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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JULY 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-17085
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
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed, since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO__.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 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 ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
27,400,631 shares of Common Stock
as of August 31, 1997
Page 1 of 21 pages
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PART I -- FINANCIAL INFORMATION
ITEM 1 _ FINANCIAL STATEMENTS
The following financial statements required to be provided by this Item
1 and Rule 10.01 of Regulation S-X are filed herewith, at the respective pages
indicated on this Quarterly Report, Form 10-Q:
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Consolidated Balance Sheets at April 30, 1997 and July 31, 1997 (unaudited) . . . . . . . 13
Consolidated Statements of Operations for the periods from May 1, 1996
to July 31, 1996 (unaudited) and from May 1, 1997 to July 31, 1997;
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Consolidated Statement of Stockholders' Equity for the period from April 30, 1997
to July 31, 1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Consolidated Statements of Cash Flows for the periods May 1, 1996 to July 31, 1996
(unaudited) and from May 1, 1997 to July 31, 1997 (unaudited) . . . . . . . . . . . . . . 17
Notes to Consolidated Financial Statements (unaudited) . . . . . . . . . . . . . . . . . 19
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ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q 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".
RESULTS OF OPERATIONS
The Company's net loss of $2,270,913 for the quarter ended July 31, 1997
represents an increase of $1,322,649 in comparison to the net loss of $948,264
for the prior year quarter ended July 31, 1996. This increase in the net loss
for the quarter ended July 31, 1997 is primarily attributable to a $1,439,259
increase in total costs and expenses which is partially offset by a $116,610
increase in total revenues. The increased loss over the comparable period in
the prior year is primarily attributable to increases in activity by the
Company associated with the expansion of its facilities, continuation and
expansion of the clinical trial activities for LYM-1 (Oncolym TM) and TNT
antibody technologies and increases in administrative and operational personnel
related to increases in clinical trial activities and in preparation for
scale-up of the manufacturing process for production of the LYM-1 (Oncolym TM)
antibodies to be used in Phase III clinical trials. The Company expects to
continue to incur losses during the fiscal year ending April 30, 1998 as it
further expands the clinical trials for its LYM-1 (Oncolym TM) and TNT
technologies.
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Revenues for the quarter ended July 31, 1997 increased $116,610,
compared to the same period in the prior year. The quarterly increase in
revenues is attributable to a $73,893 increase in interest income, a $38,417
increase in rental income, and a $4,300 increase in sales revenue. Interest
income increased during the current quarter coinciding with an increased level
of cash funds available for investment. Management expects interest income
during the remainder of the current year to exceed amounts earned in the prior
year due to the increase in cash and short term investments resulting from the
closing of the issuance of the 5% Adjustable Convertible Class C Preferred Stock
in April 1997. Rental income increased as a result of the Company's purchase of
a second building in October 1996, that is partially leased to tenants. Product
sales increased in the current quarter compared to the quarter ended July 31,
1996 due to shipments of LYM-1 (Oncolym (TM)) used in the Phase II/III clinical
trials. Management expects revenues from the sale of antibodies to increase
during the remainder of the fiscal year ending April 30, 1998 as the Company
continues to ship its LYM-1 (Oncolym (TM)) antibody for use in the Phase II/III
clinical trials.
The Company's total costs and expenses increased $1,439,259
during the quarter ended July 31, 1997, in comparison to the same prior quarter
period ended July 31, 1996. This increase resulted from a $4,300 increase in
cost of sales, a $745,985 increase in research and development expenses, a
$664,871 increase in general and administrative expenses, and a $24,103
increase in interest expense in comparison to the prior year quarter ended July
31, 1996.
The increase in cost of sales was due to the increase in sales
of antibodies associated with the LYM-1 (Oncolym (TM)) Phase II/III clinical
trials. The increase in research and development expenses resulted primarily
from increased payroll costs associated with the hiring additional management
and staff personnel and increased material costs to facilitate the expansion of
clinical trial activities for LYM-1 (Oncolym (TM)) and to continue final
development of the TNT technologies in preparation for the filing of two
Investigational New Drug Applications (IND's) for U.S. Phase I/II clinical
trials. Research and development expenses also increased as a result of
expenses associated with patents and various sponsored research agreements
related to Vascular Targeting Agents (VTA) technologies, which related to
the acquisition of Peregrine Pharmaceuticals, Inc. in April 1997.
