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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
JANUARY 31, 1998
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.
40,428,555 shares of Common Stock
as of March 2, 1998
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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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Page
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Consolidated Balance Sheets at April 30, 1996 and January 31, 1998 (unaudited) 20
Consolidated Statements of Operations for the periods from November 1, 1996
to January 31, 1997 (unaudited) and from November 1, 1997 to January 31, 1998
(unaudited); from May 1, 1996 to January 31, 1997 (unaudited) and from
May 1, 1997 to January 31, 1998 (unaudited) 22
Consolidated Statement of Stockholders' Equity for the period from April
30, 1997 to January 31, 1998 (unaudited) 23
Consolidated Statements of Cash Flows for the periods from May 1, 1996
to January 31, 1997 (unaudited) and from May 1, 1997 to January 31, 1998
(unaudited) 24
Notes to Consolidated Financial Statements (unaudited) 26
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FACTORS THAT MAY AFFECT FUTURE RESULTS
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 nine months of fiscal 1998 and has an accumulated deficit of approximately
$69,182,000 at January 31, 1998. Historically, the Company has relied on third
party and investor funds to fund its operations and clinical trials, and
additional funds will be required in the near term 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 through
financings or licensing arrangements or other sources, it will be forced to
consider bankruptcy issues, scale back operations which would have a material
adverse effect on the Company or to seek judicial reorganization and protection
from its creditors. 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 will be required and, ultimately
to attain successful operations. During the year ended April 30, 1997, the
Company received funding through the issuance of preferred stock which has
resulted in cash and cash equivalents balance of approximately $2,670,000 as of
January 31, 1998. Management believes that additional capital must be raised to
support the Company's continued operations and other short-term cash needs.
NEED FOR ADDITIONAL CAPITAL. At January 31, 1998, the Company had
approximately $2,670,000 in cash and cash equivalents. The Company currently has
significant liabilities related to the construction of manufacturing facilities
and has commitments to expend additional funds for facilities construction,
clinical trials, radiolabeling contracts, consulting, and for the repurchase of
Oncolym(R) (LYM-1) marketing rights from Alpha Therapeutic Corporation
("Alpha"). The Company expects operating expenditures related to clinical trials
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. As a result of
increased activities in connection with the Phase II/III clinical trials for
Oncolym(R), the development and clinical trial costs associated with Tumor
Necrosis
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Therapy ("TNT") and the development costs associated with Vascular Targeting
Agents ("VTA"), the Company expects that the monthly negative cash flow will
continue. To sustain research and development, provide for future clinical
trials and to continue its operations until it is able to generate sufficient
additional revenue from the sale and/or licensing of its products, the Company
must raise additional funds. 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 various short-term and long-term
financings with lending institutions, venture funds and private investors. The
Company is pursuing short-term funding for amounts between $2,000,000 and
$6,000,000 and long-term funding for gross proceeds between $20,000,000 and
$60,000,000.
At March 14, 1998, the Company had firm commitments providing for
borrowings aggregating $2,500,000 from two lending sources. One of these
commitments provides for an extension of time until June 30, 1998, to pay
outstanding construction costs of approximately $1,900,000 as of March 1, 1998
and provides for immediate funding of $500,000 for working capital purposes.
Under this commitment, the construction costs and any additional funding would
be due on June 30, 1998, would bear interest at a bank's prime rate plus 5% and
would be collateralized by the Company's facilities. Interest on the borrowings
would be payable in common stock of the Company at $1.00 per share. In addition,
in exchange for this commitment, the lender would receive a warrant, expiring in
March 2001, to purchase up to 240,000 shares of the Company's common stock at
$.5625 per share. The Company expects that it will exercise its rights to defer
the payment of $1,900,000 and to provide immediate funding of $500,000.
