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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 OCTOBER 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.
27,669,614 shares of Common Stock
as of November 30, 1997
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PART I -- FINANCIAL INFORMATION
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ITEM 1 -- FINANCIAL STATEMENTS
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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:
<TABLE>
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Page
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Consolidated Balance Sheets at April 30, 1997 and October 31, 1997 (unaudited) 20
Consolidated Statements of Operations for the periods from August 1, 1996 to
October 31, 1996 (unaudited) and from August 1, 1997 to October 31, 1997
(unaudited); from May 1, 1996 to October 31, 1996 (unaudited) and from May 1,
1997 to October 31, 1997 (unaudited) 22
Consolidated Statement of Stockholders' Equity for the period from April 30,
1997 to October 31, 1997 (unaudited) 23
Consolidated Statements of Cash Flows for the periods from May 1, 1996 to
October 31, 1996 (unaudited) and from May 1, 1997 to October 31, 1997
(unaudited) 24
Notes to Consolidated Financial Statements (unaudited) 26
</TABLE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
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GOING CONCERN. The accompanying 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
financial statements, the Company experienced losses in fiscal 1997 and in
the first six months of fiscal 1998 and has an accumulated deficit at October
31, 1997. Historically, the Company has relied on third party and investor funds
to fund its operations and clinical trials, and management expects that
additional funds will be required in the future to continue to fund operations
and clinical trials. 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 which 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. During the year ended April 30, 1997, the Company
received significant funding through the issuance of preferred stock which has
resulted in cash and short-term investment balances of $6,821,700 as of October
31, 1997. Management believes that additional capital must be raised to support
the Company's continued operations and other cash needs.
FLUCTUATION OF 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
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factors include worldwide economic and political conditions and industry
specific factors. If the Company is to remain competitive and to timely develop
and produce commercially viable products at competitive prices in a timely
manner, it must maintain access to external financing sources until it can
generate revenue from licensing transactions or sales of products. The Company's
ability to obtain financing and to manage its expenses and cash depletion rate
("burn rate") is the key to the Company's continued development of product
candidates and the completion of ongoing clinical trials. The Company expects
that its burn rate will vary substantially on a quarter to quarter basis as it
funds non-recurring items associated with clinical trials, product development,
patent legal fees and various consulting fees. The Company has limited
experience with clinical trials and if the Company encounters unexpected
difficulties with its operations or clinical trials, it may have to expend
additional funds which would increase its burn rate.
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 the early
stages of development, with only one product candidate currently in a clinical
trial. Revenues from product sales have been insignificant and throughout the
Company's history there have been minimal revenues from product royalties.
Additionally, product candidates 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 product candidates can be manufactured at acceptable cost and with
appropriate quality or that any approved products can be successfully marketed.
NEED FOR ADDITIONAL CAPITAL. At October 31, 1997, the Company had
approximately $6,822,000 in cash and cash equivalents and short-term
investments. The Company currently has commitments to expend significant funds
for building improvements, equipment, furniture and fixtures, developmental
research, clinical trials, consulting, and to acquire the marketing rights
previously owned by Alpha Therapeutics, Inc. ("Alpha"). The Company expects
these expenditures to increase in the future as the Company's clinical trial
activity increases and scale up for clinical trial production continues. 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 in connection with the Phase III
clinical trials for Oncolym(R) 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 complete the research and
development of the Company's additional product candidates. The Company is
actively pursuing the possibility of raising additional funds with various
lending institutions, investment banking firms and private investors, but as of
December 1, 1997, the Company had not entered into any firm commitments for
additional funds. If the initial results from any of the clinical trials 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
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believes are necessary for the continued growth of the Company. If 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.
To conduct clinical trials on a timely basis, obtain regulatory approval
and be commercially successful, the Company must be able to scale up its
manufacture processes and facilities and ensure compliance with regulatory
requirements of its product candidates so that such product candidates can be
manufactured in increased clinical trial quantities and ultimately in commercial
quantities. As the Company's first product, Oncolym(R) moves closer to
completion of the clinical trial process for FDA approval, the Company or a
contract manufacturer must scale up its production process to enable production
in commercial quantities. The Company anticipates that the scale up of its
Oncolym(R) product will currently cost at least two million dollars and that, if
the Company were to commercially manufacture the product, it will have to expend
an additional six to ten million dollars on production facility expansion.
Accordingly, once the Company's current scale up project is complete, the
Company believes it can successfully negotiate an agreement with a contract
manufacturer to have Oncolym(R) produced on a "per run basis" thereby deferring
or eliminating the significant expenditure (six to ten million dollars) which it
estimates is required upgrade its facilities to handle commercial quantities.
The Company anticipates that production of its products in commercial quantities
will create technical and financial challenges for the Company. The Company has
limited manufacturing experience, and no assurance can be given as to the
Company's ability to scale its manufacturing, the suitability of the Company's
present facility for clinical trial production or commercial production, the
Company's ability to make a successful transition to commercial production or
the Company's ability to reach an acceptable agreement with a contract
manufacturer to produce Oncolym(R) or the Company's other product candidates in
clinical or commercial quantities. The failure of the Company to scale its
manufacturing for clinical trial or commercial production or to obtain a
contract manufacturer could have 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 October 31, 1997, the Company's accumulated
deficit was approximately $65,234,000. 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,
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, preclinical studies or 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
significant product revenues for at least the next few years. There can be no
assurance that the Company will ever generate significant product revenues which
are sufficient to become profitable or to sustain profitability.
SHARES ELIGIBLE FOR FUTURE SALE; DILUTION; CONTROL. A precipitous
decline in the market price of the Company's Common Stock may lead to very
substantial dilution to current holders of Common Stock. Both the Class B
Convertible Preferred Stock ("Class B Preferred Stock") and the Class C
Preferred Stock provide that the conversion of such shares of preferred stock
into shares of the Company's Common Stock issued or issuable shall be at the
lower of a conversion cap or a conversion price indexed to the market price of
the Common Stock at the time of conversion. On conversion of the Class B
Preferred Stock and the Class C Preferred Stock, all of such shares of Common
Stock which
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are issued may be freely tradable. Sales of substantial amounts of Common Stock
in the public market could adversely affect the prevailing market price of the
Common Stock and, depending upon the then current market price of the Common
Stock, increase the risks associated with the possible conversion of the
Preferred Stock.