The increase in general and administrative expenses during the
quarter ended July 31, 1997 resulted primarily from increased payroll and
related costs associated with the hiring of new personnel, costs associated
with the directors and officers liability insurance coverage obtained during
August 1996, increased travel costs and an increase in stock based compensation
expense. The increase in the number of personnel and increased travel costs
were required to facilitate the expansion of the Company's development and
clinical trial activities and to facilitate expansion of European development
activities. The increase in interest expense of $24,103 is due to a higher
level of interest bearing debt outstanding during the current quarter as a
result of the purchase of the Company's second building in October 1996.
Original borrowings for the second facility amounted to $1,020,000.
Management believes that research and development costs as well as
general and administrative expenses will continue to increase as the Company's
continues to expand its clinical trial activities and increases production of
the LYM-1 (Oncolym (TM)) antibodies for the expanded Phase II/III LYM-1 (Oncolym
(TM)) clinical trials.
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The Company began 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 Therapeutic
Corporation ("Alpha"), a wholly owned subsidiary of Green Cross Corporation. The
clinical trials are being held at participating medical centers including M.D.
Anderson, The Cleveland Clinic, Cornell University (N.Y.C.), George Washington
University and University of Cincinnati. Alpha completed the patient imaging
portion of the Phase III trial and submitted the final imaging and dosimetry
data reports to the FDA in August 1997. Alpha has scheduled a meeting with the
FDA for October 28, 1997 to discuss expansion of the Phase II/III trial to
include additional trial sites and to discuss certain requested protocol changes
for patient selection and treatment during the remainder of the expanded Phase
II/III trial. Following the completion of the clinical trials, the Company
expects Alpha to file an application with the FDA to market LYM-1 (Oncolym (TM))
in the United States.
The Company adopted Financial Accounting Standards Board (SFAS) No.
128, "Earnings per Share". Under SFAS No. 128, the Company was 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 adoption of
this standard had no effect on the Company's reported net loss per share
amounts.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1997, the Company had $10,460,630 in cash and short-term
investments and working capital of $8,629,786 compared to $12,228,660 in cash
and short-term investments and working capital of $10,618,012 at April 30, 1997.
Although management believes that the Company's cash and short term investments
are sufficient to sustain its operations through at least July 31, 1998, the
Company has historically experienced significant losses and negative cash flows
from operations and has an accumulated deficit of $53,372,332 at July 31, 1997.
The Company expects that it will continue to experience negative cash flows as
it increases activities associated with the Phase II/III clinical trials for
LYM-1 (Oncolym (TM)) and activities associated with its research, development
and clinical trials for its Tumor Necrosis Therapy ("TNT") and other
technologies. Historically, the Company has relied on third party and investor
funds to fund its operations and clinical trials. The Company must raise
additional capital in the future to sustain its research and development efforts
and to provide for future clinical trials. Although management expects to
receive additional funding in the future, there can be no assurance that funding
will be received. If the Company does not receive additional funding, it will be
forced to scale back operations and it could 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.
COMMITMENTS
The Company is currently negotiating with Alpha Therapeutic
Corporation concerning Techniclone's increased participation in the development
of LYM-1 (Oncolym (TM)). The negotiations
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include the possibility of Techniclone acquiring Alpha's LYM-1 (Oncolym (TM))
marketing rights and clinical data and Alpha's cooperation in the ongoing
clinical trial, in exchange for a series of fixed dollar payments and royalties
on sales through a specified time period.
