(TM)) are poor, then management believes that such
results will have a material adverse effect upon the Company's ability to raise
additional capital, which will affect the Company's ability to continue a
full-scale research and development effort for its antibody technologies. The
Company's future success is highly dependent upon its continued access to
sources of financing which it believes are necessary for the continued growth of
the Company. In the event the Company is unable to maintain access to its
existing financing sources, or obtain other sources of financing there would be
a material adverse effect on the Company's business, financial position and
results of operations.
ANTICIPATED FUTURE LOSSES. The Company has experienced significant
losses since inception. As of April 30, 1997, the Company's accumulated deficit
was approximately $57,000,000. The
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Company expects to incur significant additional operating losses in the future
and expects cumulative losses to increase substantially due to expanded research
and development efforts, preclinical studies and clinical trials and development
of manufacturing, marketing and sales capabilities. The Company expects that
losses will fluctuate from quarter to quarter and that such fluctuations may be
substantial. All of the Company's products are in development in preclinical
studies and clinical trials, and significant revenues have not been generated
from product sales. To achieve and sustain profitable operations, the Company,
alone or with others, must develop successfully, obtain regulatory approval for,
manufacture, introduce, market and sell its products. The time frame necessary
to achieve market success is long and uncertain. The Company does not expect to
generate product revenues for at least the next few years. There can be no
assurance that the Company will ever generate sufficient product revenues to
become profitable or to sustain profitability.
COMPETITION. The biotechnology industry is intensely competitive and
changing rapidly. Substantially all of the Company's existing competitors have
greater financial resources, larger technical staffs, and larger research
budgets than the Company. There can be no assurance that these competitors will
not be able to expend resources to develop their products prior to the Company's
product being granted approval for marketing by the U.S. Food and Drug
Administration. There can be no assurance that the Company will be able to
compete successfully or that competition will not have a material adverse effect
on the Company's results of operations.
TECHNOLOGY. The Company's future success will depend significantly upon
its ability to develop and test workable products for which the Company will
seek FDA approval to market to certain defined groups. A significant risk
remains as to the technological performance and commercial success of the
Company's technology and products. The products currently under development by
the Company will require significant additional laboratory and clinical testing
and investment over the foreseeable future. The significant research,
development, and testing activities, together with the resulting increases in
associated expenses, are expected to result in operating losses for the
foreseeable future. Although the Company is optimistic that it will be able to
successfully complete development of one or more of its products, there can be
no assurance that (i) the Company's research and development activities will be
successful, or that any proposed products will prove to be effective in clinical
trials; that (ii) the Company will be able to obtain all necessary governmental
clearances and approvals to market its products; (iii) that such proposed
products will prove to be commercially viable or successfully marketed; or (iv)
that the Company will ever achieve significant revenues or profitable
operations. In addition, the Company may encounter unanticipated problems,
including development, manufacturing, distribution and marketing difficulties.
The failure to adequately address such difficulties could have a material
adverse effect on the Company's prospects.
CLINICAL TRIALS. The clinical trial for the Company's LYM-1 antibody is
being conducted by Alpha and as a result the Company has limited control over
the LYM-1 clinical trial. The ability of the Company to conduct and complete its
ongoing and planned clinical trials in a timely manner is subject to a number of
uncertainties and risks, including the rate at which patients can be accrued in
each clinical trial, the Company's ability to obtain necessary regulatory
approvals in each clinical trial and the occurrence of unanticipated adverse
events. Any suspension or delay of any of the clinical trials could have a
material adverse effect on the Company's business, financial condition and
results of operation.
REGULATION. The Company's products are subject to extensive government
regulation in the United States by federal, state and local agencies including
principally the Food and Drug Administration. If drug products are marketed
abroad, they are also subject to extensive regulation by foreign governments.
The process of obtaining and maintaining FDA and other required regulatory
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<PAGE> 33
approvals for the Company's products is lengthy, expensive and uncertain. There
can be no assurance that the Company can obtain FDA or other regulatory approval
for the marketing of its products or that changes in existing regulations or the
adoption of new regulations will not occur which will adversely affect the
Company. There can be no assurance that any clearances or approvals, once
obtained, will not be withdrawn or that compliance with other regulatory
requirements can be maintained. Failure to comply with FDA and other regulatory
requirements can result in sanctions being imposed, including without limitation
warning letters, fines, product recalls, seizures, injunctions and withdrawals
of previously approved applications. There can be no assurance that the Company
will be able to comply with applicable regulations and other FDA regulatory
requirements. Such failure could have a material adverse effect on the Company's
business and financial condition and results of operations.
MANUFACTURING REGULATIONS. Manufacturers of drugs and biologics also
are required to comply with the applicable FDA good manufacturing practice
("GMP") regulations, which include requirements relating to quality control and
quality assurance as well as the corresponding maintenance of records and
documentation. Manufacturing facilities are subject to inspection by the FDA,
including unannounced inspection, and must be licensed before they can be used
in commercial manufacturing of the Company's products. There can be no assurance
that the Company or its suppliers will be able to comply with the applicable GMP
regulations and other FDA regulatory requirements. Such failure could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RADIOLABELING SERVICES. The Company procures its radiolabeling services
from Mills Biopharmaceuticals, Inc. The Company is negotiating with several
other companies to provide radiolabeling services for its antibodies and expects
to have additional antibody radiolabeling sources in late-1997. There can be no
assurance that contracts with these additional suppliers will be entered into in
a timely manner, if at all, or that governmental clearances will be provided in
a timely manner, if at all, and that clinical trials will not be delayed or
disrupted as a result. While the Company plans to develop additional suppliers
of these services, it expects to rely on its current suppliers for all or a
significant portion of its requirements for the LYM-1 antibody for the
foreseeable future. Radiolabeled antibody cannot be stockpiled against future
shortages due to the eight-day half-life of the I-131 radioisotope. Accordingly,
any change in the Company's existing or planned contractual relationships with,
or interruption in supply from, its third-party suppliers could adversely affect
the Company's ability to complete its ongoing clinical trials and to market the
LYM-1 antibody, if approved. Any such change or interruption would have a
material adverse effect on the Company's business, financial condition and
results of operators.
UNCERTAINTY OF MARKET ACCEPTANCE. Even if the Company's products are
approved for marketing by the FDA and other regulatory authorities, there can be
no assurance that the Company's products will be commercially successful. If the
Company's most advanced product, LYM-1 (Oncolym(TM)) is approved, it would
represent a significant departure from currently approved methods of treatment
for Non-Hodgkin's lymphoma. Accordingly, LYM-1 (Oncolym(TM)) may experience
under-utilization by oncologists and hematologists who are unfamiliar with the
application of LYM-1 (Oncolym(TM)) in the treatment of Non-Hodgkin's lymphoma.
As with any new drug, doctors may be inclined to continue to treat patients with
conventional therapies, in this case chemotherapy. Market acceptance also could
be affected by the availability of third party reimbursement. Failure of LYM-1
(Oncolym(TM)) to achieve market acceptance would have a material adverse effect
on the Company's business, financial condition and results of operations.
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PRODUCT LIABILITY. The manufacture and sale of human therapeutic
products involve an inherent risk of product liability claims. The Company has
only limited product liability insurance. There can be no assurance that the
Company will be able to maintain existing insurance or obtain additional product
liability insurance on acceptable terms or with adequate coverage against
potential liabilities. Such insurance is expensive, difficult to obtain and may
not be available in the future on acceptable terms, if at all. An inability to
obtain sufficient insurance coverage on reasonable terms or to otherwise protect
against potential product liability claims brought against the Company in excess
of its insurance coverage, if any, or a product recall could have a material
adverse effect upon the Company's business, financial condition and results of
operations.
HEALTH CARE REFORM AND THIRD-PARTY REIMBURSEMENT. Political, economic
and regulatory influences are subjecting the health care industry in the United
States to fundamental change. Recent initiatives to reduce the federal deficit
and to reform health care delivery are increasing cost-containment efforts. The
Company anticipates that Congress, state legislatures and the private sector
will continue to review and assess alternative benefits, controls on health care
spending through limitations on the growth of private health insurance premiums
and Medicare and Medicaid spending, the creation of large insurance purchasing
groups, price controls on pharmaceuticals and other fundamental changes to the
health care delivery system. Any such proposed or actual changes could affect
the Company's ultimate profitability. Legislative debate is expected to continue
in the future, and market forces are expected to drive reductions of health care
costs. The Company cannot predict what impact the adoption of any federal or
state health care reform measures or future private sector reforms may have on
its business.
EARTHQUAKE RISKS. The Company's corporate and research facilities where
the majority of its research and development activities are conducted, are
located near major earthquake faults which have experienced earthquakes in the
past. The Company does not carry earthquake insurance on its facility due to its
prohibitive cost and limited available coverages. In the event of a major
earthquake or other disaster affecting the Company's facilities, the operations
and operating results of the Company could be adversely affected.
STOCK PRICE FLUCTUATIONS AND LIMITED TRADING VOLUME. The Company's
participation in the highly competitive biotechnology industry often results in
significant volatility in the Company's common stock price. Also, at times there
is a limited trading volume in the Company's stock. This volatility in the stock
price and limited trading volume are significant risks investors should
consider.