At any date prior to March 24, 1998, the shares of Class C Preferred
Stock may be converted into shares of Common Stock at a discount from the
average of the lowest market trading price for the five days preceding
conversion ("Conversion Price"). If any shares of Class C Preferred Stock are
converted on or after September 25, 1997, but prior to November 25, 1997, the
discount from Market Price is 0.0%, if any shares of Class C Preferred Stock are
converted on or after November 25, 1997, but prior to January 25, 1998, the
discount from Market Price is 13%, if any shares of Class C Preferred Stock are
converted on or after January 25, 1998, but prior to March 25, 1998, the
discount from Market Price is 20%, if any shares of Class C Preferred Stock are
converted on or after March 25, 1998, but prior to May 25, 1998, the discount
from Market Price is 22.5%, if any shares of Class C Preferred Stock are
converted on or after May 25, 1998, but prior to July 25, 1998, the discount
from Market Price is 25%, if any shares of Class C Preferred Stock are converted
on or after July 25, 1998, the discount from Market Price is 27%.
At any date after March 24, 1998, the Conversion Price shall be the
lower of (i) the Conversion Price calculated in accordance with the paragraph
set forth above or (ii) the average of the closing prices of the Common Stock
for the thirty (30) trading days including and immediately preceding March 24,
1998 (the "Conversion Cap").
In the event of a dissolution or liquidation of the Company, the holders
of the Class C Preferred Stock are entitled to a liquidation or preference of
$1,000 plus accrued dividends. Upon the occurrence of certain specified events
the holders of the Class C Preferred Stock may force a redemption of the Class C
Preferred Stock. The Company may elect in its redemption notice to redeem the
Preferred Stock either in cash or in Common Stock. For purposes of redemption,
the value of the Common Stock shall be 73% of the average of the lowest market
trading price for five consecutive days during the period beginning on the date
of the redemption notice and ending on the redemption date.
The Class B Preferred Stock has a mandatory conversion date of December
29, 1998, and the warrants related thereto have an expiration date as of
December 28, 2000. If the market price of the Common Stock is below $3.61 per
share at the time of conversion of the Class B Preferred Stock, the effective
conversion price of the Class B Preferred Stock issued will be lower than the
conversion cap of $3.06875, resulting in the issuance of more shares of Common
Stock upon the conversion of the Class B Preferred Stock. The conversion price
for the Class B Preferred Stock is the lower of (i) $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 and the closing price on December 5,
1995, the date the Company agreed to proceed with the offering of the Class B
Preferred Stock, or (ii) 85% of the closing bid price for the Company's Common
Stock for the five trading days immediately preceding the date of the
conversion. The number of shares of Common Stock issued upon conversion of each
share of Class B 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 December 29, 1995 and the date of conversion plus
(ii) One Thousand Dollars ($1,000), (iii) divided by the conversion price.
The Class B Preferred Stock has a liquidation preference over the
Company's Common Stock. This liquidation preference is $1,000 per share of Class
B Preferred Stock plus 10% per annum pro-rated through any liquidation date.
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During the quarter end October 31, 1997, no shares of Class B Preferred
Stock were converted and 628 shares of Class C Preferred Stock were converted at
the election of the holders into 245,610 shares of Common Stock. As of October
31, 1997, 11,627 shares and 2,200 shares of Class C and Class B Preferred
Stock, respectively, remain outstanding with total liquidation preference of
approximately $14,533,000.
In addition to the warrants set forth above, the Company has outstanding
warrants to issue 130,100 shares of stock at prices ranging from $3.00 to $5.30.
The warrants expire as follows: 30,000 warrants expire on or before April 30,
1998, 10,000 on December 31, 1999 and 90,100 on December 18, 2000. In connection
with its search for a chief executive officer, the Company has committed to
grant warrants. Such grant is dependent on the success and the conclusion date
of the search. As of October 31, 1997, the Company had granted options to
purchase 4,639,000 shares of Common Stock pursuant to its stock option plans.
STOCK PRICE FLUCTUATIONS AND LIMITED TRADING VOLUME. The Company's
participation in the highly competitive biotechnology industry often results in
significant volatility in the market price of the Company's Common Stock. Also,
at times there is a limited trading volume in the Company's Common Stock.
Announcements of technological innovations or new commercial products by the
Company or its competitors, developments or disputes concerning patent or
proprietary rights, publicity regarding actual or potential medical results
relating to products under development by the Company or its competitors,
regulatory developments in both the United States and foreign countries, public
concern as to the safety of biotechnology products and economic and other
external factors, as well as period-to-period fluctuations in financial results
may have a significant impact on the market price of the Company's Common Stock.
The volatility in the stock price and limited trading volume are significant
risks investors should consider. If the price of the Common Stock declines and
the holders of the Preferred Stock convert when the price is low, the Company
will be required to issue a substantial amount of additional shares as both the
Class B Convertible Preferred Stock and the Class C Preferred Stock provide that
the conversion of such shares of preferred stock into shares of the Company's
Common Stock issued or issuable shall be at the lower of a conversion cap or a
conversion price indexed to the market price of the Common Stock at the time of
conversion. If the holders of the Preferred Stock converted and attempted to
sell all or a significant portion of the shares of Common Stock in the open
market, this could cause a severe depression of the market price for a share of
the Company's Common Stock.
MAINTENANCE CRITERIA FOR NASDAQ SECURITIES. The National Association of
Securities Dealers, Inc. ("NASD"), which administers NASDAQ, recently made
changes in the criteria for continued NASDAQ eligibility on the NASDAQ SmallCap
Market. In order to continue to be included in NASDAQ, the Company must maintain
$2 million in tangible net assets, public float of 500,000 shares with a
$1,000,000 market value of its public float and $1 million in total capital and
surplus. In addition, continued inclusion requires two market-makers, at least
300 holders of the Common Stock and a minimum bid price of $1 per share;
provided, however, that if the Company falls below such minimum bid price, it
will remain eligible for continued inclusion in NASDAQ if the market value of
the public float is at least $1 million and the Company has $2 million in
capital and surplus. The Company's failure to meet these maintenance criteria in
the future may result in the discontinuance of the inclusion of its securities
in NASDAQ. In such event, the Company would become subject to the "penny stock"
rules and trading, if any, in the Company's Common Stock would then continue to
be conducted in the non-NASDAQ over-the-counter market in what are commonly
referred to as the electronic bulletin board and the "pink sheets." As a result,
an investor may find it more difficult to dispose of or to obtain accurate
quotations as to the market value of the securities.