The other commitment is with Biotechnology Development, Ltd. (BTD), an
affiliate of a significant shareholder, and provides for borrowings of up to
$2,000,000 under a line of credit, expiring May 31, 1998. Borrowings under the
line of credit would bear interest at 9% annually and are payable only on the
earlier of (i) completion of a long-term financing or a significant licensing
arrangement (as defined in the agreement) or (ii) at the time the Company can
demonstrate it has sufficient funding to retire the Note, complete the
Oncolym(R) trials and file a BLA for Oncolym(R). If none of these occurs before
January 1, 1999, the Company would not be able to retire the Note and would be
considered in default. In exchange for providing this commitment, whether or not
the Company borrows under this arrangement, BTD will receive a warrant, expiring
in March 2003, to purchase 500,000 shares of the Company's common stock at $1.00
per share. Should the Company exercise its ability to borrow under this
agreement and be unable to repay the amounts when due, BTD would receive another
warrant to purchase 500,000 shares of the Company's common stock at $1.00 per
share. In addition, if the Company defaults, BTD would obtain all rights and
assume all obligations relating to the LYM-1 and LYM-2 licensing rights that the
Company has with Northwestern University ("Licensing Agreement"). BTD would have
the right to manufacture LYM-1 and LYM-2 and would retain the marketing rights
for North and South America. As part of the foreclosure, BTD would grant
Techniclone worldwide marketing rights for LYM-1 and LYM-2 for the remainder of
the world and would pay Techniclone a 5% royalty on all sales of LYM-1 and LYM-2
on products sold in North and South America. The Company would have an option to
purchase the LYM-1 and LYM-2 licensing and marketing rights from BTD for
$10,000,000, reimbursement of costs as specified in the agreement, issuance of a
warrant to purchase 1,000,000 shares of the Company's common stock for $1.00 per
share and a perpetual royalty of 5% on world-wide sales of the LYM-1, LYM-2 and
related products. BTD, at its option, may transfer amounts advanced under the
commitment into any financing obtained by the Company in the future on the same
terms as the future financing. If BTD elects to transfer the amounts into a
future financing, all terms of this commitment, except the issuance of the
original warrant to purchase 500,000 shares of the Company's common stock at
$1.00 per share would terminate. The Company does not intend to borrow under
this arrangement unless other short term financing, with acceptable terms,
cannot be obtained.
The Company is also pursuing funding for up to $4,000,000 from private
investors under a secured convertible debt arrangement and funding for up to
$4,250,000 under a securitized debt arrangement. As of March 14, 1998, no
commitments have been received under either of these arrangements. Should
sufficient funding be obtained under either of these arrangements, borrowings
under the $2,000,000 commitment described above would not be made.
In addition to the short term financing arrangements described above,
the Company is actively pursuing licensing arrangements with various well
established companies and is pursuing long-term financing arrangements
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with private investors and venture firms. The Company is seeking financing for
gross proceed amounts between $20,000,000 and $60,000,000 from these groups.
One of the financings with a private investor group would provide for
aggregate funding of $60,000,000 in gross proceeds. Of this amount, the Company
expects that approximately $20,000,000 in gross proceeds will be in the form of
a convertible debenture and the remaining $40,000,000 in gross proceeds will be
in the form of a minority interest in a newly formed Techniclone European
operating subsidiary. Completion of this financing is subject to the
satisfactory completion of the due diligence process and resolution of issues
relating to the U.S. and European tax aspects of the transaction by the investor
group.
The Company is also in preliminary discussions regarding long-term
financings with other potential investors.
With the exception of the two aforementioned short term funding
commitments, there can be no assurances that any financings will be completed in
a timely manner or at all. The Company's future success is dependent upon
raising additional money to provide for the necessary operations of the Company.
If the Company is unable to obtain additional financing, there would be a
material adverse effect on the Company's business, financial position and
results of operations.
The Company believes that it has sufficient cash on hand and available
pursuant to the financing commitments described above to meet its obligations on
a timely basis through June 30, 1998.
COMMERCIAL PRODUCTION. 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 forward in 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 has expended significant funds for the
scale up of its Oncolym(R) product and expects that additional funds will be
required to complete the scale up process 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 to 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.
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 factors include worldwide economic
and political conditions and industry specific factors. If the Company is to
remain competitive and is 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
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generally in the early stages of development, with only one product candidate
currently in a clinical trial and another clinical trial scheduled to begin.
Revenues from product sales have been insignificant and throughout the Company's
history there have been minimal revenues from product royalties. 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.
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.
ANTICIPATED FUTURE LOSSES. The Company has experienced significant
losses since inception. As of January 31, 1998, the Company's accumulated
deficit was approximately $69,182,000. 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. The decline in the
market price of the Company's Common Stock has lead to substantial dilution to
current holders of Common Stock. The Class C Preferred Stock provides shares of
Class C Preferred Stock will, if converted, be converted into shares of the
Company's Common Stock 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 C Preferred Stock into Common Stock, all of the issued
shares of Common Stock, are freely tradable. Sales, particularly short selling,
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 Class C Preferred Stock. Since September 26,
1997, the date on which the Class C Preferred Stock was first convertible, the
price of the Company's common stock has steadily declined while trading volume
has increased significantly.