FORWARD-LOOKING STATEMENTS. This Annual Report on Form 10-K contains
certain forward-looking statements that are based on current expectations. In
light of the important factors that can materially affect results, including
those set forth above and elsewhere in this Form 10-K, the inclusion of
forward-looking information herein should not be regarded as a representation by
the Company or any other person that the objectives or plans of the Company will
be achieved. The Company may encounter competitive, technological, financial and
business challenges making it more difficult than expected to continue to
develop, market and manufacture its products; competitive conditions within the
industry may change adversely; upon development of the Company's products,
demand for the Company's products may weaken; the market may not accept the
Company's products; the Company may be unable to retain existing key management
personnel; the Company's forecasts may not accurately anticipate market demand;
and there may be other material adverse changes in the Company's operations or
business. Certain important factors affecting the forward looking statements
made herein include, but are not limited to (i) accurately forecasting capital
expenditures, and (ii) obtaining new sources of external financing prior to the
expiration of existing support arrangements
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or capital. Assumptions relating to budgeting, marketing, product development
and other management decisions are subjective in many respects and thus
susceptible to interpretations and periodic revisions based on actual experience
and business developments, the impact of which may cause the Company to alter
its capital expenditure or other budgets, which may in turn affect the Company's
financial position and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements included in this Report
at pages F-1 through F-25.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except for information concerning the Company's executive officers
which is included in Part I of this Amended Annual Report on Form 10-K, the
information required by Item 10 is incorporated herein by reference from the
Company's definitive proxy statement for the Company's 1997 annual shareholders'
meeting.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
from the Company's definitive proxy statement for the Company's 1997 annual
shareholders' meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
from the Company's definitive proxy statement for the Company's 1997 annual
meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended April 30, 1997, the Company incurred and
paid expenses of $62,000 to Kanady & Moding C.P.A.'s, an accounting firm in
which Mr. William V. Moding, an executive officer and retiring director of the
Company, is a partner, for accounting and consulting services rendered to the
Company. Similar expenses in the amount of $89,000 and $60,000 were incurred and
paid to Mr. Moding's firm during the fiscal year ended April 30, 1996 and 1995,
respectively. On October 1, 1996 Mr. Moding commenced full-time employment with
the Company and Mr. Moding's accounting firm no longer renders services to the
Company.
During the year ended April 30, 1997, the Company incurred and paid
expenses of $343,768 to Stradling, Yocca, Carlson & Rauth, a law firm in which
Mr. R .C. Shepard, an officer and a retiring director of the Company, is an
officer and stockholder which renders legal services to the Company. Similar
expenses in the amount of $145,781 and $89,333 were incurred to Mr. Shepard's
firm during the year ended April 30, 1996 and 1995, respectively.
On January 17, 1997, the Company loaned Lon H. Stone, the Chairman of
the Board of Directors and the Chief Executive Officer of the Company, $350,000
pursuant to a Promissory Note. The highest loan balance during the year ended
April 30, 1997 was $356,914 and the loan balance at September 30, 1997 was
$367,172 (the principal of $350,000; plus interest of $17,172). The purpose of
the loan was to provide Mr. Stone with the additional cash necessary to purchase
a new residence. The Compensation Committee which is comprised of two outside
directors, Carmelo J. Santoro and Edward J. Legere, together with the remainder
of the Board of Directors determined that it was in the best interests of the
Company to loan Mr. Stone the money. After determining that such loan was in the
best interests of the Company, the Board of Directors, with Lon Stone
abstaining, unanimously approved the loan to Lon Stone. The Note is
collateralized by real estate and bears interest at seven percent (7%) per
annum. The Note is due and payable on January 31, 2000.
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On April 30, 1997, the Company requested that Mr. Moding exchange
$203,500 of non-interest bearing outstanding notes which Mr. Moding had executed
and delivered to the Company, to pay for options exercised under the Company's
stock option plans. The Company's option plans, which have been approved by
shareholders, provide that a purchaser's promissory note may be used to exercise
options. The original notes were executed and delivered by Mr. Moding in
connection with the exercise of options. At the Company's request, Mr. Moding
agreed to, and did, exchange two non-interest bearing notes with maturity dates
at April 30, 1999, for two new notes aggregating $203,500. The new notes are
secured by both personal assets of Mr. Moding and 204,000 shares of the Common
Stock of the Company held by Mr. Moding. The new notes bear interest at six
percent (6%) per annum and are payable in 7 equal annual installments beginning
April 30, 1998. At September 30, 1997, the outstanding balance of the new notes
was $208,618.
On April 30, 1997, the Company requested that Mr. Shepard exchange
$203,083 (the highest amount outstanding during the fiscal year ended April 30,
1997) of non-interest bearing outstanding notes which Mr. Shepard had executed
and delivered to the Company, to pay for options exercised under the Company's
stock option plans. The Company's option plans, which have been approved by
shareholders, provide that a purchaser's promissory note may be used to exercise
options. The original notes were executed and delivered by Mr. Shepard in
connection with the exercise of options. At the Company's request, Mr. Shepard
agreed to, and did, exchange two non-interest bearing notes with maturity dates
of April 30, 1999, for two new notes aggregating $203,083. The new notes are
secured by personal assets of Mr. Shepard and 203,000 shares of the Common Stock
of the Company held by Mr. Shepard. The new notes bear interest at six percent
(6%) per annum and are payable in 7 equal annual installments beginning April
30, 1998. At September 30, 1997 the outstanding balance of the new notes was
$208,190.
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PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORT ON
FORM 8-K
(a) (1) Consolidated Financial Statements
The financial statements and schedules listed below are filed as part
of this Report:
<TABLE>
<CAPTION>
Page
----------
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheets as of F-2 & F-3
April 30, 1997 and 1996 (Restated)
Consolidated Statements of Operations F-4
for each of the three years in the period
ended April 30, 1997 (Restated)
Consolidated Statements of Stockholders' F-5
Equity (Deficit) for each of the three years
in the period ended April 30, 1997 (Restated)
Consolidated Statements of Cash Flows F-6 & F-7
for each of the three years in the period
ended April 30, 1997
Notes to Consolidated Financial Statements (Restated) F-8 - F-24
(2) Financial Statement Schedules
II Valuation and Qualifying Accounts F-25
(3) Exhibits
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
------ ----------- --------
<S> <C> <C>
3.1 Certificate of Incorporation of Techniclone Corporation, a
Delaware corporation (Incorporated by reference to Exhibit B to
the Company's 1996 Proxy Statement as filed with the Commission
on or about August 20, 1996)
3.2 Bylaws of Techniclone Corporation, a Delaware corporation
(Incorporated by reference to Exhibit C to the Company's 1996
Proxy Statement as filed with the Commission on or about August
20, 1996)
3.3 Certificate of Designation of 5% Adjustable Convertible Class C
Preferred Stock as filed with the Delaware Secretary of State on
April 23, 1997. (Incorporated by reference to Exhibit 3.1
contained in Registrant's Current Report on Form 8-K as filed
with the Commission on or about May 13, 1997)
4.1 Form of Certificate for Common Stock (Incorporated by reference
to the exhibit of the same number contained in Registrants'
Annual Report on Form 10-K for the year end April 30, 1988)
4.4 Form of Subscription Agreement entered into with Series B
Convertible Preferred Stock Subscribers (Incorporated by
reference to Exhibit 4.1 contained in Registrant's Report on
Form 8-K dated December 27, 1995, as filed with the Commission
on or about January 24, 1996)
4.5 Registration Rights Agreement dated December 27, 1995, by and
among Swartz Investments, Inc. and the holders of the
Registrant's Series B Convertible Preferred Stock (incorporated
by reference to Exhibit 4.2 contained in Registrant's Current
Report on Form 8-K dated December 27, 1995 as filed with the
Commission on or about January 24, 1996)
4.6 Warrant to Purchase Common Stock of Registrant issued to Swartz
Investments, Inc. (Incorporated by reference to Exhibit 4.3
contained in Registrant's Current Report on Form 8-K dated
December 27, 1995 as filed with the Commission on or about
January 24, 1996
4.7 5% Preferred Stock Investment Agreement between Registrant and
the Investors (Incorporated by reference to Exhibit 4.1
contained in Registrant's Current Report on Form 8-K as filed
with the Commission on or about May 13, 1997)
4.8 Registration Rights Agreement between the Registrant and the
Investors (Incorporated by reference to Exhibit 4.2 contained in
Registrant's Current Report on Form 8-K as filed with the
Commission on or about May 13, 1997)
</TABLE>
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<TABLE>
<S> <C> <C>
4.9 Form of Stock Purchase Warrant to be issued to the holders of
the Class C Preferred Stock upon conversion of the Class C
Preferred Stock (Incorporated by reference to Exhibit 4.3
contained in Registrant's Current Report on Form 8-K as filed
with the Commission on or about May 13, 1997)
10.22 1982 Stock Option Plan (Incorporated by reference to the exhibit
contained in Registrant's Registration Statement on Form S-8
(File No. 2-85628)
10.23 Incentive Stock Option, Nonqualified Stock Option and Restricted
Stock Purchase Plan - 1986 (Incorporated by reference to the
exhibit contained in Registrant's Registration Statement on Form
S-8 (File No. 33-15102)
10.24 Cancer Biologics Incorporated Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase Plan -
1987 (Incorporated by reference to the exhibit contained in
Registrant's Registration Statement on Form S-8 (File No.