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INTENSE COMPETITION. The biotechnology industry is intensely competitive
and changing rapidly. Substantially all of the Company's existing competitors
have greater financial resources, larger technical staff, and larger research
budgets than the Company and greater experience in developing products and
running clinical trials. Two of the Company's competitors, Idec Pharmaceuticals
Corporation ("Idec") and Coulter Pharmaceuticals, Inc. ("Coulter"), each have a
lymphoma antibody which, while indicated for a different stage of the
Non-Hodgkins Lymphoma, may compete with the Company's Oncolym(R) product. The
Company believes that both Idec and Coulter will be marketing their respective
lymphoma products prior to the time the Oncolym(R) product receives marketing
approval. 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 business, financial position and results of operations. There can be
no assurance that the Company's competitors will not be able to raise
substantial funds and to employ these funds and their other resources to develop
products which compete with the Company's other product candidates.
TECHNOLOGICAL UNCERTAINTY. 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; (ii) any proposed products will prove to be effective in clinical
trials; (iii) the Company's product candidates will not cause harmful side
effects during clinical trials; (iv) the Company's product candidates may take
longer to progress through clinical trials than has been anticipated; (v) the
Company's product candidates may prove impracticable to manufacture in
commercial quantities at a reasonable cost and/or with acceptable quality; (vi)
the Company will be able to obtain all necessary governmental clearances and
approvals to market its products; (vii) the Company's product candidates will
prove to be commercially viable or successfully marketed; or (viii) 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 business, financial position 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 Oncolym(R) 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 Oncolym(R) 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
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demonstrate adequately the safety and efficacy of Oncolym(R) 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.
UNCERTAINTIES ASSOCIATED WITH CLINICAL TRIALS. The Company has limited
experience in conducting clinical trials, but it believes that the clinical
trials will be costly. The rate of completion of the Company's clinical trials
will be dependent upon, among other factors, the rate of patient enrollment.
Patient enrollment is a function of many factors, including the nature of the
Company's clinical trial protocols, existence of competing protocols, size of
the patient population, proximity of patients to clinical sites and eligibility
criteria for the study. Delays in patient enrollment will result in increased
costs and delays, which could have a material adverse effect on the Company. The
Company cannot assure that patients enrolled in the Company's clinical trials
will respond to the Company's product candidates. Setbacks are to be expected in
conducting human clinical trials. Failure to comply with the United States Food
and Drug Administration ("FDA") regulations applicable to such testing can
result in delay, suspension or cancellation of such testing, and/or refusal by
the FDA to accept the results of such testing. In addition, the FDA may suspend
clinical trials at any time if it concludes that the subjects or patients
participating in such trials are being exposed to unacceptable health risks.
Further, there can be no assurance that human clinical testing will show any
current or future product candidate to be safe and effective or that data
derived therefrom will be suitable for submission to the FDA. 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.
LENGTHY REGULATORY PROCESS; NO ASSURANCE OF REGULATORY APPROVALS. The
testing, manufacturing, labeling, advertising, promotion, export and marketing,
among other things, of the Company's proposed products are subject to extensive
regulation by governmental authorities in the United States and other countries.
In the United States, pharmaceutical products are regulated by the FDA under the
Federal Food, Drug, and Cosmetic Act and other laws, including, in the case of
biologics, the Public Health Service Act. At the present time, the Company
believes that its products will be regulated by the FDA as biologics.
Manufacturers of biologics may also be subject to state regulation.
The steps required before a biologic may be approved for marketing in
the United States generally include (i) preclinical laboratory tests and animal
tests, (ii) the submission to the FDA of an Investigational New Drug application
("IND") for human clinical testing, which must become effective before human
clinical trials may commence, (iii) adequate and well-controlled human clinical
trials to establish the safety and efficacy of the product, (iv) the submission
to the FDA of a Product License Application ("PLA") or a Biologics License
Application ("BLA"), (v) the submission to the FDA of an Establishment License
Application ("ELA"), (vi) FDA review of the ELA and the PLA or BLA, and (vii)
satisfactory completion of an FDA inspection of the manufacturing facility or
facilities at which the product is made to assess compliance with CGMP. The
testing and approval process requires substantial time, effort, and financial
resources and there can be no assurance that any approval will be granted on a
timely basis, if at all. There can be no assurance that Phase I, Phase II or
Phase III testing will be completed successfully within any specific time
period, if at all, with respect to any of the Company's product candidates.
Furthermore, the FDA may suspend clinical trials at any time on various grounds,
including a finding that the subjects or patients are being exposed to an
unacceptable health risk.
The results of preclinical studies and clinical studies, together with
detailed information on the manufacture and composition of a product candidate,
are submitted to the FDA in the form of a PLA or
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BLA requesting approval to market the product candidate. Before approving a PLA
or BLA, the FDA will inspect the facilities at which the product is
manufactured, and will not approve the marketing of the product candidate unless
CGMP compliance is satisfactory. The FDA may deny a PLA or BLA if applicable
regulatory criteria are not satisfied, require additional testing or
information, and/or require postmarketing testing and surveillance to monitor
the safety or efficacy of a product. There can be no assurance that FDA approval
of any PLA or BLA submitted by the Company will be granted on a timely basis or
at all. Also, if regulatory approval of a product is granted, such approval may
entail limitations on the indicated uses for which it may be marketed.
Both before and after approval is obtained, violations of regulatory
requirements, including the preclinical and clinical testing process, the PLA or
BLA review process, or thereafter (including after approval) may result in
various adverse consequences, including the FDA's delay in approving or refusing
to approve a product, withdrawal of an approved product from the market, and/or
the imposition of criminal penalties against the manufacturer and/or license
holder. For example, license holders are required to report certain adverse
reactions to the FDA, and to comply with certain requirements concerning
advertising and promotional labeling for their products. Also, quality control
and manufacturing procedures must continue to conform to CGMP regulations after
approval, and the FDA periodically inspects manufacturing facilities to assess
compliance with CGMP. Accordingly, manufacturers must continue to expend time,
monies and effort in the area of production and quality control to maintain CGMP
compliance. In addition, discovery of problems may result in restrictions on a
product, manufacturer, including withdrawal of the product from the market.
Also, new government requirements may be established that could delay or prevent
regulatory approval of the Company's product candidates.