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 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.
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During the quarter ended January 31, 1998, 50 shares of Class B
Preferred Stock were converted into 56,767 shares of Common Stock and 1,226
shares of Class C Preferred Stock were converted into 921,184 shares of Common
Stock. During the quarter ended January 31, 1998, warrants to purchase 230,296
shares of Common Stock were issued to holders of the Class C Preferred Stock in
connection with conversions. As of March 2, 1998, the holders of the remaining
2,150 shares of Class B Preferred Stock had converted such stock into 4,269,394
shares of Common Stock and at March 2, 1998, the holders of Class C Preferred
Stock had converted 5,556 Preferred Shares into 8,671,390 shares of Common Stock
and 7,169 shares of Class C Preferred Stock remained outstanding with a total
liquidation preference of approximately $7,228,000. In conjunction with the
conversions of Class C Preferred Stock between February 1, 1998 and March 2,
1998, warrants to purchase 2,167,847 shares of common were granted, which will
be priced on March 24, 1998 at 110% of the conversion cap as defined in the
Preferred Stock agreement.
In addition to the warrants set forth above, the Company has outstanding
warrants to issue 373,310 shares of stock at prices ranging from $3.00 to $5.30.
The warrants expire as follows: 6,000 warrants expire in April 1998, 10,000 in
December 1999 and 357,310 in December 2000. In connection with its search for a
chief executive officer, the Company has committed to grant additional warrants.
Such grant is dependent on the success and the conclusion date of the search. As
of January 31, 1998, the Company had granted options to purchase 4,739,000
shares of Common Stock pursuant to its stock option plans.
ISSUANCE OF ADDITIONAL SHARES; SHAREHOLDER MEETING. If all convertible
instruments were converted into Common Stock on March 2, 1998, the Company would
be obligated to issue stock in excess of its authorized Common Stock. The
Company has scheduled a Shareholder Meeting for April 23, 1998, to approve an
increase in its authorized Common Stock to 120,000,000 shares.
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 the potential additional new shares of
Common Stock that may be issued on the conversion of Class C Preferred Stock and
the historical limited trading volume are significant risks investors should
consider. As a result of the decline in the price of the Common Stock, when the
holders of the Class C Preferred Stock convert, the Company will be required to
issue a substantial amount of additional shares of common stock because the
Class C Preferred Stock provides that the conversion of such shares of Class C
Preferred Stock into shares of the Company's Common Stock 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. As can be seen from the recent increases
in volume and the resulting price decline in the shares of the Company's common
stock, if the holders of the Class C Preferred Stock convert all or a
significant portion of their Class C Preferred Stock in a limited time period
and attempt to sell all or a significant portion of the shares of Common Stock
issued in conversion in the open market, a severe depression of the market price
for a share of the Company's Common Stock could result.
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 or "pink sheets market." If the
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Company does not maintain its NASDQ listing, an investor may find it more
difficult to dispose of or to obtain accurate quotations as to the market value
of the securities.
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 staffs, 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 adequately demonstrate 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
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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 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
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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 pursuant to negotiated contracts with three different radiolabeling
companies. There can be no assurance that these 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. The
Company will pursue additional suppliers of these services and it expects to
rely on its current suppliers for all or a significant portion of its
requirements for the Oncolym(R) antibody for the foreseeable future. Prior to
commercial distribution, the Company will be required to identify and contract
with a commercial radiolabeling facility for commercial quantities. Radiolabeled
antibody cannot be stockpiled against future shortages due to the eight-day
half-life of the I(131) radioisotope. Accordingly, any change in the Company's
existing or planned contractual relationships with, or interruption in supply
from, its third-party suppliers could adversely affect the Company's ability to
complete its ongoing clinical trials and to market the 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.
HAZARDOUS AND RADIOACTIVE MATERIALS. The manufacturing and use of the
Company's Oncolym(R) requires the handling and disposal of I(131). The Company
is relying on its current contract manufacturers, to radiolabel its antibodies
with I(131) 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 these 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.