33-8664)
10.25 Amendment to 1982 Stock Option Plan dated March 1, 1988
(Incorporated by reference to the exhibit of the same number
contained in Registrants' Annual Report on Form 10-K for the
year ended April 30, 1988)
10.26 Amendment to 1986 Stock Option Plan dated March 1, 1988
(Incorporated by reference to the exhibit of the same number
contained in Registrant's Annual Report on Form 10-K for the
year ended April 30, 1988)
10.31 Agreement dated February 5, 1996, between Cambridge Antibody
Technology, Ltd. and Registrant (Incorporated by reference to
Exhibit 10.1 contained in Registrant's Current Report on Form
8-K dated February 5, 1996, as filed with the Commission on or
about February 8, 1996)
10.32 Distribution Agreement dated February 29, 1996, between
Biotechnology Development, Ltd. and Registrant (Incorporated by
reference to Exhibit 10.1 contained in Registrant's Current
Report on Form 8-K dated February 29, 1996, as filed with the
Commission on or about March 7, 1996)
10.33 Option Agreement dated February 29, 1996, by and between
Biotechnology Development, Ltd. And Registrant (Incorporated by
reference to Exhibit 10.2 contained in Registrant's Current
Report on Form 8-K dated February 29, 1996, as filed with the
Commission on or about March 7, 1996)
10.34 Purchase Agreement for Real Property and Escrow Instructions
dated as of March 22, 1996, by and between TR Koll Tustin Tech
Corp. and Registrant (Incorporated by reference to Exhibit 10.1
contained in Registrant's Current Report on Form 8-K dated March
25, 1996, as filed with the Commission on or about April 5,
1996)
</TABLE>
40
<PAGE> 41
<TABLE>
<S> <C>
10.35 Incentive Stock Option and Nonqualified Stock Option Plan-1993
(Incorporated by reference to the exhibit contained in
Registrants' Registration Statement on Form S-8
(File No. 33-87662))
10.36 Promissory Note dated October 24, 1996 in the original principal
amount of $1,020,000 payable to Imperial Thrift and Loan
Association by Registrant (Incorporated by reference to Exhibit
10.1 to Registrants' Current Report on Form 8-K dated October
25, 1996)
10.37 Deed of Trust dated October 24, 1996 among Registrant and
Imperial Thrift and Loan Association (Incorporated by reference
to Exhibit 10.2 to Registrants' Current Report on Form 8-K dated
October 25, 1996)
10.38 Assignment of Lease and Rents dated October 24, 1996 between
Registrant and Imperial Thrift and Loan Association
(Incorporated by reference to Exhibit 10.3 on Registrants'
Current Report on Form 8-K dated October 25, 1996)
10.39 Commercial Security Agreement dated October 24, 1996 between
Imperial Thrift and Loan Association and Registrant
(Incorporated by reference to Exhibit 10.4 on Registrants'
Current Report on Form 8-K dated October 25, 1996)
10.40 1996 Stock Incentive Plan (Incorporated by reference to the exhibit
contained in Registrants' Registration Statement in form S-8 (File
No. 333-17513)
10.41 Stock Exchange Agreement dated as of January 15, 1997 among the
stockholders of Peregrine Pharmaceuticals, Inc. and Registrant
(Incorporated by reference to Exhibit 2.1 to Registrants'
Quarterly Report on Form 10-Q for the quarter ended January 31,
1997)
10.42 First Amendment to Stock Exchange Agreement among the
Stockholders of Peregrine Pharmaceuticals, Inc. and Registrant
(Incorporated by reference to Exhibit 2.1 contained in
Registrant's Current Report on Form 8-K as filed with the
Commission on or about May 12, 1997
11 Computation of Net Income (Loss) per share (As Restated)
21 Subsidiaries of Registrant
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
(i) Current Report on Form 8-K as filed with the Commission on
February 11, 1997 reporting the Company entering into the Stock
Exchange Agreement with the Stockholders of Peregrine
Pharmaceuticals, Inc.
(ii) Current Report on Form 8-K as filed with the Commission on
March 24, 1997 reporting the merger of Techniclone
International Corporation with and into Techniclone
Corporation.
41
<PAGE> 42
(iii) Current Report on Form 8-K as filed with the Commission on
April 25, 1997 reporting the Amendment to the Stock Exchange
Agreement between the Company and Peregrine Pharmaceuticals,
Inc. and the Class C Preferred Stock Financing.
42
<PAGE> 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
TECHNICLONE CORPORATION
Dated: October 12, 1997 By: /s/ LON H. STONE
------------------------------
Lon H. Stone, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ LON H. STONE Chairman of the Board, October 12, 1997
- -------------------------------- President, Chief Executive
Lon H. Stone Officer and Director (Principal
Executive Officer)
/s/ WILLIAM V. MODING Chief Financial Officer October 12, 1997
- -------------------------------- Secretary and Director
William V. Moding (Principal Financial and
Principal Accounting Officer)
/s/ RUDOLPH C. SHEPARD Assistant Secretary October 12, 1997
- -------------------------------- and Director
Rudolph C. Shepard
/s/ CLIVE R. TAYLOR, M.D., PH.D Director October 12, 1997
- --------------------------------
Clive R. Taylor, M.D., Ph.D.
Director October __, 1997
- --------------------------------
Edward Joseph Legere II
Director October __, 1997
- --------------------------------
Carmelo J. Santoro
</TABLE>
43
<PAGE> 44
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Techniclone Corporation:
We have audited the accompanying consolidated balance sheets of Techniclone
Corporation (the Company) as of April 30, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended April 30, 1997. Our audits
also included the financial statement schedule listed in the index at Item 14.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Techniclone Corporation as of April
30, 1997 and 1996, and the results of their operations and their cash flows for
each of the three years in the period ended April 30, 1997 in conformity with
generally accepted accounting principles. Also in our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 12, the consolidated financial statements as of April 30,
1997 and 1996 have been restated.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
May 23, 1997, except
Note 12, as to which the
date is September 24, 1997
F-1
<PAGE> 45
TECHNICLONE CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------------- -------------
(As Restated) (As Restated)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2) ........... $ 12,228,660 $ 4,179,313
Short-term investments (Note 2) .............. 3,898,888
Accounts receivable, net ..................... 33,748 95,146
Receivable from shareholders (Note 2) ........ 326,700
Inventories, net (Note 2) .................... 172,162 93,921
Prepaid expenses and other current assets ... 20,138 17,294
------------ ------------
Total current assets ................. 12,781,408 8,284,562
PROPERTY (Notes 2 and 4):
Land ......................................... 1,050,510 525,255
Buildings and improvements ................... 3,350,916 1,298,416
Laboratory equipment ......................... 1,579,300 1,139,663
Furniture and fixtures ....................... 396,225 78,155
------------ ------------
6,376,951 3,041,489
Less accumulated depreciation and amortization (1,038,619) (722,436)
------------ ------------
Property, net ................................ 5,338,332 2,319,053
OTHER ASSETS (Note 2):
Patents, net ................................. 178,815 166,585
Note receivable from officer and shareholder . 356,914
Other ........................................ 46,001 5,557
------------ ------------
Total other assets ................... 581,730 172,142
------------ ------------
$ 18,701,470 $ 10,775,757
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 46
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 1997 AND 1996 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------------- -------------
(As Restated) (As Restated)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 707,504 $ 230,144
Accrued legal and accounting fees (Note 10) 385,500 99,495
Accrued payroll and related costs 162,487 88,791
Accrued royalties and sponsored research (Note 6) 339,560 61,667
Reserve for contract losses (Note 2) 248,803 173,563
Accrued license termination fee (Note 6) 100,000 100,000
Accrued interest (Note 4) 72,844
Current portion of long-term debt (Note 4) 76,527 32,968
Other current liabilities (Note 5) 70,171 37,420
------------ ------------
Total current liabilities 2,163,396 824,048
LONG-TERM DEBT (Note 4) 1,970,065 987,032
COMMITMENTS (Notes 5 and 6)
STOCKHOLDERS' EQUITY (Notes 2, 3, 4, 6, 7 and 8):
Preferred stock - $.001 par value; authorized 5,000,000 shares:
Class B convertible preferred stock, shares outstanding - 1997,
2,200 shares; 1996, 6,800 shares (liquidation
preference of $2,497,151 at April 30, 1997) 2 7
Class C convertible preferred stock, shares outstanding - 1997,
12,000 shares; 1996, no shares (liquidation preference
of $12,008,218 at April 30, 1997) 12
Common stock - $.001 par value; authorized 50,000,000 shares;
outstanding - 1997, 27,248,652 shares;
1996, 20,048,014 shares 27,249 20,048
Additional paid-in capital (Note 12) 72,391,736 33,069,846
Accumulated deficit (Note 12) (57,374,408) (23,648,642)
------------ ------------
15,044,591 9,441,259
Less notes receivable from sale of common stock (476,582) (476,582)
------------ ------------
Total stockholders' equity 14,568,009 8,964,677
------------ ------------
$ 18,701,470 $ 10,775,757
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 47
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS RESTATED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
(As Restated) (As Restated) (As Restated)
<S> <C> <C> <C>
REVENUES (Notes 2 and 6):
Net product sales and royalties $ 26,632 $ 4,824 $ --
Licensing fees 3,000,000 7,265
Interest and other income 319,709 138,499 126
------------ ------------ ------------
Total revenues 346,341 3,143,323 7,391
COSTS AND EXPENSES (Notes 2, 3, 4,
5, 6, 8 and 10):
Cost of sales 24,940 2,580
Research and development 2,886,931 1,679,558 1,357,143
General and administrative:
Unrelated entities 3,046,873 947,816 547,133
Affiliates 266,628 170,659 137,326
Interest 147,852 17,412 27,833
Purchased in-process research and
development 27,154,402 4,849,591
------------ ------------ ------------
Total costs and expenses 33,527,626 2,818,025 6,919,026
------------ ------------ ------------
NET INCOME (LOSS) $(33,181,285) $ 325,298 $ (6,911,635)
============ ============ ============
Net income (loss) before preferred stock
accretion and dividends $(33,181,285) $ 325,298 $ (6,911,635)
Preferred stock accretion and dividends:
Accretion of Class B Preferred Stock
Discount (5,327,495)
Imputed dividends for Class B Convertible
Preferred Stock (536,263) (560,467)
Imputed dividends for Class C Convertible
Preferred Stock (8,218)
------------ ------------ ------------
Net Loss Applicable to Common Stock
(Note 2) $(33,725,766) $ (5,562,664) $ (6,911,635)
============ ============ ============
Weighted Average Shares Outstanding
(Note 2) 21,429,858 18,466,359 15,794,811
============ ============ ============
Net Loss per Share (Note 2) $ (1.57) $ (0.30) $ (0.44)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 48
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS RESTATED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOTES
RECEIVABLE NET
Preferred Stock Common Stock ADDITIONAL FROM SALE STOCKHOLDERS'
--------------- -------------------- PAID-IN ACCUMULATED OF COMMON EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK (DEFICIT)
------- ------ ----------- ------- ------------- ------------- --------- ------------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, May 1, 1994 10,000 $ 10 14,162,625 $14,163 $11,344,265 $ (11,174,343) $(245,000) $ (60,905)
Common stock issued for cash,
net of issuance costs of
$15,132 1,221,978 1,222 1,497,896 1,499,118