The Company will also be subject to a variety of foreign regulations
governing clinical trials and sales of its products. Whether or not FDA approval
has been obtained, approval of a product candidate by the comparable regulatory
authorities of foreign countries must be obtained prior to the commencement of
marketing of the product in those countries. The approval process varies from
country to country and the time may be longer or shorter than that required for
FDA approval. At least initially, the Company intends, to the extent possible,
to rely on foreign licensees to obtain regulatory approval for marketing its
products in foreign countries.
SOURCE OF RADIOLABELING SERVICES. The Company procures its radiolabeling
services from Mills Biopharmaceuticals, Inc. In addition to Mills
Biopharmaceuticals, Inc., the Company has negotiated contracts with two other
radiolabeling companies and continues to negotiate with other companies to
provide radiolabeling services for its antibodies. There can be no assurance
that these additional suppliers will be able to qualify their facilities, label
and supply 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 is
developing additional suppliers of these services, it expects to rely on its
current supplier for all or a significant portion of its requirements for the
Oncolym(R) 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 Oncolym(R) 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.
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HAZARDOUS AND RADIOACTIVE MATERIALS. The manufacturing and use of the
Company's Oncolym(R) requires the handling and disposal of I131. The Company is
relying on its current contract manufacturer, Mills Biopharmaceuticals, Inc
("MBI") and other contract radiolabeling companies, to radiolabel its antibodies
with I131 and to 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 other contract radiolabeling companies or a clinical trial
site could delay significantly completion of such trials. Violations of safety
regulations could occur with these manufacturers, and, therefore, there is a
risk of accidental contamination or injury. 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. In
the event of any such noncompliance or accident, the supply of Oncolym(R) 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.
DEPENDENCE ON THIRD PARTIES FOR COMMERCIALIZATION. The Company intends
to sell its products in the United States and internationally in collaboration
with marketing partners. At the present time, the Company does not have a sales
force to market Oncolym(R). If and when the FDA approves Oncolym(R), the
marketing of Oncolym(R) will be contingent upon the Company entering into an
agreement with a company with a sales force or upon the Company recruiting,
training and deploying a sales force. The Company does not possess the resources
and experience necessary to market either Oncolym(R) or 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 the Company is successful in obtaining FDA
approval for one of its other product candidates the Company's ability to market
the product will be contingent upon it either licensing or entering into a
marketing agreement with a large company or upon it recruiting, developing,
training and deploying its own sales force. Development of an effective sales
force requires significant financial resources and time. There can be no
assurance that the Company will be able to establish such a sales force in a
timely or cost effective manner, if at all, or that such a sales force will be
capable of generating 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, Oncolym(R) is approved, it would represent a
significant departure from currently approved methods of treatment for
Non-Hodgkin's lymphoma. Accordingly, Oncolym(R) may experience under-utilization
by oncologists and hematologists who are unfamiliar with the application of
Oncolym(R) 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, rather than new alternative therapies.
Market acceptance also could be affected by the availability of third party
reimbursement. Failure of Oncolym(R) to achieve market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations.
PATENTS AND PROPRIETARY RIGHTS. The Company's success will depend, in
large part, on its ability to maintain a proprietary position in its products
through patents, trade secrets and orphan drug designations. The Company has
several United States patent(s), United States patent applications and numerous
corresponding foreign patent applications, and has licenses to patents or patent
applications
-10-
<PAGE> 11
owned by other entities. No assurance can be given, however, that the patent
applications of the Company or the Company's licensors will be issued or that
any issued patents will provide competitive advantages for the Company's
products or will not be successfully challenged or circumvented by its
competitors. The patent position worldwide of biotechnology companies in
relation to proprietary products is highly uncertain and involves complex legal
and factual questions. Moreover, there can be no assurance that any patents
issued to the Company or the Company's licensors will not be infringed by others
or will be enforceable against others. In addition, there can be no assurance
that the patents, if issued, would not be held invalid or unenforceable by a
court of competent jurisdiction. Enforcement of the Company's patents may
require substantial financial and human resources. Moreover, the Company may
have to participate in interference proceedings if declared by the United States
Patent and Trademark Office to determine priority of inventions, which typically
take several years to resolve and could result in substantial costs to the
Company.
A substantial number of patents have already been issued to other
biotechnology and biopharmaceutical companies. Particularly in the monoclonal
antibody field, competitors may have filed applications for or have been issued
patents and may obtain additional patents and proprietary rights relating to
products or processes competitive with or similar to those of the Company. To
date, no consistent policy has emerged regarding the breadth of claims allowed
in biopharmaceutical patents. There can be no assurance that patents do not
exist in the United States or in foreign countries or that patents will not be
issued that would have an adverse effect on the Company's ability to market any
product which it develops. Accordingly, the Company expects that commercializing
monoclonal antibody-based products may require licensing and/or cross-licensing
of patents with other companies in this field. There can be no assurance that
the licenses, which might be required for the Company's processes or products,
would be available, if at all, on commercially acceptable terms. The ability to
license any such patents and the likelihood of successfully contesting the scope
or validity of such patents are uncertain and the costs associated therewith may
be significant. If the Company is required to acquire rights to valid and
enforceable patents but cannot do so at a reasonable cost, the Company's ability
to manufacture its products would be materially adversely affected.
The Company also relies on trade secrets and proprietary know-how which
it seeks to protect, in part, by confidentiality agreements with its employees
and consultants. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
developed by competitors.
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
-11-
<PAGE> 12
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.
The Company's ability to successfully commercialize its product
candidates will depend in part on the extent to which appropriate reimbursement
codes and authorized cost reimbursement levels of such products and related
treatment are obtained from governmental authorities, private health insurers
and other organizations, such as health maintenance organizations ("HMOs"). The
Health Care Financing Administration ("HCFA"), the agency responsible for
administering the Medicare program, sets requirements for coverage and
reimbursement under the program, pursuant to the Medicare law. In addition, each
state Medicaid program has individual requirements that affect coverage and
reimbursement decisions under state Medicaid programs for certain health care
providers and recipients. Private insurance companies and state Medicaid
programs are influenced, however, by the HCFA requirements.
There can be no assurance that any of the Company's product candidates,
once available, will be included within the then current Medicare coverage
determination. In the absence of national Medicare coverage determination, local
contractors that administer the Medicare program, within certain guidelines, can
make their own coverage decisions. Favorable coverage determinations are made in
those situations where a procedure falls within allowable Medicare benefits and
a review concludes that the service is safe, effective and not experimental.