Techniclone is also negotiating with a large, well-established
biopharmaceutical service company for the manufacture of a significant portion
of additional antibodies required for expanded clinical trials. The terms of
the manufacturing agreement have not been finalized but, the Company believes
that this type of agreement would enable Techniclone to delay the significant
investment required to build the in-house GMP facilities required to support
increased clinical trial activity and to devote the Company's resources to
expanding ongoing clinical trials and additional trials of its other
technologies.
These agreements are in the process of being negotiated and there can
be no assurances that the agreements will be finalized.
At July 31, 1997, the Company had commitments to acquire additional
assets of approximately $500,000 to expand its office and production facilities
and to purchase furniture and fixtures.
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 July 31, 1997, the Company had
$10,460,630 in cash and short-term investments which management believes is
sufficient to support the Company's estimated operations and other cash needs
through at least July 31, 1998. As of July 31, 1997, the Company had
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
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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 Agents ("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 July 31, 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.
COMPETITION. The biotechnology industry is intensely competitive and
changing rapidly. Substantially all of the Company's existing competitors have
larger technical staffs, more established and larger research budgets and
significantly greater financial resources 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.
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CLINICAL TRIALS. The clinical trial for the Company's LYM-1 (Oncolym
(TM)) antibody is being conducted by Alpha and as a result the Company has
limited control over the LYM-1 (Oncolym (TM)) 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 operations.
The results of initial preclinical and clinical testing of the
products under development by the Company are not necessarily indicative of
results that will be obtained from subsequent or more extensive preclinical
studies and clinical testing. The Company's clinical data gathered to date
with respect to its LYM-1 (Oncolym (TM)) antibody are primarily from a Phase II
dose escalation trial which was designed to develop and refine the therapeutic
protocol, to determine the maximum tolerated dose of total body radiation and
to assess the safety and efficacy profile of treatment with a radiolabeled
antibody. Further, the data from this Phase II dose escalation trial were
compiled from testing conducted at a single site and with a relatively small
number of patients. Substantial additional development and clinical testing
and investment will be required prior to seeking any regulatory approval for
commercialization of this potential product. There can be no assurance that
clinical trials of the LYM-1 (Oncolym (TM)) or other product candidates under
development will demonstrate the safety and efficacy of such products to the
extent necessary to obtain regulatory approvals for the indications being
studied or at all. Companies in the pharmaceutical and biotechnology
industries have suffered significant setbacks in advanced clinical trials, even
after obtaining promising results in earlier trials. The failure to
demonstrate adequately the safety and efficacy of LYM-1 (Oncolym (TM)) or any
other therapeutic product under development could delay or prevent regulatory
approval of the product and would have a material adverse effect on the
Company's business, financial condition and results of operations.
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 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, 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
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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 currently procures its
radiolabeling services from Mills Biopharmaceuticals, Inc. for the Phase II/III
clinical trials of LYM-1 (Oncolym (TM)). The Company has negotiated with two
other companies to provide additional radiolabeling services for its antibodies
and continues to negotiate with other companies to provide additional
radiolabeling services. There can be no assurance that these additional
suppliers will be able to radiolabel antibody 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 (Oncolym (TM)) antibody for the foreseeable future.
Radiolabeled antibody cannot be stockpiled against future shortages due to the
eight-day half-life of the I131 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
(Oncolym (TM)) antibody, if approved. Any such change or interruption would have
a material adverse effect on the Company's business, financial condition and
results of operations.
HAZARDOUS AND RADIOACTIVE MATERIALS. The manufacturing and use of the
Company's LYM-1 (Oncolym((TM))) requires the handling and disposal of I131. The
Company is relying on a contract manufacturer, Mills Biopharmaceuticals, Inc,
("MBI"), to radiolabel its LYM-1 (Oncolym (TM)) antibody with I131. MBI must
comply with various state and federal regulations regarding the handling and
use of radioactive materials. Violation of these state and federal regulations
by MBI or a clinical trial site could delay significantly completion of such
trials. Violations of safety regulations could occur with this manufacturer
and therefore, there is a risk of accidental contamination or injury. In the
event of any such noncompliance or accident, the supply of LYM-1 (Oncolym((TM)))
for use in clinical trials or commercially could be interrupted, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company could be held liable for any damages that result from such
an accident, contamination or injury from the handling and disposal of these
materials, as well as for unexpected remedial costs and penalties that may
result from any violation of applicable regulations, which could result in a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company may incur substantial costs to
comply with environmental regulations.