Common stock issued upon
conversion of preferred
stock (5,775) (6) 288,750 289 (283)
Common stock issued in
exchange for services 10,000 10 12,490 12,500
Common stock issued upon
exercise of options 6,223 6 10,884 10,890
Common stock and compensatory
options issued upon
acquisition of minority
interest in subsidiary
(Note 3) 1,079,333 1,079 5,080,094 (231,582) 4,849,591
Net loss (6,911,635) (6,911,635)
------ ---- ---------- ------- ----------- ------------ --------- ------------
BALANCES, April 30, 1995 4,225 4 16,768,909 16,769 17,945,346 (18,085,978) (476,582) (600,441)
Common stock issued for cash 1,770,396 1,770 1,287,582 1,289,352
Class B preferred stock issued
for cash, net of issuance
costs of $1,062,456 8,200 8 7,137,536 7,137,544
Discount on Class B preferred
stock 5,327,495 (5,327,495)
Accretion of Class B preferred
stock (dividends) 560,467 (560,467)
Common stock issued upon
conversion of Class A and
Class B preferred stock (5,625) (5) 807,144 807 (802)
Common stock issued upon
conversion of note payable
and accrued interest to
related party (Note 4) 235,000 235 362,962 363,197
Common stock issued upon
settlement of liabilities
and exchange for services
(Note 4) 240,433 241 190,859 191,100
Common stock issued upon
exercise of stock options 226,132 226 217,777 218,003
Proceeds from sale of stock
purchase warrants, net 40,624 40,624
Net income 325,298 325,298
------ ---- ---------- ------- ----------- ------------ --------- ------------
BALANCES, April 30, 1996
As Restated (Note 12) 6,800 7 20,048,014 20,048 33,069,846 (23,648,642) (476,582) 8,964,677
Class C preferred stock issued
for cash, net of issuance
costs of $931,029 (Note 7) 12,000 12 11,068,959 11,068,971
Accretion of Class C preferred
stock dividends 8,218 (8,218)
Accretion of Class B preferred
stock dividends 536,263 (536,263)
Common stock issued upon
conversion of Class B
preferred stock (4,600) (5) 1,587,138 1,587 (1,582)
Common stock issued for
acquisition of subsidiary
(Note 3) 5,080,000 5,080 26,664,920 26,670,000
Common stock issued upon
exercise of stock options 533,500 534 272,366 272,900
Stock-based compensation
(Note 8) 772,746 772,746
Net loss (33,181,285) (33,181,285)
------ ---- ---------- ------- ----------- ------------ --------- ------------
BALANCES, April 30, 1997
As Restated (Note 12) 14,200 $ 14 27,248,652 $27,249 $72,391,736 $ (57,374,408) $(476,582) $ 14,568,009
====== ==== ========== ======= =========== ============ ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 49
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS RESTATED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(33,181,285) $ 325,298 $ (6,911,635)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Purchased in-process research and development
(non-cash) 27,154,402 4,849,591
Stock-based compensation 772,746
Depreciation and amortization 348,525 169,162 151,368
Common stock issued for services and interest
expense 70,887 12,500
Increase in reserves 230,793
Changes in operating assets and liabilities, net
of effects from acquisition of subsidiaries:
Accounts receivable, net 61,398 (92,768) (2,378)
Inventories, net (78,241) 132,536 (236,499)
Prepaid expenses and other current assets (2,844) (17,294)
Deposits 33,600
Accounts payable and accrued legal and
accounting fees 369,127 (142,980) 171,980
Accrued royalties and sponsored research fees (4,750)
Other accrued expenses and current liabilities 197,499 (39,628) 244,106
------------ ------------ ------------
Net cash provided by (used in)
operating activities (4,363,423) 405,213 (1,456,574)
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenses paid for acquisition of subsidiary,
net of cash acquired (77,189)
Sale (purchase) of short-term investments 3,898,888 (3,898,888)
Property acquisitions (3,284,281) (2,025,619) (39,262)
Increase in note receivable from Chief
Executive Officer and shareholder (356,914)
Increase in other assets (85,016) (42,558) (7,632)
------------ ------------ ------------
Net cash provided by (used in)
investing activities 95,488 (5,967,065) (46,894)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock 11,068,971 7,137,544
Proceeds from issuance of common stock 272,900 1,547,979 1,510,008
Principal payments on long-term debt (44,589)
Proceeds from issuance of long-term debt 1,020,000 1,020,000
------------ ------------ ------------
Net cash provided by financing activities 12,317,282 9,705,523 1,510,008
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 50
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS RESTATED
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
NET INCREASE IN CASH AND CASH
EQUIVALENTS $ 8,049,347 $ 4,143,671 $ 6,540
CASH AND CASH EQUIVALENTS,
beginning of year 4,179,313 35,642 29,102
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
end of year $ 12,228,660 $ 4,179,313 $ 35,642
============ ============ ============
SUPPLEMENTAL INFORMATION:
Acquisition of subsidiaries (1997) and
minority interest in subsidiary (1995)
(Note 2):
Fair value of assets acquired $ 27,154,402 $ 4,849,591
Common stock issued (26,670,000) (2,504,053)
Compensatory options issued (2,577,120)
------------ ------------
Net (assets acquired) liabilities assumed $ 484,402 $ (231,582)
============ ============
Interest paid $ 132,040 $ 3,625 $ 6,998
Income taxes paid $ 800 $ 800 $ 1,600
</TABLE>
For supplemental information relating to conversion of preferred stock into
common stock, common stock issued in exchange for services, common stock issued
upon merger and other noncash transactions, see Notes 2, 3, 4, 7 and 8.
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 51
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS
RESTATED (CONTINUED)
- --------------------------------------------------------------------------------
1. GENERAL AND NATURE OF OPERATIONS
Nature of Operations - Techniclone International Corporation was
incorporated on June 3, 1981 under the laws of the State of California and was
merged into Techniclone Corporation (incorporated on September 25, 1996 under
the laws of the state of Delaware) on March 24, 1997. Techniclone Corporation
(the Company) is engaged in research and development of new technologies
utilizing monoclonal antibodies and the production of specific antibodies with
prospective research, diagnostic and therapeutic applications.
The Company's activities are primarily focused on innovative drug
delivery systems that permit the destruction or treatment of cancerous tumors.
The Company's most advanced drug development program is I-131 LYM-1 (Oncolym), a
Non-Hodgkin's B-cell lymphoma therapy product currently being studied in a
multi-center Phase II/III clinical trial. The clinical trials for the Company's
Oncolym product are being performed by Alpha Therapeutics Corporation (Note 6).
The Company's product pipeline also includes the following technologies: Tumor
Necrosis Therapy (TNT), a drug delivery system that has the potential to destroy
large tumors at the necrotic (dead) core without damaging surrounding healthy
tissue; Vascular Targeting Agents (VTAs), a drug delivery system targeting the
capillaries and vessels inside a tumor to deliver a clot-inducing drug,
potentially causing the tumor to be "starved" of vital oxygen and nutrients
necessary for its survival; Vasopermeation Enhancement, a technology which
targets tumor vessels with vasoactive agents (molecules that cause tissues to
become temporarily permeable) and causes enhanced levels of drug and isotope
uptake within a tumor; and several other cancer treatment based products. The
Company plans to initiate Phase I/II clinical trials for TNT in the United
States in late 1997, with clinical trials in Europe to follow shortly
thereafter.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary,
Peregrine Pharmaceuticals, Inc. (Peregrine). All intercompany balances and
transactions have been eliminated.
Cash Equivalents - The Company considers all highly liquid, short-term
investments with an initial maturity of three months or less to be cash
equivalents.
Short-term Investments - Short-term investments at April 30, 1996
represent six-month term treasury bills, which expired at various dates through
July 1996, are classified as held-to-maturity, and are stated at cost, which
approximates fair value.
Receivable from shareholders - Receivable from Shareholders represents
short-term, non-interest bearing amounts due to Peregrine from its prior
shareholders. The amounts were received in May 1997 (Note 3).
F-8
<PAGE> 52
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS
RESTATED (CONTINUED)
- --------------------------------------------------------------------------------
Inventories - Inventories are stated at the lower of first-in,
first-out cost or market and consist of the following at April 30:
1997 1996
-------- --------
Raw materials and supplies $ 78,746 $ 40,558
Finished goods 139,041 79,885
Reserves (45,625) (26,522)
-------- --------
$172,162 $ 93,921
======== ========
The Company estimates reserves on its inventories after considering the
inventory on hand, anticipated usage of the inventory and any sales agreements
for inventory at fixed prices. The inventory reserves at April 30, 1997 are for
quantities in excess of expected future usage and for costs incurred in excess
of the expected sales price for the related inventory. The reserves for excess
quantities are based on a comparison of the quantity of inventory on hand and
the future expected usage of such inventory and have been valued at the lower of
the cost of the inventory or the estimated salvage value of the inventory. The
reserves for costs incurred in excess of the expected sales price are based on
the difference between total costs incurred for the inventory and the sales
price of the product under the distribution agreement with Alpha Therapeutic
Corporation ("Alpha") to supply LYM-1 (Oncolym(TM)) antibodies for the Phase
II/III clinical trials (Note 6).
Property - Property is recorded at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the related asset. Generally, the estimated useful lives are 8 to 25 years for
buildings and improvements and five years for laboratory equipment and furniture
and fixtures.
Other Assets - Other assets include a note receivable from the Chief
Executive Officer and shareholder of $350,000 plus accrued interest of $6,914.
The note is collateralized by real estate, bears interest at 7% with principal
and interest due January 31, 2000. The note receivable approximates fair value,
as the rate of interest earned is consistent with what the Company could earn on
similar instruments. Other assets also include patent costs, which are amortized
over the lesser of the estimated useful life of the patent or the estimated
useful life of the related product. Patent costs totaled $178,815 and $166,585,
net of related accumulated amortization of $172,660 and $140,318, at April 30,
1997 and 1996, respectively. The Company assesses recoverability of its
long-term assets by comparing the remaining carrying value to the value of the
underlying collateral or the fair market value of the related long-term asset.
Reserves for Contract Losses - The reserves for contract losses
represent reserves for losses to be incurred under a fixed sales contract with
Alpha to supply LYM-1 (Oncolym(TM)) antibodies for the Phase II/III clinical
trials (Note 6). The reserves are based upon the difference between the sum of
the carrying cost of the LYM-1 inventory and the estimated sales costs less the
sales price
F-9
<PAGE> 53
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS
RESTATED (CONTINUED)
- --------------------------------------------------------------------------------
specified in the Alpha contract and have been included in reserve for contract
losses in the accompanying consolidated financial statements.