Under HCFA coverage requirements, FDA approval for marketing will not
necessarily lead to a favorable coverage decision. A determination will still
need to be made as to whether the product is reasonable and necessary for the
purpose used. In addition, HCFA has proposed adopting regulations that would add
cost-effectiveness as a criterion in determining Medicare coverage. Changes in
HCFA's coverage policy, including adoption of a cost-effective criterion could
have a material adverse effect on the Company.
Third-party payers are increasingly challenging the prices charged for
medical products and services. Also, the trend toward managed health care in the
United States and the concurrent growth of organizations such as HMOs, which
could control or significantly influence the purchase of health care services
and products, as well as legislative proposals to reform health care or reduce
government insurance programs may all result in lower prices for the Company's
product candidates than it expects. The cost containment measures that health
care payers and providers are instituting and the effect of any health care
reform could materially adversely affect the Company's ability to operate
profitably.
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.
FORWARD-LOOKING STATEMENTS. Based on current expectations, this
Quarterly Report on Form 10-Q contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. In light of the important factors that can materially affect
-12-
<PAGE> 13
results, including those set forth above, the inclusion of forward-looking
information 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,
other commitments, or clinical trial casts, 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
business, financial position and results of operations.
THE COMPANY
-----------
Techniclone Corporation was incorporated in the State of Delaware on
September 25, 1996. On March 24, 1997, Techniclone International Corporation, a
California corporation, was merged with and into Techniclone Corporation. The
merger was effected for the purpose of effecting a change in the Company's state
of incorporation from California to Delaware. Unless the context otherwise
requires, references to the "Company" herein includes Techniclone Corporation,
its predecessor Techniclone International Corporation, its former subsidiary
Cancer Biologics, Inc. (which was merged into the Company on June 26, 1994) and
its wholly owned subsidiary Peregrine Pharmaceuticals, Inc. The principal
executive offices of the Company are located at 14282 Franklin Avenue, Tustin,
California 92780-7017. The Company's telephone number is (714) 838-0500 and the
Company's address on the World Wide Web is http://www.techniclone.com.
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 (collectively
the "LYM Antibodies") 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).
The Company 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 linked to Iodine-131 (I131). A significant number of these patients
had significant clinical responses including patients showing complete and
durable responses. The side effects experienced by these patients were minimal
and the toxicities, including bone marrow suppression, that normally accompany
cancer treatment with conventional therapeutic radioisotopes were all clinically
manageable.
-13-
<PAGE> 14
Phase II/III testing in multi-center clinical trials of the Oncolym(R)
antibody in late stage non-Hodgkins lymphoma patients were conducted and
sponsored by Alpha Therapeutic Corporation ("Alpha"), a wholly owned subsidiary
of Green Cross Corporation. The clinical trials were 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 II/III trial and
submitted the final imaging and dosimetry data reports to the FDA in August
1997. Alpha met with the FDA on October 28, 1997, to discuss expansion of the
clinical trials.
On November 14, 1997, the Company entered into a Termination and
Transfer Agreement (the "Termination Agreement") with Alpha Therapeutic
Corporation ("Alpha"). The Termination Agreement terminates the Development
Agreement dated October 28, 1992, as amended and transfers to the Company all of
Alpha's right, title and interest in and to the IND Application and related
documents and the Company's clinical program relating to the antibody. The
Termination Agreement requires certain payments to be made (i) upon the signing
of the Agreement, (ii) when the first patient is enrolled in a Techniclone
sponsored clinical trial or six months, whichever is earlier, (iii) upon the
company's filing of a BLA of and (iv) upon FDA approval of a BLA for LYM 1 and
royalties on product sales thereafter.
After acquiring Oncolym(R), the Company met with the FDA and further
changed and expanded the treatment regimen. The Company expects to resume Phase
III clinical trials for Oncolym(R) in the first quarter of 1998. Following the
completion of the clinical trials, the Company will file an application with the
FDA to market Oncolym(R) in the United States.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------
OPERATIONS
- ----------
GOING CONCERN
- -------------
The accompanying 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 financial
statements, the Company experienced losses in fiscal 1997 and during the first
six months of fiscal 1998 and has an accumulated deficit at October 31, 1997.
Historically, the Company has relied on third party and investor funds to fund
its operations and clinical trials, and management expects that additional funds
will be required in the future to continue to fund operations and clinical
trials. 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 which 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. During the year ended April 30, 1997, the Company
received significant funding through the issuance of preferred stock which has
resulted in cash and short-term investment balances of approximately $6,822,000
as of October 31, 1997. Management believes that additional capital must be
raised to support the Company's continued operations and other cash needs.
RESULTS OF OPERATIONS
- ---------------------
The Company's net loss of approximately $3,429,000 before preferred
stock accretion and dividends for the quarter ended October 31, 1997 represents
an increase in losses of $1,909,000 from the prior year quarter ended October
31, 1996. The increase in the net loss for the quarter ended October 31, 1997,
before preferred stock accretion and dividends is primarily
-14-
<PAGE> 15
attributable to a $1,984,200 increase in total costs and expenses which were
partially offset by a $74,900 increase in total revenues. The Company's net loss
of approximately $5,700,000 for the six months ended October 31, 1997 represents
an increase in losses of $3,232,000 over the six months ended October 31, 1996.
The increased loss over the comparable periods 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 Oncolym(R) 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 Oncolym(R) 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 Oncolym(R) and
TNT technologies.
Revenues for the quarter ended October 31, 1997 increased $74,900
compared to the same period in the prior year. The quarterly increase in
revenues is attributable to a $44,100 increase in interest income and a $30,800
increase in rental income. Revenues for the six months ended October 31, 1997
increased $191,500 compared to the same prior year period ended October 31,
1996. This increase is attributable to a $118,000 increase in interest income, a
$69,200 increase in rental income and a $4,300 increase in sales revenue in
comparison to the same prior year period ended October 31, 1996. Interest income
increased during the current quarter coinciding with an increased level of cash
available for investment. Management expects interest income during the
remainder of the current year to approximate amounts earned in the prior year
based on anticipated cash levels for the remainder of the year. 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 six
months ended October 31, 1997 compared to the period of the prior quarter due to
shipments of Oncolym(R) used in the Phase II/III clinical trials. Management
does not expect to sell antibodies during the remainder of the fiscal year
ending April 30, 1998.