DEPENDENCE ON THIRD PARTIES FOR COMMERCIALIZATION. The Company
intends to sell its products in the United States and internationally in
collaboration with marketing partners. The Company has a development and
marketing agreement with Alpha, which currently does not possess a sales force
to market LYM-1 (Oncolym (TM)). Additionally , the Company does not possess the
resources
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and experience necessary to market its other product candidates. The Company
has no arrangements for the distribution of its other product candidates, and
there can be no assurance that the Company will be able to enter into any such
arrangements in a timely manner or on commercially favorable terms, if at all.
If and when the FDA approves one of the Company's product candidates, the
Company's ability to market the product will be contingent upon it recruiting,
developing, training and deploying its own sales force and on Alpha recruiting,
training and deploying a sales force. Development of an effective sales force
will require significant financial resources and time. There can be no
assurance that the Company will be able to establish such a sales force and
generate a demand for the Company's product candidates.
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.
ANTICIPATED FUTURE LOSSES. The Company has experienced significant
losses since inception. As of July 31, 1997, the Company's accumulated deficit
was $53,372,332. The 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, pre-clinical 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 pre-clinical 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
successfully develop, 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 year. There can be no assurance that the
Company will ever generate sufficient product revenues to become profitable or
to sustain profitability.
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.
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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 Quarterly Report on Form 10-Q
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-Q, 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,
regulatory, technological, financial and/or business challenges making it more
difficult than expected to continue to develop, market and manufacture its
products; competitive and/or regulatory 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 future expenses, and (ii) obtaining new sources of external
financing prior to the expiration of existing support arrangements 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.
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PART II
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities. None.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders. None.
Item 5. Other Information. None.
Item 6. Exhibits and Report on Form 8-K.
(a) Exhibits:
Exhibit Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K: Report on Form 8-K filed May 12, 1997
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHNICLONE CORPORATION
By: /ss/ Lon H. Stone
----------------------------
By: /ss/ William V. Moding
----------------------------
12
<PAGE> 13
TECHNICLONE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1997 1997
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 12,228,660 $ 8,500,657
Short-term investments 1,959,973
Other receivables 360,448 98,402
Inventories, net 172,162 186,977
Prepaid expenses and other current assets 20,138 65,224
------------ ------------
Total current assets 12,781,408 10,811,233
PROPERTY:
Land 1,050,510 1,050,510
Buildings and improvements 3,350,916 3,350,916
Laboratory equipment 1,579,300 1,766,705
Furniture and fixtures 396,225 533,521
Construction-in-progress 255,880
------------ ------------
6,376,951 6,957,532
Less accumulated depreciation and amortization (1,038,619) (1,170,338)
------------ ------------
Property, net 5,338,332 5,787,194
OTHER ASSETS:
Patents, net 178,815 173,541
Note receivable from officer and shareholder 356,914 363,089
Other 46,001 94,316
------------ ------------
Total other assets 581,730 630,946
------------ ------------
$ 18,701,470 $ 17,229,373
============ ============
</TABLE>
13
<PAGE> 14
TECHNICLONE CORPORATION
CONSOLIDATED BALANCE SHEETS
(continued)
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1997 1997
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 707,504 $ 590,420
Accrued legal and accounting fees 385,500 269,534
Accrued payroll and related costs 162,487 167,397
Accrued royalties and sponsored research 339,560 465,295
Reserve for contract losses 248,803 216,306
Accrued license termination fee 100,000 100,000
Accrued interest 72,844 72,844
Current portion of long-term debt 76,527 103,886
Other current liabilities 70,171 195,765
------------ ------------
Total current liabilities 2,163,396 2,181,447
LONG-TERM DEBT 1,970,065 2,018,893
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value; authorized 5,000,000 shares:
Class B convertible preferred stock, shares outstanding -
April 30, 1997 and July 31, 1997, 2,200 shares; (liquidation