Preferred Stock Dividends - Dividends on Class B and Class C Preferred
Stock are accreted over the life of the preferred stock and are based on the
stated dividend rate (10% for the Class B and 5% for the Class C) plus the
dividend amount attributable to the discount at the issuance date. To the extent
that unconverted shares of Class B and Class C Preferred Stock remain
outstanding, the value of the dividend is remeasured and recorded on each date
that the conversion rate changes.
Revenue Recognition - Product revenues are recognized upon shipment to
customers. Revenues related to licensing agreements (Note 6) are recognized when
cash has been received and all obligations of the Company have been met, which
is generally upon the transfer of the technology license or other rights to the
licensee. Other income primarily consists of rental income and is recognized on
a straight-line basis over the rental period.
Net Income (Loss) per Share (As Restated) - Net income (loss) per share
is calculated by dividing net income (loss) after deducting Class B Preferred
Stock and Class C Preferred Stock discount and accreted dividends of $5,887,962
in fiscal 1996 and $544,481 in fiscal 1997, by the average number of shares of
common stock and dilutive common stock equivalents outstanding each year. Shares
issuable upon the exercise of common stock warrants and options (utilizing the
treasury stock method) and conversion of outstanding preferred stock and
preferred stock dividends on Class B and Class C Preferred Stock have been
excluded in the per share computations because their effect is antidilutive
(Note 7).
Net Income (Loss) Attributable to Common Stockholders - Net income
(loss) per share attributable to common stockholders is calculated by taking the
net income (loss) for the year and deducting the dividends and Preferred Stock
issuance discount accretion on the Class B Preferred Stock and the Class C
Preferred Stock during the year and dividing the sum of these amounts by the
average number of shares of common stock outstanding during the year. Shares
issuable upon the exercise of common stock warrants and options have been
excluded from the fiscal 1997 and 1995 per share calculation because their
effect is antidilutive. Accretion of the Class B Preferred Stock dividends and
issue discount amounted to $5,887,962 and $536,263 for the fiscal years ended
April 30, 1996 and 1997, respectively. The accretion of the dividends and issue
discount on the Class C Preferred Stock was not significant in fiscal year 1997
(Note 7).
Income Taxes - The Company accounts for income taxes in accordance with
the standards specified in Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes. SFAS No. 109 requires the recognition of
deferred tax liabilities and assets for the future consequences of events that
have been recognized in the Company's financial statements or tax returns. In
the event the future consequences of differences between financial reporting
bases and tax bases of the Company's assets and liabilities result in a deferred
tax asset, SFAS No. 109 requires an evaluation of the probability of being able
to realize the future benefits indicated by
F-10
<PAGE> 54
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS
RESTATED (CONTINUED)
- --------------------------------------------------------------------------------
such asset. A valuation allowance is provided when it is more likely than not
that some portion or the entire deferred tax asset will not be realized.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Actual results could differ from these
estimates.
Reclassifications - Certain amounts as previously reported have been
reclassified to conform to the fiscal 1997 presentation.
New Accounting Standards - During fiscal year 1997, the Company adopted
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". The adoption of SFAS No. 121 did not have
a significant impact on the Company's financial position or results of
operations. In accordance with SFAS No. 121, long-lived assets to be held are
reviewed for events or changes in circumstances, which indicate that their
carrying value may not be recoverable. The Company assesses the need for
recognition of an impairment of its long-lived assets by determining whether
there have been any events or changes in circumstances that would indicate that
the recoverability of the carrying value of these assets might be impaired.
Impairment of the Company's land, buildings and improvements are assessed by
reviewing the fair market value of these assets. The Company will measure
impairment based on any excess of the assets carrying amounts over the
respective fair values.
The Company also adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", during fiscal year 1997. The new standard defines a fair value
method of accounting for stock option and other equity instruments. Under the
fair value method, compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the service period, which is
usually the vesting period. Pursuant to SFAS No. 123, the Company has elected to
continue to use Accounting Principles Board Opinion No. 25 for measurement of
employee stock based transactions and provide pro forma information as if the
employee stock based transactions occurring subsequent to April 30, 1995, had
been accounted for on the fair value method (Note 8).
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share". Under SFAS No. 128, the Company will be required
to disclose basic earnings (loss) per share and diluted earnings (loss) per
share for all periods for which an income statement is presented. The Company
will be required to adopt this standard for the period ending January 31, 1998.
The Company believes the adoption of this standard will have no effect on the
basic or diluted earnings per share for periods in which the Company incurs
losses, will result in an increase in basic earnings per share as compared with
primary earnings per share in periods with income and will have no effect on the
fully diluted earnings per share in periods with income.
F-11
<PAGE> 55
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS
RESTATED (CONTINUED)
- --------------------------------------------------------------------------------
3. ACQUISITION OF SUBSIDIARIES
Effective April 24, 1997, the Company acquired all of the outstanding
stock of Peregrine in exchange for 5,080,000 shares of the Company's common
stock and the assumption of net liabilities of approximately $484,000. Peregrine
was a development stage company involved in the research and development of
vascular targeting agents. The acquisition was accounted for as a purchase.
In June 1994, the Company acquired the remaining minority interest in
the Company's 62%-owned subsidiary, Cancer Biologics Incorporated (CBI), in
exchange for 1,079,333 shares of the Company's common stock and the assumption
of options to purchase 1,416,000 shares of CBI's common stock. Each option was
converted into the right to acquire shares of the Company's common stock with
the same terms and conditions as specified in the CBI option agreements. The
acquisition of the minority interest was accounted for utilizing the purchase
method.
For each of these acquisitions, the excess of the purchase price over
net tangible assets acquired (cash and notes receivable) and liabilities assumed
(accounts payable and accrued liabilities) represents the difference between the
fair value of the Company's common stock exchanged and the fair value of net
assets purchased including in the case of CBI, the difference between the fair
value of the options to purchase the Company's common stock and the exercise
price of the CBI options exchanged of $2,577,120. The excess purchase price of
$27,154,402 for Peregrine and $4,849,591 for CBI over the net tangible assets
acquired represents the amount paid for acquired technologies and related
intangible assets. The excess purchase price for each of these acquisitions has
been charged to operations as of the effective date of the acquisition as the
related technologies have not reached technological feasibility and the
technology had no known future alternative uses other than the possibility for
treating cancer patients.
The acquisition of Peregrine is expected to result in increased annual
expenses and cash outflows. Had the acquisition of Peregrine occurred on May 1,
1995, pro forma net loss and loss per common share would have been as follows:
<TABLE>
<CAPTION>
Pro forma Pro forma net loss
net loss per common share
Restated Restated
------------- ------------------
<S> <C> <C>
Fiscal year 1996 $(33,985,500) $(1.44)
Fiscal year 1997 $ (7,973,100) $ (.30)
</TABLE>
Revenues for fiscal years would not have changed had the acquisition
occurred on May 1, 1995.
F-12
<PAGE> 56
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS
RESTATED (CONTINUED)
- --------------------------------------------------------------------------------
4. LONG-TERM DEBT
During fiscal 1996, long-term debt to a related party and accrued
interest of $258,500 and $104,697, respectively, were converted into 235,000
shares of common stock at the election of the related party pursuant to the
terms of the convertible note dated December 31, 1991. Interest expense related
to this convertible debt amounted to $13,787 and $20,680 for the years ended
April 30, 1996 and 1995, respectively. Additionally, during fiscal 1996, accrued
expenses and other current liabilities of $134,000 were converted into 183,333
shares of common stock. No gain or loss was recorded on the transaction.
In April 1996 and October 1996, the Company entered into two separate
note agreements for $1,020,000 each to finance the purchase of two buildings
used as its operating and administrative facilities. The notes payable are
collateralized by substantially all of the assets of the Company, bear interest
at LIBOR plus 4.25% (9.5% at April 30, 1997) with a minimum rate of 9.5% and a
maximum rate of 14.5%, and mature in April and November 2011, respectively.
Principal and interest payments are due monthly.
During March 1997, the Company entered into a separate note agreement
to finance the purchase of laboratory equipment for $51,181. The note payable
bears interest at 10.0% per annum and matures in March 2002. Principal and
interest payments of $1,078 are due monthly.
F-13
<PAGE> 57
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS
RESTATED (CONTINUED)
- --------------------------------------------------------------------------------
Minimum principal payments on the Company's long-term debt as of April
30, 1997 are as follows:
Year ending April 30:
1998 $ 76,527
1999 84,267
2000 92,313
2001 102,123
2002 110,284
Thereafter 1,581,078
----------
$2,046,592
==========
The Company's stated amounts of its long-term debt approximate its fair
value as the debt is financed at the borrowing rates currently available to the
Company.
5. COMMITMENTS
The Company has various employment agreements with certain officers of
the Company providing for payments as defined in the agreements. Some of the
employment agreements also provide for additional compensation payable upon
termination of the officer. The employment agreements continue in effect unless
notification of termination is made. Upon notification of termination, the
agreements expire over periods ranging from 12 to 36 months. The Company also
has an agreement with an employee that provides for the granting of options to
purchase 75,000 shares of the Company's common stock at $4.00 per share upon
attainment of specified performance criteria. The performance criteria had not
been met as of April 30, 1997. The Company also has agreements with various
consultants that provide for cash payments and stock options to purchase the
Company's common stock (Note 8). At April 30, 1997, future fixed commitments
under these agreements amounted to $803,000, $393,000 and $173,000 for the years
ended April 30, 1998, 1999 and 2000, respectively.
The Company also has a royalty agreement with an employee, which
entitles that employee to receive 2% of the profits on certain products. There
have been no sales of the related products during fiscal 1995, 1996 or 1997.
At April 30, 1997, the Company has commitments for facilities
construction and the purchase of equipment, furniture and fixtures aggregating
approximately $783,000.
On April 30, 1996, the Company terminated the operating lease on its
principal facility in conjunction with the purchase of the related property
(Note 4). Rent expense amounted to approximately $180,000 and $174,000 for each
of the two years in the period ended April 30, 1996, respectively.