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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 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. 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 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
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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 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 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 costs 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
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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 LYM-1 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.
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.
The Company has received clearance from the United States Food and Drug
Administration (FDA) to begin Phase I human clinical trials of 131I-chTNT-1/B, a
radioactive chimeric monoclonal antibody, for the treatment of malignant glioma.
The protocol will use an interstitial delivery system pioneered by the National
Institutes of Health (NIH). The interstitial delivery system pioneered by NIH
uses a low-pressure intra-tumoral catheter reported to deliver therapeutic
agents to large regions of the brain by increasing bulk flow and producing
interstitial convection. The Phase I clinical investigation is designed to
assess the safety and tolerability of interstitially administered
131I-chTNT-1/B. The protocol will include up to 24 patients with recurrent
supratentorial anaplastic astrocytoma and glioblastoma multiforme who are
candidates for surgical treatment. 131I-chTNT-1/B will be given by continuous
infusion (CI) through a stereotactically place intra-tumoral catheter over
24-hours. Endpoints in the study include safety, determination of the maximum
tolerated dose, pharmacokinetic profile, and radiation dosimetry. Contract
negotiations with clinical sites are currently underway with a number of
universities in the United States. The studies are scheduled to begin enrollment
by March 31, 1998.
Oncolym (131I-Lym-1) is a radiolabeled murine monoclonal antibody. When
the Lym-1 antibody is attached to the radioactive form of iodine-131, the result
is 131I-Lym-1 or Oncolym. In vitro studies with this antibody indicated its
potential for high specificity for human lymphoma cells. Oncolym is being
investigated as a treatment for patients with intermediate- and high-grade
relapsed or refractory non-Hodgkin's B-cell lymphoma that have failed two prior
chemotherapy treatments. To date, 88 patients have been treated with a
therapeutic dose of Oncolym. Of the total number of treated patients, 39
achieved complete or partial remissions of their tumors. Side effects such as
thrombocytopenia (low platelets) and leukopenia (low white blood cells) have
been observed. However, the U.S. Food and Drug Administration (FDA) will need to
review all clinical data to confirm findings before Oncolym is cleared for
marketing.
The current Phase II/III investigational protocol to evaluate the
efficacy of Oncolym in the treatment of patients with intermediate- and
high-grade relapsed or refractory non-Hodgkin's B-cell lymphoma has been
submitted to FDA. This study will evaluate the effect of two therapeutic doses
(60 mCi/m2) of radiolabeled Lym-1 given 6 weeks apart. This dose is based on
data from previous studies. There are no restrictions for prior
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<PAGE> 13
chemotherapy regimens and in many cases patients may be able to be treated in
oupatient facilities rather than in the hospital. The Company expects to begin
this multi-center clinical trials prior to March 31, 1998.
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
II/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
nine months of fiscal 1998 and has an accumulated deficit at January 31, 1998 of
approximately $69,182,000. 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 through
financings or licensing arrangements or other sources, it will be forced to
consider bankruptcy and will have 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 will be
required and, ultimately to attain successful operations. During the year ended
April 30, 1997, the Company received funding through the issuance of preferred
stock which has resulted in cash and cash equivalents balance of approximately
$2,670,000 as of January 31, 1998. Management believes that additional capital
must be raised to support the Company's continued operations and other
short-term cash needs.
RESULTS OF OPERATIONS
The Company's net loss of approximately $2,960,000, before preferred
stock accretion and dividends, for the quarter ended January 31, 1998,
represents an increase in losses of approximately $1,537,000 from the prior year
quarter ended January 31, 1997. The increase in the net loss for the quarter
ended January 31, 1998, before preferred stock accretion and dividends is
primarily attributable to a $1,585,000 increase in total costs and expenses
which were partially offset by a $48,000 increase in total revenues. The
Company's net loss of approximately $8,661,000, before preferred stock accretion
and dividends, for the nine months ended January 31, 1998 represents an increase
in losses of $4,770,000 over the nine months ended January 31, 1997. The
increased loss over the comparable periods in the prior year is primarily
attributable to expansion of Company's facilities, continuation and expansion of
the clinical trial activities for Oncolym(R) and TNT antibody technologies and
increases in administrative and operating personnel related to increases in
clinical trial activities and 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.