preference of $2,552,603 at July 31, 1997) 2 2
Class C convertible preferred stock, shares outstanding
April 30, 1997 and July 31, 1997, 12,000 shares; (liquidation
preference of $12,159,454 at July 31, 1997) 12 12
Common stock - $.001 par value; authorized 50,000,000 shares;
outstanding - April 30, 1997, 27,248,652 shares; July 31, 1997,
27,398,631 shares 27,249 27,399
Additional paid-in capital 65,967,511 66,850,534
Accumulated deficit (50,950,183) (53,372,332)
------------ ------------
15,044,591 13,505,615
Less notes receivable from sale of common stock (476,582) (476,582)
------------ ------------
Total stockholders' equity 14,568,009 13,029,033
------------ ------------
$ 18,701,470 $ 17,229,373
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
14
<PAGE> 15
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31, JULY 31,
1996 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES:
Net product sales and royalties $ - $ 4,300
Interest and other income 86,302 198,612
------------ ------------
Total revenues 86,302 202,912
COSTS AND EXPENSES:
Cost of sales 4,300
Research and development 578,122 1,324,107
General and administrative:
Unrelated entities 376,215 1,064,804
Affiliates 55,255 31,537
Interest 24,974 49,077
------------ ------------
Total costs and expenses 1,034,566 2,473,825
------------ ------------
NET LOSS $ (948,264) $ (2,270,913)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 20,686,817 27,360,223
============ ============
NET LOSS PER SHARE - BASIC AND DILUTED $ (.05) $ (.08)
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
15
<PAGE> 16
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL ACCUMU- FROM
--------------- ------------------------ PAID-IN LATED SALE OF
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL
------ ------- ------------ ---------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
APRIL 30, 1997..................... 14,200 $ 14 27,248,652 $ 27,249 $ 65,967,511 $(50,950,183) $ (476,582) $ 14,568,009
Common stock issued
upon exercise of stock
options (unaudited)............... 6,000 6 5,994 6,000
Common stock issued for cash
(unaudited)....................... 143,979 144 549,856 550,000
Stock-based compensation
(unaudited)....................... 175,937 175,937
Accretion of Class C preferred stock
dividends (unaudited) 151,236 (151,236)
Net loss
(unaudited)....................... (2,270,913) (2,270,913)
------ ------- ------------ ---------- ------------ ------------ ---------- ------------
BALANCE AT
JULY 31, 1997 (unaudited) 14,200 $ 14 27,398,631 $ 27,399 $ 66,850,534 $(53,372,332) $ (476,582) $ 13,029,033
====== ======= ============ ========== ============ ============ ========== ============
</TABLE>
See accompanying notes to consolidated financial statements
16
<PAGE> 17
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31, JULY 31,
1996 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (948,264) $(2,270,913)
Adjustments to reconcile net loss to net cash used
in operating activities:
Stock based compensation 175,937
Depreciation and amortization 69,786 137,445
Changes in operating assets and liabilities:
Other receivables 75,568 262,046
Inventories, net (86,959) (14,815)
Prepaid expenses and other current assets 8,100 (45,086)
Accounts payable and accrued legal and accounting
fees (27,387) (233,050)
Accrued royalties and sponsored research fees 20,000 125,735
Other accrued expenses and current liabilities (9,590) 98,007
----------- -----------
Net cash used in operating activities (898,746) (1,764,694)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short-term investments 3,898,888 (1,959,973)
Property acquisitions (189,430) (577,491)
Increase in other assets (6,175) (58,032)
----------- -----------
Net cash provided by (used in) investing
activities 3,703,283 (2,595,496)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 8,000 556,000
Principal payments on long-term debt (5,100) (21,894)
Proceeds from issuance of long-term debt 98,081
----------- -----------
Net cash provided by financing activities 2,900 632,187
</TABLE>
See accompanying notes to consolidated financial statements
17
<PAGE> 18
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31, JULY 31,
1996 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ 2,807,437 $ (3,728,003)
CASH AND CASH EQUIVALENTS,
beginning of period 4,179,313 12,228,660
------------ ------------
CASH AND CASH EQUIVALENTS,
end of period $ 6,986,750 $ 8,500,657
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 16,671 $ 49,077
Income taxes paid $ 800 $ 800
</TABLE>
See accompanying notes to consolidated financial statements
18
<PAGE> 19
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) The accompanying unaudited consolidated financial statements contain
all adjustments (consisting of only normal recurring adjustments)
which, in the opinion of management, are necessary to present fairly
the consolidated financial position of the Company at July 31, 1997,
and the consolidated results of its operations and its consolidated
cash flows for the three month periods ended July 31, 1997 and 1996.