F-14
<PAGE> 58
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS
RESTATED (CONTINUED)
- --------------------------------------------------------------------------------
The Company has an agreement with an unrelated entity to advance funds
to cover substantially all operating expenses of the entity and to purchase
certain property and equipment for the entity's operations in exchange for the
entity providing radio-labeling services for the Company. The radio-labeling
services consist of attaching radioactive isotopes to the Company's LYM-1
(Oncolym(TM)) antibodies prior to product shipment to the LYM-1 clinical trial
sites. The agreement provides for repayment of the operating advances from
future revenues of the entity receivable through the discounting of
radio-labeling services. Due to the uncertainty of recoverability of the
advances made for operations, the operating advances have been expensed as
incurred. Under the agreement, approximately $118,000, $227,000 and $246,000
were advanced and expensed as research and development in fiscal 1995, 1996 and
1997, respectively, of which $13,950 was offset against radio-labeling purchases
in fiscal 1997. Additionally, at April 30, 1997, the Company had purchased
equipment with an aggregate cost of $289,000 and net book value of $76,000 for
use by the unrelated entity. Should the Company discontinue use of this entity
for its radio-labeling services, the entity would be required to purchase the
equipment at its then carrying value or return the equipment to Company. The
radio-labeling services agreement is cancelable by either party upon sixty days
notice.
Under a separate agreement, as of April 30, 1995, an unrelated entity
had advanced the Company $40,000 which is to be repaid through inventory
purchases from the Company. At April 30, 1997 and 1996, the remaining advances
amounted to $12,480 and $37,420, respectively, and have been included in other
current liabilities in the accompanying balance sheets.
During fiscal 1996, the Company entered into a joint venture agreement
with an unrelated entity to develop and market a new class of products for
cancer therapy and diagnosis based upon the unrelated party's patented
technology for producing fully human monoclonal antibodies and the Company's
TNT. The agreement provides that equity in the joint venture and costs
associated with the development of the product would be shared equally. The
activities of the joint venture were not considered significant for the years
ended April 30, 1997 and 1996. The Company retains exclusive world-wide
manufacturing rights under the agreement.
6. LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS
Prior to fiscal 1995, the Company entered into an agreement to
terminate the licensing rights and certain other rights (the Termination
Agreement) with a shareholder. The Termination Agreement provides for maximum
payments of $1,100,000, to be paid based on the achievement of certain
milestones and royalties on sales of the related product. Under the terms of the
agreement, the Company was required to pay $100,000 upon finalization of the
agreement, $100,000 upon commencement of Phase III clinical trials for the
related product, $200,000 upon issuance of a license or other approval for the
initial marketing in the United States and royalties equal to 4% of sales
revenue related to such product, up to a maximum of $700,000 and 25% of any
royalties received by the Company for sales of the licensed product. At April
30, 1997, the Company had paid $100,000 of the fees and accrued for another
$100,000 when it commenced Phase III clinical trials in fiscal 1994. There have
been no sales of the related products through April 30, 1997.
F-15
<PAGE> 59
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS
RESTATED (CONTINUED)
- --------------------------------------------------------------------------------
During October 1992, the Company entered into an agreement with an
unrelated entity which provides the entity with exclusive licensing rights in
certain geographic areas to certain patents and products owned by the Company in
exchange for: (1) $50,000 when a specified meeting with the United States Food
and Drug Administration (FDA) occurred, (2) $100,000 upon the first submission
to the European regulatory agency to sell the product in certain countries or
six months from the effective date of the commencement of Phase III clinical
trials, whichever is sooner, (3) $200,000 upon approval of the first European
submission, (4) $500,000 on the submission to the FDA of a product license
application, and (5) $100,000 per year as a research and development grant after
completion of the Phase III clinical trials (as defined), of which 50% of such
payment is specified for certain research programs. Additionally, the Company is
to receive 10% royalties from any product sales related to this agreement which
will be applied to offset any amounts due under stipulation (4) above. Under the
terms of the agreement, the $100,000 and $200,000 payments and the right to
distribute the Company's product in certain European countries was dependent
upon the distributor beginning clinical trials in Europe within a specified time
period. The entity did not begin the trials within the specified time frame and
the distribution rights were assigned in conjunction with another agreement with
a related entity. The agreement also provides for the Company to sell LYM-1
antibodies for Phase II/III clinical trials to the unrelated entity at a fixed
price. Through April 30, 1997, the Company has received $150,000 under the
agreement. No licensing revenue was earned related to this agreement during the
three years ended April 30, 1997.
In fiscal 1996, the Company entered into a distribution agreement
(Agreement) with a partnership in which one of the partners is also a
shareholder and director of the Company in exchange for a nonrefundable fee of
$3,000,000. The Agreement provides the distributor with exclusive distribution
rights in various foreign countries for one of the Company's products and
granted the right for the entity to assume distribution rights in certain
European countries from another unrelated entity should that unrelated entity
forfeit or relinquish its rights under a separate agreement. During fiscal 1997,
the rights under the separate agreement were forfeited and were assumed in
accordance with the terms of the Agreement. The Agreement also provides that the
Company is guaranteed minimum sales prices from the distributor and has been
granted an option to repurchase the distribution rights, should the Company
elect to do so. The repurchase rights are at the sole discretion of the Company
and may be exercised through July 1998. If the repurchase rights are exercised,
the Company would be required to pay a lump sum fee of $4,500,000, grant options
to the distributor for the purchase of 1,000,000 shares of the Company's common
stock at $5.00 per share and pay royalties ranging between 2% and 5% on sales of
the related product in the geographic areas covered by the Agreement. The
Agreement has an initial term of 15 years with automatic renewals under terms as
specified in the Agreement. The Company recognized the license fee as revenue
during the year ended April 30, 1996, as the Company had no further obligations
under the Agreement that it was required to fulfill.
The Company has entered into several license, sublicense and research
and development agreements with various institutions providing for the
exclusive, worldwide licensing rights to use certain patents and technologies in
exchange for fixed and contingent payments and royalties ranging from 2% to 6%
of net sales of the related products. Certain of these agreements also provide
for reduced royalty payments if the technology is sublicensed or if products
incorporate both the licensed technology and another technology. Some of the
agreements are terminable at the discretion of the
F-16
<PAGE> 60
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS
RESTATED (CONTINUED)
- --------------------------------------------------------------------------------
Company while others continue through 2001. Minimum royalties under these
agreements are $86,500 annually. At April 30, 1997, fixed commitments (excluding
royalties) due under these agreements amounted to $206,250, of which $106,250 is
due in fiscal 1998 and $100,000 is due in fiscal 2000. Royalties related to
these agreements amounted to $86,500, $86,500 and $49,500 for the years ended
April 30, 1997, 1996 and 1995, respectively.
Contingent future commitments related to the vascular targeting agents
technologies, exclusive of royalties, are as follows:
<TABLE>
<S> <C>
Payments due upon completion of Phase I clinical trials ............ $ 37,500
Annual payments upon patent issuance and until royalties begin ..... $ 50,000
Payments due upon initiation of Phase II clinical trials ........... $175,000
Payments due upon completion of Phase II clinical trials ........... $ 50,000
Payment upon commercial introduction of the related product or
new drug or product license application .......................... $375,000
Payment upon commercial introduction for each additional new
Product encompassing related technology .......................... $300,000
</TABLE>
Additionally, the Company has entered into sponsored research
agreements with academic medical institutions expiring in fiscal 1998. Future
commitments under these agreements at April 30, 1997 are $158,000.
7. STOCKHOLDERS' EQUITY
The Company has issued three classes of preferred stock, Class A, Class
B and Class C. The Class B and Class C preferred stock is nonvoting, has
preferences in liquidation, provides for antidilution protection and is
convertible into common stock. A summary of the preferred stock is as follows:
<TABLE>
<CAPTION>
Number of Per
Class Issuance Date Shares Issued Share Cost Dividend Rate
----- ------------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Class A .... March 1992 10,000 $ 60 None
Class B .... December 1995 8,200 $1,000 None
Class C .... April 1997 12,000 $1,000 5%
</TABLE>
During fiscal 1995, 5,775 shares of Class A preferred stock were
converted into 288,750 shares of the Company's common stock. The remaining 4,225
shares of Class A preferred stock were converted into 338,000 shares of common
stock in fiscal 1996 with the commencement of the Phase III clinical trials for
the Company's Oncolym product.
Each share of Class B preferred stock has a liquidation preference
equal to the share cost plus an amount equal to 10% of the original share cost
per annum since the issuance date (liquidation
F-17
<PAGE> 61
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS
RESTATED (CONTINUED)
- --------------------------------------------------------------------------------
value). The Class B preferred shares may be converted anytime at the option of
the holder into that number of common shares calculated by taking the
liquidation value at the date of conversion divided by the conversion price
($3.06875 at April 30, 1997). The conversion price is the lower of $3.06875 or
an amount ranging between 85% and 100% of the average bid price for the five day
period prior to notice of conversion. During fiscal 1996 and 1997, 1,400 and
4,600 shares of Class B preferred stock were converted into 469,144 and
1,587,138 common shares, respectively. Any remaining Class B preferred shares
outstanding at December 15, 1998 are automatically converted into common shares.
The Class B preferred stock is also redeemable, at the option of the Company, as
long as the initial redemption amount equals or exceeds $1,500,000. If the
holder requests redemption, the redemption price is equal to the closing bid
price on the date of redemption multiplied by the number of shares the Class B
is convertible into. If the Company initiates the conversion, the redemption
price ranges from 105% to 120% of the original issue cost depending on the date
of redemption.
The dividends on the Class C preferred stock are payable quarterly in
Class C preferred stock or cash, at the option of the Company, beginning
September 30,1997. The Class C preferred stock is convertible, at the option of
the holder, commencing on September 26, 1997, into the number of shares of
common stock of the Company determined by dividing $1,000 plus all accrued but
unpaid dividends by the conversion price. The conversion price is the average of
the lowest trading price of the Company's common stock for the five consecutive
trading days ending with the trading day prior to the conversion date reduced by
13 percent beginning on November 26, 1997, 20 percent beginning on January 26,
1998, 22.5 percent beginning on March 26, 1998, 25 percent beginning on May 26,
1998, 27 percent beginning on July 26, 1998 and thereafter. At any time after
March 24, 1998, the conversion price will be the lower of the conversion price
as calculated in the preceding sentence or the average of the closing price of
the Company's common stock for the 30 trading days including and immediately
preceding March 24, 1998 (Conversion Cap).