The Company's total costs and expenses increased $1,984,200 during the
quarter ended October 31, 1997, in comparison to the same prior year period
ended October 31, 1996. This increase resulted from a $1,225,700 increase in
research and development expenses, a $729,700 increase in general and
administrative expenses, and a $28,900 increase in interest expense in
comparison to the prior year period ended October 31, 1996. The Company's total
costs and expenses increased $3,423,500 for the six months ended October 31,
1996, in comparison to the same prior year ended October 31, 1996. This increase
resulted from a $4,300 increase in cost of sales, a $2,053,800 increase in
research and development expenses, a $1,312,300 increase in general and
administrative expenses and a $53,000 increase in interest expense in comparison
to the prior year period ended October 31, 1996.
The increase in cost of sales during the six months ended October 31,
1997 was due to the increase in sales of antibodies associated with the
Oncolym(R) Phase II/III clinical trials. The increase in research and
development expenses during the quarter and six months ended October 31, 1997,
relates to increased internal research and development activities, increased
research and patent activity associated with the acquisition of Peregrine
Pharmaceuticals, Inc. (Peregrine) and the net effect of a write-off of inventory
and the reduction in reserves for contract losses associated with terminating
the Alpha Agreement. During the three and six month periods ended October 31,
1997, internal research and development costs increased due to increased payroll
costs associated with hiring of additional management and staff personnel and
increased costs to facilitate the expansion of clinical trial activity
for Oncolym(R) and continued development of the TNT technologies in preparation
for the filing of the Investigational New Drug Applications (IND's) for U.S.
Phase I/II clinical trials. External research and development costs also
increased during the three and six month periods ended October 31, 1997, due to
increases in sponsored
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<PAGE> 16
research and development costs and increased legal and patent costs primarily
associated with the VTA technologies and the acquisition of Peregrine.
Additionally, during the three months ended October 31, 1997, in conjunction
with the Termination Agreement with Alpha. The Company wrote off the remaining
value of its LYM-1 inventory ($241,000) and removed its reserve for contract
losses ($248,000) and inventory reserves ($46,000). The inventory and related
reserve were written off because subsequent to the Termination Agreement, the
Company will no longer be selling inventory for use in the LYM-1 trials to Alpha
at predetermined prices, but will be utilizing the inventory in Phase II/III
clinical trials now being conducted by the Company.
The increase in general and administrative expenses during the quarter
and six months ended October 31, 1997, resulted primarily from increased payroll
and related costs associated with the recruiting and hiring of new personnel,
costs associated with the Company's annual shareholder meeting held on October
27, 1997, increased travel costs, an increase in stock-based compensation
expense, and increased legal, accounting and other costs associated with the
Class C Preferred Stock. 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 during the
quarter and six months ended October 31, 1997 of $28,900 and $53,000,
respectively, is primarily due to a higher level of interest bearing debt
outstanding during the current quarter and six-month period 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
expenses associated with clinical trials will continue to increase as the
Company's continues to expand its clinical trial activities and increases
production of the Oncolym(R) antibodies for the expanded Phase III Oncolym(R)
clinical trials.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At October 31, 1997, the Company had approximately $6,821,700 in cash
and cash equivalents and short-term investments and had working capital of
approximately $3,859,300 compared to $12,228,700 in cash and cash equivalents
and working capital of $10,618,000 at April 30, 1997. The Company experienced
losses in fiscal 1997 and during the first six months of fiscal 1998 and had an
accumulated deficit at October 31, 1997. During the year ended April 30, 1997,
the Company received significant funding through the issuance of preferred stock
which has resulted in cash and short-term investment balances of $6,821,700 as
of October 31, 1997. Management believes that additional capital must be raised
to support the Company's continued operations and other cash needs.
The increased research and development activities, expanded clinical
trial efforts and the acquisition of Peregrine and the continuance of obtaining
patent and license rights related to the VTA technologies have increased the
Company's losses and burn rate. The Company believes it can only reduce the burn
rate if it significantly reduces programs or delays the commencement of clinical
trials and development of the facilities. The Company believes that it will
continue to experience losses and negative cash flow from operations for the
foreseeable future as it increases activities associated with the Phase III
clinical trials for Oncolym(R) 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
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<PAGE> 17
Company does not receive additional funding, it will be forced to scale back
operations and it 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.
COMMITMENTS
- -----------
At October 31, 1997, the Company had fixed commitments of approximately
$2,700,000 for building improvements, equipment, furniture and fixtures,
developmental research, clinical trials and consulting agreements. In addition,
the Company has additional significant contingent obligations for payments to
licensors for its technologies and to Alpha in connection with the acquisition
of the Oncolym(R) rights previously owned by Alpha. While this obligation to
Alpha is contingent upon the Company attaining certain milestones, the Company
believes the milestones are achievable and that it will incur these milestone
obligations. The Company is actively pursuing a partner to assist with the
marketing and development costs.
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 such funds on terms acceptable to it, or at
all, or that sufficient additional capital will be raised to complete the
research and development of the Company's additional product candidates. The
Company is actively pursuing the possibility of raising additional funds with
various lending institutions, investment banking firms and private investors,
but as of December 1, 1997, the Company had not entered into any firm
commitments for additional funds. If the initial results from any of clinical
trials 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. If 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.
-17-
<PAGE> 18
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.
---------------------------------------------------
The Company held an annual meeting of the stockholders (the "Stockholder
Meeting") on October 27, 1997.
At the Stockholder Meeting incumbent directors Lon H. Stone, Clive R.
Taylor, Edward Joseph Legere, II and Carmelo J. Santoro were re-elected and Marc
E. Lippman was elected to the Board of Directors to serve until the next meeting
of the stockholders or until their respective successors are elected and
qualified.
The number of shares voted in favor of the election of Lon H. Stone to
the Board of Directors was 24,030,877 and the number of shares voted against or
withheld were 341,587. The number of shares voted in favor of the election of
Clive R. Taylor to the Board of Directors was 24,140,715 and the number of
shares voted against or withheld were 231,749. The number of shares voted in
favor of the election of Edward Joseph Legere II to the Board of Directors was
24,091,649 and the number of shares voted against or withheld were 280,815. The
number of shares voted in favor of the election of Carmelo J. Santoro to the
Board of Directors was 24,091,513 and the number of shares voted against or
withheld were 280,951. The number of shares voted in favor of Marc E. Lippman to
the Board of Directors was 24,152,118 and the number of shares voted against or
withheld were 220,346.