Although the Company believes that the disclosures in the financial
statements are adequate to make the information presented not
misleading. Certain information and footnote disclosures normally
included in the consolidated financial statements have been condensed
or omitted pursuant to rules and regulations of the Securities and
Exchange Commission. The consolidated financial statements included
herein should be read in conjunction with the consolidated financial
statements of the Company, included in the Company's Annual Report on
Form 10-K for the year ended April 30, 1997, filed with the Securities
and Exchange Commission on July 29, 1997.
(2) The Company adopted Financial Accounting Standards Board (SFAS) No.
128, "Earnings per Share". Under SFAS No. 128, the Company was 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 adoption of this standard had no effect on the Company's reported
net loss per share amounts.
(3) In August 1997, the Company filed a Registration Statement on Form S-3
to register common shares which may be issued should the Class C
Preferred stockholders exercise their conversion rights under the 5%
Preferred Stock Investment Agreement. 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%
starting on November 26, 1997, 20% starting on January 26, 1998, 22.5%
starting on March 26, 1998, 25% starting on May 26, 1998, 27% starting
on the 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. 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. 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 Stock in cash or in common stock. 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.
Except as provided in the Certificate of Designation or by Delaware
law, the Class C Stock does not have voting rights.
19
<PAGE> 20
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) Results of operations for the interim periods covered by this Report
may not necessarily be indicative of results of operations for the full
fiscal year.
(5) Management believes that the Company's cash and short term investments
are sufficient to sustain its operations through at least July 31,
1998. Although management believes that the current financial resources
are sufficient to sustain operations through at least July 31, 1998,
the Company has historically experienced significant losses and
negative cash flows from operations and had an accumulated deficit of
$53,372,332 at July 31, 1997. The Company expects that it will continue
to experience negative cash flows as it increases activities associated
with the Phase II/III clinical trials for LYM-1 (Oncolym (TM)) and with
its research, development and clinical trials for its Tumor Necrosis
Therapy ("TNT") and other technologies. Historically, the Company has
relied on third party and investor funds to fund its operations and
clinical trials. The Company must raise additional capital to sustain
its research and development efforts and to provide for future clinical
trials. Although management expects to receive additional funding in
the future, there can be no assurance that funding will be received. If
the Company does not receive additional funding, it will be forced to
scale back operations and it could 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.
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE PERIOD ENDED 4/30/97 AND FORM 10-Q FOR THE PERIOD ENDED 07/31/97.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> JUL-31-1997
<EXCHANGE-RATE> 1,000
<CASH> 8,501
<SECURITIES> 1960
<RECEIVABLES> 98
<ALLOWANCES> 0
<INVENTORY> 187
<CURRENT-ASSETS> 10,811
<PP&E> 6,958
<DEPRECIATION> 1,170
<TOTAL-ASSETS> 17,299
<CURRENT-LIABILITIES> 2,181
<BONDS> 0
0
0
<COMMON> 27
<OTHER-SE> 13,002
<TOTAL-LIABILITY-AND-EQUITY> 17,229
<SALES> 4
<TOTAL-REVENUES> 203
<CGS> 4
<TOTAL-COSTS> 2,474
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49
<INCOME-PRETAX> (2,271)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,271)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,271)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