The Class C preferred stock is subject to mandatory redemption upon
certain events as defined in the Class C preferred stock agreement. Some of the
mandatory redemption features are within the control of the Company. For those
mandatory redemption features that are not within the control of the Company,
the Company has the option to redeem the Class C preferred stock in cash or
common stock. Should a redemption event occur, it is management of the Company's
intention to redeem the preferred stock through the issuance of the Company's
common stock.
In conjunction with the issuance of the Class C preferred stock, the
preferred shareholders were granted warrants to purchase up to one-fourth of the
number of shares of common stock issued upon conversion. The warrants are
exercisable at 110% of the Conversion Cap and expire in April 2002. No value has
been ascribed to these warrants, as the warrants are considered non-detachable.
Additionally, the Company granted a warrant to the placement agent providing for
the purchase of 1,200 shares of Class C preferred stock at $1,000 per share
which is exercisable through April 2002 (Note 8).
In accordance with the preferred stock agreement, the Company has
reserved 15,500,000 shares of the Company's common stock to provide shares
issuable upon conversion or exercise of the warrants.
F-18
<PAGE> 62
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS
RESTATED (CONTINUED)
- --------------------------------------------------------------------------------
Both the Class B Preferred Stock and the Class C Preferred Stock
agreements include provisions for conversion of the preferred stock into common
stock at a discount during the term of the agreements. As a result of these
conversion features, the Company is accreting an amount from accumulated deficit
to additional paid-in capital equal to the Preferred Stock Discount. The
Preferred Stock Discount was computed by taking the difference between the fair
value of the Company's common stock on the date the Preferred Stock agreements
were finalized and the conversion price (assuming the maximum discount allowable
under the terms of the agreement) multiplied by the number of common shares into
which the preferred stock would have been convertible into (assuming the maximum
discount allowable). The Preferred Stock Discount is being amortized over the
period from the date of issuance of the Preferred Stock to the Conversion or
discount period (three months for the Class B and sixteen months for the Class
C) using the effective interest method. The total Preferred Stock Discount
related to these issuances to be amortized amounted to $5,327,495 and $4,438,356
for the Class B and Class C, respectively. The accumulated accretion of the
discount for Class C was not significant at April 30, 1997.
The Company issued 5,080,000 and 1,079,333 shares of its common stock
in fiscal 1997 and fiscal 1995, respectively, in conjunction with acquisitions
of subsidiaries (Note 3).
In conjunction with a stock subscription agreement, the Company issued
676,167 common shares for $1,014,250 in fiscal 1995 and 55,833 common shares for
$83,750 in fiscal 1996 to a director of the Company and to an entity affiliated
with the director.
Notes receivable from the sale of common stock are due from one
officer, one director and various employees. The notes bear interest at 6% per
annum, are collateralized by personal assets of the holders and are due in seven
equal annual installments beginning in April 1998.
8. STOCK OPTIONS AND WARRANTS
The Company has five stock incentive plans. The plans were adopted or
assumed in conjunction with a merger in December 1982 (1982 Plan), January 1986
(1986 Plan), June 1994 (1993 Plan), April 1995 (CBI Plan) and September 1996
(1996 Plan). The plans provide for the granting of options to purchase shares of
the Company's common stock at prices not less than the fair market value of the
stock at the date of grant and generally expire ten years after the date of
grant.
The 1996 Plan originally provided for the issuance of options to
purchase up to 4,000,000 shares of the Company's common stock. The number of
shares for which options may be granted under the 1996 Plan automatically
increases for all subsequent common stock issuances by the Company in an amount
equal to 20% of such subsequent issuances as long as the total shares allocated
to the 1996 Plan do not exceed 20% of the Company's authorized stock. As a
result of issuances of common stock by the Company subsequent to the adoption of
the 1996 Plan, the number of shares for which options may be granted has
increased to 5,171,522. There are no remaining shares available for grant under
the 1982, 1986 or CBI Plans. At April 30, 1997, 51,795 shares were available for
grant under the 1993 Plan.
F-19
<PAGE> 63
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS
RESTATED (CONTINUED)
- --------------------------------------------------------------------------------
The Company also has an option agreement with an unrelated entity that
provides for the purchase of 100,000 shares at $3.00 per share and which becomes
exercisable only if the Company experiences a change in ownership of greater
than 50%. The option expires in March 1999.
Option activity for each of the three years ended April 30, 1997 is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- -------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, Beginning Of year 2,237,750 $(0.66) 1,961,000 $(0.59) 563,667 $(0.97)
Granted 2,419,000 $(4.63) 588,982 $(1.10)
Assumed with acquisition 1,416,000 $(0.50)
Exercised (533,500) $(0.51) (283,232) $(0.97) (6,223) $(1.75)
Canceled (65,000) $(2.31) (29,000) $(1.75) (12,444) $(1.75)
--------- --------- ----------
BALANCE, End of year 4,058,250 $(3.02) 2,237,750 $(0.66) 1,961,000 $(0.59)
========= ========= ==========
</TABLE>
Additional information regarding options outstanding as of April 30,
1997 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ---------------------------------
WEIGHTED AVG.
RANGE OF PER REMAINING WEIGHTED AVG.
SHARE EXERCISE NUMBER OF SHARES CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER OF SHARES PER SHARE
PRICES OUTSTANDING (YRS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------- ---------------- ---------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.27 - $ 0.50 1,066,000 5.27 $ 0.45 1,066,000 $0.45
$ 1.00 - $ 1.75 638,250 7.82 $ 1.16 464,400 $1.21
$ 4.00 - $ 5.50 2,354,000 9.06 $ 4.70 646,222 $4.69
</TABLE>
At April 30, 1997, options to purchase 4,058,250 shares of the
Company's common stock were outstanding, of which 2,176,622 shares were
exercisable. Options to purchase 2,752,017 shares were available for grant under
these plans.
During fiscal 1997, the Company granted stock options to employees and
various consultants. Compensation expense recorded in fiscal year 1997 primarily
relates to stock option grants made to consultants and has been measured
utilizing the Black-Scholes option valuation model. Total
F-20
<PAGE> 64
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS
RESTATED (CONTINUED)
- --------------------------------------------------------------------------------
compensation expense related to stock option grants made to nonemployees during
fiscal 1997 amounted to $508,000 and is being amortized over the period of
service or through February 2000. Stock option grants to nonemployees were not
significant during fiscal years 1996 or 1995.
The Company utilizes the guidelines in Accounting Principles Board
Opinion No. 25 for measurement of stock based transactions for employees. Had
the Company utilized a fair value model for measurement of stock based
transactions for employees and amortized the expense over the vesting period,
pro forma information would be as follows:
1997 1996
------------ -----------
Pro forma net loss $(35,606,290) $(5,909,405)
Pro forma net loss per share $(1.66) $(.32)
The fair value of the options granted in fiscal 1996 and 1997 were
estimated at the date of grant using the Black-Scholes option pricing model,
assuming an expected life of four years, a risk-free interest rate of 6.39% and
a volatility factor of 92%. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock volatility. Because the Company's options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair values estimated, in
the opinion of management, the existing models do not necessarily provide a
reliable measure of the fair value of its options. The weighted average
estimated fair value in excess of the grant price for employee stock options
granted during fiscal 1997 and 1996 was $3.48 and $2.81, respectively.
During the year ended April 30, 1996, the Company granted warrants to
purchase 40,000 restricted shares of common stock at prices ranging between
$3.00 and $5.30 per share to consultants for services to be provided. The value
assigned to these warrants was not significant and has been amortized over the
period of service.
In conjunction with the Class B preferred stock financing, the Company
issued warrants to purchase 357,310 shares of the Company's common stock at
prices between $3.069 and $5.00 per share. The Company estimated the difference
between the grant price and the fair value of the warrants on the date of grant
to be $349,000. In conjunction with the Class C preferred stock financing, the
Company issued the preferred shareholders warrants to purchase a contingent
number of common shares at a price to be determined in the future (Note 7). No
value has been ascribed to these Class C financing warrants as the warrants are
considered non-detachable. Additionally, the Company granted a separate warrant
to the placement agent providing for the purchase of 1,200 shares of Class C
preferred stock at $1,000 per share which is exercisable through April 2002
(Note 7). The Company estimated the difference between the grant price and the
fair value of the placement agent warrants on the date of grant to be
approximately $862,000 . The value of the warrants was based on a Black
F-21
<PAGE> 65
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS
RESTATED (CONTINUED)
- --------------------------------------------------------------------------------
Scholes formula based on warrant terms in the agreements. Because the Class B
and Class C financing warrants relate to equity financing, the value of the
warrants has been treated as a cost of the offering in the accompanying
consolidated financial statements
As of April 30, 1997, warrants to purchase an aggregate of 397,310
shares were outstanding, all of which were exercisable at prices ranging between
$3.00 and $5.30 per share. The warrants expire through December 2000.
9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------ --------- -----------
<S> <C> <C> <C>
Provision for income taxes at
statutory rate $(11,282,000) $ 120,000 $(2,557,000)
Acquisition of in process research and
development 10,047,000 1,940,000
Stock based compensation 98,000
State income taxes, net of federal
benefit (995,000) 10,000 (208,000)
Expired net operating loss
carryforwards and change in
estimated future benefits 582,000
Other 7,000 9,000 10,000
Change in valuation allowance 1,543,000 (139,000) 815,000
----------- --------- ----------
Provision $ -- $ -- $ --
=========== ========= ==========
</TABLE>
At April 30, 1997 and 1996, the Company had net deferred tax assets,
all of which had been offset by a valuation allowance as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net operating loss carryforwards $7,092,000 $4,874,000
Noncash compensation 297,000 118,000
General business and research and development credits 56,000 61,000
Inventory reserve 17,000 11,000
Accrued license fee 37,000 40,000
Accrued interest 27,000
Accrued royalties 126,000 25,000
Accrued vacation 31,000 13,000
Contract losses 92,000 69,000
---------- ----------
7,775,000 5,211,000
Less valuation allowance (7,775,000) (5,211,000)
----------- -----------
Net deferred taxes $ -- $ --
=========== ===========
</TABLE>
F-22
<PAGE> 66
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS
RESTATED (CONTINUED)
- --------------------------------------------------------------------------------
At April 30, 1997, the Company and Peregrine have federal net operating
loss carryforwards of $16,926,400 and $2,824,000 and tax credit carryforwards of
$60,450 and $41,000, respectively. Due to changes in ownership, there may be
limitations on the utilization of the net operating losses and tax credit
carryforwards in the future.