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Revenues for the quarter ended January 31, 1998, increased approximately
$48,000 compared to the same period in the prior year primarily as a result of
an increase in interest income during the current period. Revenues for the nine
months ended January 31, 1998, increased approximately $239,000 compared to the
same prior year period ended January 31, 1997. This increase is primarily
attributable to a $162,000 increase in interest income and a $73,000 increase in
rental income in comparison to the same prior year period ended January 31,
1998. Interest income increased during the current quarter coinciding with an
increased level of cash available for investment. Interest income is not
expected to be significant during the remainder of the fiscal year due to the
level of cash balances on hand. 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 were minimal during the nine months ended
January 31, 1998 and the Company 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 approximately
$1,585,000 during the quarter ended January 31, 1998, in comparison to the same
prior year period ended January 31, 1997. This increase resulted from a
$1,243,000 increase in research and development expenses and a $342,000 increase
in general and administrative expenses in comparison to the prior year period
ended January 31, 1997. The Company's total costs and expenses increased
approximately $5,009,000 for the nine months ended January 31, 1998, in
comparison to the same prior year ended January 31, 1997. This increase resulted
primarily from a $3,297,000 increase in research and development expenses, a
$1,654,000 increase in general and administrative expenses and a $54,000
increase in interest expense in comparison to the prior year period ended
January 31, 1997.
The increase in research and development expenses during the quarter and
nine months ended January 31, 1998, relates to increased internal research and
development activities, including research related to radiopharmaceutical
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 and, an initial payment of
$260,000 to Alpha Therapeutic Corporation in conjunction with the reacquisition
of the Oncolym(R) marketing rights. During the three and nine month periods
ended January 31, 1998, 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 and costs associated with obtaining
alternate radiolabeling sources. External research and development costs also
increased during the three and nine month periods ended January 31, 1998, due to
increased radiopharmaceutical research costs, increases in sponsored research
and development costs and increased legal and patent costs primarily associated
with the VTA technologies and the acquisition of Peregrine. Additionally, during
the nine months ended January 31, 1998, in conjunction with the Termination
Agreement with Alpha, the Company wrote off the remaining value of its LYM-1
inventory ($241,000), removed its reserve for contract losses ($248,000) and
inventory reserves ($46,000) and expensed an initial payment of $260,000 for the
reacquisition of the marketing rights to Oncolym(R) from Alpha. 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 nine months ended January 31, 1998, 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
nine months ended January 31, 1998 of $54,000 is primarily due to a higher level
of interest bearing debt
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outstanding during the nine-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.
While the Company's expenses have increased over comparable periods in
the prior year, expenses have decreased in the quarter ended January 31, 1998,
when compared to the quarter ended October 31, 1997. Total costs and expenses
for the quarter ended October 31, 1997, were approximately $3,590,000, as
compared to $3,068,000 during the quarter ended January 31, 1998 or a decrease
of approximately $522,000. The decrease in total costs and the expenses related
primarily to general and administrative costs of $462,000. The decrease in
general and administrative expenses for the aforementioned period primarily
related to a decrease in consulting fees, the absence of costs associated with
the annual shareholders' meeting during the quarter ended January 31, 1998 and
additional fees incurred related to the Class C Preferred Stock during the
quarter ended October 31, 1998. Additionally, ongoing research and development
expenses declined slightly, but the decrease was offset by an initial payment of
$260,000 to Alpha Therapeutic Corporation in connection with the repurchase of
the Oncolym(R) (LYM-1) licensing rights.
Since January 31, 1998, the Company has reduced its workforce
approximately 30% and expects to realize some cost savings in the future from
this reduction in workforce. However, the Company expects that these cost
reductions will be offset by increased personnel and other costs associated with
clinical trial activities and other activities as the Company's Oncolym(R)
(LYM-1) and TNT clinical trials move forward.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1998, the Company had approximately $2,670,000 in cash
and cash equivalents and had a working capital deficit of approximately
$569,000. The Company experienced losses in fiscal 1997 and during the first
nine months of fiscal 1998 and had an accumulated deficit at January 31, 1998.