In addition, the stockholders approved the following: (i) an amendment
to the Company's Certificate of Incorporation to increase the authorized number
of shares of Common Stock from 50,000,000 to 60,000,000 (Proposal 2); and (ii)
the appointment of Deloitte & Touche LLP as independent auditors (Proposal 3).
The number of shares voting in favor of Proposal 2 was 23,824,795, the number of
shares voting against or withheld were 460,953 and the number of shares which
abstained were 86,716. The number of shares voting in favor of Proposal 3 was
23,797,548, the number of shares voting against or withheld were 510,861 and the
number of shares which abstained were 64,055.
Item 5. Other Information. None.
------------------
Item 6. Exhibits and Report on Form 8-K.
--------------------------------
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K: None.
-18-
<PAGE> 19
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: /s/ Lon H. Stone
---------------------------------
Lon H. Stone,
Chief Executive Officer
(Principal Executive Officer)
By: /s/ William V. Moding
---------------------------------
William V. Moding,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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<PAGE> 20
TECHNICLONE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS APRIL 30, OCTOBER 31,
1997 1997
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 12,228,660 $ 3,874,267
Short-term investments 2,947,385
Other receivables 360,448 197,028
Inventories, net (Note 9) 172,162 62,997
Prepaid expenses and other current assets 20,138 139,488
------------ ------------
Total current assets 12,781,408 7,221,165
PROPERTY:
Land 1,050,510 1,050,510
Buildings and improvements 3,350,916 3,679,121
Laboratory equipment 1,579,300 1,815,952
Furniture and fixtures 396,225 803,194
Construction-in-progress 1,092,972
------------ ------------
6,376,951 8,441,749
Less accumulated depreciation and amortization (1,038,619) (1,318,628)
------------ ------------
Property, net 5,338,332 7,123,121
OTHER ASSETS:
Patents, net 178,815 231,588
Note receivable from officer and shareholder 356,914 369,214
Other 46,001 35,017
------------ ------------
Total other assets 581,730 635,819
------------ ------------
$ 18,701,470 $ 14,980,105
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-20-
<PAGE> 21
TECHNICLONE CORPORATION
CONSOLIDATED BALANCE SHEETS
(continued)
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
1997 1997
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 707,504 $ 1,512,427
Accrued legal and accounting fees 385,500 729,477
Accrued payroll and related costs 162,487 158,786
Accrued royalties and sponsored research 339,560 184,667
Reserve for contract losses 248,803
Accrued license termination fee (Note 9) 100,000 100,000
Accrued interest 72,844 72,628
Current portion of long-term debt 76,527 112,456
Other current liabilities 70,171 491,425
------------ ------------
Total current liabilities 2,163,396 3,361,866
LONG-TERM DEBT 1,970,065 1,986,530
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value; authorized 5,000,000 shares: Class B
convertible preferred stock, shares outstanding April 30, 1997 and
October 31, 1997, 2,200 shares; (liquidation
preference of $2,605,041 at October 31, 1997) 2 2
Class C convertible preferred stock, shares outstanding -
April 30, 1997 12,000 shares and October 31, 1997, 11,627 shares;
(liquidation preference of $11,928,028 at October 31, 1997) 12 12
Common stock - $.001 par value; authorized 60,000,000 shares;
outstanding - April 30, 1997,27,248,652 shares; October 31, 1997,
27,669,614 shares 27,249 27,670
Additional paid-in capital (Note 8) 72,391,736 75,314,714
Accumulated deficit (Note 8) (57,374,408) (65,234,107)
------------ ------------
15,044,591 10,108,291
Less notes receivable from sale of common stock (476,582) (476,582)
------------ ------------
Total stockholders' equity 14,568,009 9,631,709
------------ ------------
$ 18,701,470 $ 14,980,105
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-21-
<PAGE> 22
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1997 1996 1997
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Net product sales and royalties $ -- $ -- $ -- $ 4,300
Interest and other income 86,043 160,897 172,345 359,509
------------ ------------ ------------ ------------
Total revenues 86,043 160,897 172,345 363,809
COSTS AND EXPENSES:
Cost of sales -- -- -- 4,300
Research and development 760,153 1,985,813 1,338,275 3,392,118
General and administrative:
Unrelated entities 745,406 1,449,375 1,121,621 2,431,981
Affiliates 75,757 101,464 131,012 133,001
Interest 24,758 53,622 49,732 102,699
------------ ------------ ------------ ------------
Total costs and expenses 1,606,074 3,590,274 2,640,640 6,064,099
Net loss before preferred stock
accretion and dividends (1,520,031) (3,429,377) (2,468,295) (5,700,290)
Preferred stock accretion and
dividends:
Imputed dividends for
Class B Preferred Stock (119,896) (65,947) (330,945) (151,030)
Accretion of Class C
Preferred Stock Discount -- (745,091) -- (1,577,283)
Imputed Dividends for Class
C Preferred Stock -- (204,477) -- (431,096)
------------ ------------ ------------ ------------
Net Loss Applicable to
Common Stock $ (1,639,927) $ (4,444,892) $ (2,799,240) $ (7,859,699)
============ ============ ============ ============
Weighted Average
Shares Outstanding 21,256,972 27,447,152 20,971,894 27,403,688
============ ============ ============ ============
Net Loss per Share ($0.08) ($0.16) ($0.13) ($0.29)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-22-
<PAGE> 23
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL FROM
----------------- ------------------- PAID IN ACCUMULATED 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 $72,391,736 $(57,374,408) $(476,582) $14,568,009
Common stock issued
upon exercise of
stock options (unaudited) 20,750 21 21,950 21,971
Common stock issued
for cash (unaudited) 143,979 144 549,856 550,000
Common stock issued
for services
(unaudited) 10,623 11 44,156 44,167
Stock-based compensation
(unaudited) 267,773 267,773
Class C preferred stock
offering costs
(unaudited) (115,193) (115,193)
Conversion of Class C
preferred stock
(unaudited) (628) 245,610 245 (245)
Accretion of Class C
preferred stock
discount (unaudited) 1,577,283 (1,577,283)
Accretion of Class B
and Class C preferred
stock dividends
(unaudited) 255 577,398 (582,126) (4,728)
Net loss (unaudited) (5,700,290) (5,700,290)
------ ----- ---------- ------- ----------- ------------ --------- ----------
BALANCE AT
OCTOBER 31, 1997,
(unaudited) 13,827 $ 14 27,669,614 $27,670 $75,314,714 $(65,234,107) $(476,582) $9,631,709
====== ===== ========== ======= =========== ============ ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-23-
<PAGE> 24
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
OCTOBER 31, OCTOBER 31,
1996 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(2,468,295) $(5,700,290)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock based compensation 232,736 267,773
Depreciation and amortization 148,235 296,294
Stock issued for services 44,167
Inventory write-off 241,441
Reserve for contract losses (294,428)
Changes in operating assets and liabilities:
Other receivables 75,204 163,420
Inventories, net (96,441) (86,651)
Prepaid expenses and other current assets 11,492 (119,350)
Accounts payable and accrued legal and
accounting fees (49,015) 1,148,900
Accrued royalties and sponsored research fees -- (154,893)
Other accrued expenses and current liabilities 29,825 417,337
----------- -----------
Net cash used in operating activities (2,116,259) (3,776,280)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term investments 3,898,888
Purchase of short-term investments (984,083) (2,947,385)
Property acquisitions (2,086,557) (2,061,707)
Increase in other assets (6,175) (73,465)
----------- -----------
Net cash provided by (used in)
investing activities 822,073 (5,082,557)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 8,000 571,971
Payment of Class C preferred stock offering (115,193)
costs
Payment of Class C fractional share dividends (4,728)
Principal payments on long-term debt (12,723) (45,687)
Proceeds from issuance of long-term debt 1,020,000 98,081
----------- -----------
Net cash provided by financing activities 1,015,277 504,444
</TABLE>
See accompanying notes to consolidated financial statements.