The Company's federal net operating loss carryforwards and the tax
credit carryforwards expire as follows:
<TABLE>
<CAPTION>
YEAR OF NET OPERATING INVESTMENT TAX OTHER
EXPIRATION LOSSES CREDITS TAX CREDITS
---------- ------------ -------------- -----------
<S> <C> <C> <C>
1998 $ 263,100 $1,940 $12,700
1999 897,300 1,720 41,500
2000 343,900 1,920
2001 346,800 670
2002 585,600
2003 463,300
2004 1,652,300
2005 1,665,300
2006 986,500
2007 214,100
2008 1,038,200 41,000
2009 2,102,700
2010 2,708,800
2011 6,482,500
----------- ------ -------
$19,750,400 $6,250 $95,200
=========== ====== =======
</TABLE>
F-23
<PAGE> 67
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS
RESTATED (CONTINUED)
- --------------------------------------------------------------------------------
10. RELATED PARTY TRANSACTIONS
Certain stockholders, through their separate businesses, have provided
the Company with various legal, accounting and consulting services. A summary of
such professional fees for each of the three years in the period ended April 30
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Professional fees paid $282,123 $377,378 $ 57,500
Professional fees expensed $266,628 $170,659 $137,300
Professional fees payable at April 30 $ 50,000 $ 65,495 $272,214
</TABLE>
11. BENEFIT PLAN
During fiscal 1997, the Company adopted a 401(k) benefit plan (Plan)
for all employees who are over age 21, work at least 24 hours per week and have
three or more months of continuous service. The Plan provides for employee
contributions of up to a maximum of 15% of their compensation or $9,500.
12. RESTATEMENT
At the March 13, 1997, meeting of the Emerging Issues Task Force, the
staff of the Securities and Exchange Commission ("SEC") issued an announcement
regarding accounting for the issuance of convertible preferred stock and debt
securities. The announcement dealt with, among other things, the belief by the
SEC staff that any discounts on future conversions of securities are analogous
to a dividend and should be recognized as a return to the preferred
shareholders. At April 30, 1997, the Company had two classes of securities with
future conversion discounts, the Class B Preferred Stock and the Class C
Preferred Stock. Both of these securities include conversion features which
permit the holders of the preferred stock to convert their holdings to common
shares at a discount from the market price of the common stock when converted.
Subsequent to the issuance of the Company's consolidated financial
statements for the year ended April 30, 1997, in conjunction with a review of a
Registration Statement on Form S-3 filed by the Company relating to the
registration of Common Stock underlying the Class C Preferred Stock, the SEC
requested that the Company retroactively apply the accounting suggested in their
announcement to the Company's Class B Preferred Stock which was issued in
December 1995. Accordingly, the Company's management determined that the
financial position presented in consolidated financial statements and footnotes
for the years ended April 30, 1996 and 1997 and the unaudited quarters ended
January 31, 1996, July 31, 1996, October 31, 1996 and January 31, 1997 should be
restated to comply with the SEC's request.
Under this accounting treatment, the value of the discount has been
reflected in the restated consolidated financial statements as additional
preferred dividends and has been accreted through the first possible conversion
date of the Class B Preferred Stock. The restatement also gives effect to the
F-24
<PAGE> 68
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997, AS
RESTATED (CONTINUED)
- --------------------------------------------------------------------------------
recognition in the calculations of net income (loss) per share of additional
preferred dividends on the Class B Preferred Stock representing the accretion of
the issuance discount which had not been previously recognized in the
calculation of net income (loss) per share. None of these restatements had any
effect on the net income (loss) of the Company or its cash flows.
A summary of significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
As Previously
Reported As Adjusted
------------- ------------
<S> <C> <C>
Quarter ended January 31, 1996
Additional paid-in-capital $27,074,668 $29,136,161
Accumulated deficit $(20,030,372) $(22,091,865)
Net loss per share $(.05) $(.16)
Year ended April 30, 1996
Additional paid-in-capital $27,181,884 $33,069,846
Accumulated deficit $(17,760,680) $(23,648,642)
Net income (loss) per share $.02 $(.30)
Quarter ended July 31, 1996
Additional paid-in-capital $27,188,979 $33,287,990
Accumulated deficit $(18,708,944) $(24,807,955)
Net loss per share $(.05) $(.06)
Quarter ended October 31, 1996
Additional paid-in-capital 27,421,226 $33,640,133
Accumulated deficit (20,228,975) $(26,447,882)
Net loss per share $(.07) $(.08)
Quarter ended January 31, 1997
Additional paid-in-capital $27,844,204 $34,166,616
Accumulated deficit $(21,651,841) $(27,974,253)
Net loss per share $(.07) $(.07)
Year ended April 30, 1997
Additional paid-in-capital $65,967,511 $72,391,736
Accumulated deficit $(50,950,183) $(57,374,408)
Net loss per share $(1.55) $(1.57)
</TABLE>
F-25
<PAGE> 69
SCHEDULE II
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Lower of cost or market inventory reserve $ -- $ 98,722 $ -- $ 98,722
for the year ended April 30, 1995
Lower of cost or market inventory reserve $ 98,722 $237,931 $(310,131) $ 26,522
for the year ended April 30, 1996
Lower of cost or market inventory reserve $ 26,522 $ 98,988 $ (79,885) $ 45,625
for the year ended April 30, 1997
Valuation reserve for accounts receivable $ -- $175,000 $ -- $175,000
for the year ended April 30, 1996
Valuation reserve for accounts receivable $175,000 $ -- $ -- $175,000
for the year ended April 30, 1997
</TABLE>
<PAGE> 1
EXHIBIT 11
TECHNICLONE CORPORATION
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Year Ended April 30,
--------------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
NET LOSS PER SHARE:
Net Loss Attributable to Common Stock $(33,725,766) $(5,562,664) $(6,911,635)
------------ ----------- -----------
Weighted average number of common shares
outstanding(1) 21,429,858 18,466,359 15,794,811
------------ ----------- -----------
Net (loss) per share $ (1.57) $ (.30) $ (.44)
============ =========== ===========
CALCULATION OF NET LOSS PER SHARE
ASSUMING INCLUSION OF COMMON
STOCK EQUIVALENTS:
Net Loss Attributable to Common Stock $(33,725,766) $(5,562,664) $(6,911,635)
------------ ----------- -----------
Weighted average number of common
shares outstanding(1) 21,429,858 18,466,359 15,794,811
Common equivalent shares assuming
issuance of shares represented by
outstanding stock options and
warrants(3) 1,673,849 1,852,300 1,339,842
------------ ---------- -----------
Weighted average number of common
and common equivalent shares
outstanding 23,103,707 20,318,659 17,134,653
------------ ----------- -----------
Net (loss) per share(2) $ (1.46) $ (.27) $ (0.40)
============ =========== ===========
CALCULATION OF FULLY DILUTED NET INCOME
(LOSS) PER SHARE, ASSUMING CONVERSION
OF PREFERRED STOCK AT THE BEGINNING
OF THE RESPECTIVE YEAR:
Net Loss Attributable to Common
Stock $(33,725,766) $(5,562,664) $(6,911,635)
Dividend accretion on Class B and
Class C Preferred Stock 544,481 560,467
Accretion of Class B Preferred Stock
discount 5,327,495
------------ ----------- -----------
Adjusted net income (loss) assuming
conversion of Class B and Class C
Preferred Stock at beginning of year $(33,181,285) $ 325,298 $(6,911,635)
------------ ----------- -----------
Weighted average number of common shares
outstanding(1) 21,429,858 18,466,359 15,794,811
Common equivalent shares assuming
issuance of shares represented by
outstanding stock options and
warrants(3) 1,673,849 1,852,300 1,339,842
Common equivalent shares assuming
conversion of convertible debt and
issuance of shares upon conversion of
preferred stock(4) 1,119,864 1,342,946 573,000
------------ ----------- -----------
Weighted average number of common and
common equivalent shares outstanding 24,223,571 21,661,605 17,707,653
------------ ----------- -----------
Net income (loss) per share(2) $ (1.37) $ .02 $ (.39)
============ =========== ===========
</TABLE>
- -----------------------
(1) The weighted average number of common shares outstanding during each of the
periods was calculated by dividing the sum of each days actual shares
outstanding by the number of days in the year.
(2) As the indicated calculations result in the dilution of the loss per common
share or income per common share (i.e: antidilutive), the amounts were not
presented in the accompanying financial statements.
(3) Amounts represent the incremental shares that would have to be issued for
outstanding stock options and warrants utilizing the treasury stock method.
(4) Amounts were calculated assuming conversion of convertible notes payable
(1995) or preferred stock at the beginning of the year or at the issuance
date, if later (1996 and 1997). Additionally, the stock was assumed to be
converted rather than redeemed, as it is the Company's intention not to
redeem the preferred stock for cash. The preferred stock is not considered a
common stock equivalent.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
PEREGRINE PHARMACEUTICALS, INC., A DELAWARE CORPORATION
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE PERIOD ENDED 4/30/97.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> APR-30-1997
<EXCHANGE-RATE> 1,000
<CASH> 12,229
<SECURITIES> 0
<RECEIVABLES> 360
<ALLOWANCES> 0
<INVENTORY> 172
<CURRENT-ASSETS> 12,781
<PP&E> 6,377
<DEPRECIATION> 1,039
<TOTAL-ASSETS> 18,701
<CURRENT-LIABILITIES> 2,163
<BONDS> 0
0
0
<COMMON> 27
<OTHER-SE> 14,541
<TOTAL-LIABILITY-AND-EQUITY> 18,701
<SALES> 27
<TOTAL-REVENUES> 346
<CGS> 25
<TOTAL-COSTS> 33,528
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 148
<INCOME-PRETAX> (33,181)
<INCOME-TAX> 0
<INCOME-CONTINUING> (33,181)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,181)
<EPS-PRIMARY> (1.57)
<EPS-DILUTED> (1.57)
</TABLE>