-24-
<PAGE> 25
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
OCTOBER 31, OCTOBER 31,
1996 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET DECREASE IN CASH AND
CASH EQUIVALENTS $ (278,909) $ (8,354,393)
CASH AND CASH EQUIVALENTS,
beginning of period 4,179,313 12,228,660
------------ ------------
CASH AND CASH EQUIVALENTS,
end of period $ 3,900,404 $ 3,874,267
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 41,776 $ 102,915
============ ============
Income taxes paid $ 1,034 $ 800
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-25-
<PAGE> 26
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) The accompanying 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 financial statements, the Company experienced losses in fiscal
1997 and during the first six months of fiscal 1998 and has an
accumulated deficit at October 31, 1997. Historically, the Company has
relied on third party and investor funds to fund its operations and
clinical trials, and management expects that additional funds will be
required in the future to continue to fund operations and clinical
trials. 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 which 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. During the year ended April
30, 1997, the Company received significant funding through the issuance
of preferred stock which has resulted in cash and short-term investment
balances of $6,821,700 as of October 31, 1997. Management believes that
additional capital must be raised to support the Company's continued
operations and other cash needs.
(2) 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 October 31, 1997, and
the consolidated results of its operations and its consolidated cash
flows for the three month and six months periods ended October 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, as amended by a Form 10-K/A filed on or
about October 14, 1997.
(3) The Company will adopt Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share" beginning in the quarter ending
January 31, 1998. 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 believes that adoption of this standard will have no effect on
the basic or diluted earnings per share for periods in which the Company
incurs losses and that its adoption will result in an increase in basic
earnings per share in periods with income and will have no effect on the
fully diluted earnings per share in periods with income.
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income", which requires businesses to disclose
comprehensive income and its components in their general purpose
financial statements. SFAS 130 is effective for the Company for the
fiscal year ending April 30, 1999 with reclassification of comparative
(earlier period) financial statements and is applicable to interim
periods. The Company believes that the adoption of SFAS 130 will cause
it to display an amount representing total comprehensive income for that
period, but that this amount will not differ significantly from the
disclosure presently made in its consolidated statement of operations.
-26-
<PAGE> 27
(4) Short-term investments at October 31, 1997, represent a six-month term
treasury bill valued at $999,200 and a six-month term Federal Home Loan
Bank Discount Note valued at $1,948,185, which expire at various dates
through January 1998. Both short-term investments are classified as
held-to-maturity and are stated at cost, which approximates fair value.
(5) Net loss per share is calculated by adding the net loss for the quarter
and six-month period to the dividends and Preferred Stock issuance
discount accretion on the Class B Preferred Stock and the Class C
Preferred Stock during the quarter and the six-month period divided by
the weighted average number of shares of common stock outstanding during
the quarter and six-month period. Shares issuable upon the exercise of
common stock warrants and options have been excluded from the quarter
and six-month period ended October 31, 1997 and 1996 per share
calculation because their effect is antidilutive. Accretion of the Class
B and Class C Preferred Stock dividends and issue discount amounted to
$1,015,515 and $119,896 for the quarters ended October 31, 1997 and 1996
and $2,159,409 and $330,945 for the six-month periods ended October 31,
1997 and 1996, respectively.
(6) 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, and 27% 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.
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.
(7) 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.
(8) 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 preferred securities are analogous to a dividend and
should be recognized as a return to the preferred shareholders. At
October 31, 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 shares when converted.
-27-
<PAGE> 28
Under this accounting treatment, the value of the discount has been
reflected in the consolidated financial statements as additional
preferred dividends and has been accreted through the first possible
conversion date (Class B) or through the first date of the maximum
conversion discount (Class C). This accounting treatment also gives
effect to the recognition in the calculation of net loss per share of
additional preferred dividends on the Class B and Class C Preferred
Stock representing the accretion of the issuance discount which had not
been previously recognized in the calculation of net loss per share.
(9) Subsequent to October 31, 1997, the Company terminated its agreement
with Alpha Therapeutic ("Alpha") and reacquired all of Alpha's rights in
Oncolym(R) for certain fixed payments, milestone payments and royalties
on future sales of Oncolym(R). As a result of this transaction, the
Company wrote off inventory of approximately $241,000 and a contract
loss and inventory reserves aggregating $294,000.
-28-
<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 10/31/97.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 3,874
<SECURITIES> 2,947
<RECEIVABLES> 197
<ALLOWANCES> 0
<INVENTORY> 63
<CURRENT-ASSETS> 7,221
<PP&E> 8,442
<DEPRECIATION> 1,319
<TOTAL-ASSETS> 14,980
<CURRENT-LIABILITIES> 3,362
<BONDS> 0
0
0
<COMMON> 28
<OTHER-SE> 9,604
<TOTAL-LIABILITY-AND-EQUITY> 14,980
<SALES> 4
<TOTAL-REVENUES> 364
<CGS> 4
<TOTAL-COSTS> 6,064
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 103
<INCOME-PRETAX> (5,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,700)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