The Company currently has significant liabilities related to the construction of
manufacturing facilities and has commitments to expend additional funds for
facilities construction, clinical trials, radiolabeling contracts, consulting
and to pay Alpha Therapeutic Corporation ("Alpha") for the repurchase of the
Oncolym(R) marketing rights. The Company expects operating expenditures related
to clinical trials 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
continue as a result of increased activities in connection with the Phase II/III
clinical trials for Oncolym(R) and the development and clinical trial costs
associated with Tumor Necrosis Therapy ("TNT") and the development costs
associated with Vascular Targeting Agents ("VTA"). 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 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 increased research and development activities, facilities expansion,
expanded clinical trial efforts, the acquisition of Peregrine and the
continuance of obtaining patent and license rights related to the VTA
technologies have impacted the Company's losses and cash consumption rate ("burn
rate"). The Company believes it can only reduce the burn rate significantly if
it reduces programs substantially or delays the commencement of clinical trials
and continuing development of its 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.
At March 14,1998, the Company has firm commitments providing for
borrowings aggregating $2,500,000 from two lending sources and has a commitment
from one of the lending sources to extend repayment of construction costs of
$1,900,000 as of March 1, 1998 (approximately $1,736,000 payable at January 31,
1998) until
-15-
<PAGE> 16
June 30, 1998. 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 consider bankruptcy issues,
scale back operations which would have a material adverse effect on the Company,
or to seek judicial reorganization and protection from its creditors.
The Company is also pursuing funding for up to $4,000,000 from private
investors under a secured convertible debt arrangement and funding for up to
$4,250,000 under a securitized debt arrangement. As of March 14, 1998, no
commitments have been received under either of these arrangements. Should
sufficient funding be obtained under either of these arrangements, borrowings
under the $2,000,000 commitment described above would not be made.
In addition to the short term financing arrangements described above,
the Company is actively pursuing licensing arrangements with various well
established companies and is pursuing long-term financing arrangements with
private investors and venture firms. The Company is seeking financing for gross
proceeds of amounts between $20,000,000 and $60,000,000 from these groups.
One of the financings with a private investor group would provide for
aggregate funding of $60,000,000 in gross proceeds. Of this amount, the Company
expects that approximately $20,000,000 in gross proceeds will be in the form of
a convertible debenture and the remaining $40,000,000 in gross proceeds will be
in the form of a minority interest in a newly formed Techniclone European
operating subsidiary. Completion of this financing is subject to the
satisfactory completion of the due diligence process and resolution of issues
relating to the U.S. and European tax aspects of the transaction by the
investor group.
The Company is also in preliminary discussions regarding long-term
financings with other potential investors.
With the exception of the two aforementioned short term funding
commitments, there can be no assurances that any financings will be completed in
a timely manner or at all. The Company's future success is dependent upon
raising additional money to provide for the necessary operations of the Company.
If the Company is unable to obtain additional financing, there would be a
material adverse effect on the Company's business, financial position and
results of operations.
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 will be required and, ultimately to
attain successful operations. The Company believes that it has sufficient cash
on hand and available pursuant to the financing commitments described above to
meet its obligations on a timely basis through June 30, 1998.
COMMITMENTS
At January 31, 1998, the Company had fixed commitments of approximately
$700,000 related to additional building improvements, equipment, furniture and
fixtures, developmental research, clinical trials and consulting agreements. In
addition, the Company has additional significant obligations, most of which are
contingent, 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 most of the obligation to Alpha is contingent upon the Company
attaining certain milestones relating to the development of Oncolym(R), 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 of Oncolym(R).
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. Until it is
able to generate sufficient additional revenue from the sale and/or licensing of
its products, the Company must raise additional funds in order to continue its
operations. 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.
At March 14, 1998, the Company has firm commitments providing for
borrowings aggregating $2,500,000 from two lending sources. In addition to
providing $500,000 of "new" funds for working capital purposes, one of these
commitments also provides for an extension of time until June 30, 1998, to pay
outstanding construction costs of $1,900,000. Under this commitment, the
construction costs and any additional funding would be due on June 30, 1998,
would bear interest at a bank's prime rate plus 5% and would be collateralized
by the Company's facilities. Interest on the borrowings would be payable in
common stock of the Company at $1.00 per share. In addition, in exchange for
this commitment, the lender would receive a warrant, expiring in March 2001, to
purchase up to 240,000 shares of the Company's common stock at $.5625 per share.
The Company expects that it will exercise its rights to defer the payment of
$1,900,000 and to provide immediate funding of $500,000.
-16-
<PAGE> 17
The other commitment is with Biotechnology Development, Ltd. (BTD), an
affiliate of a significant shareholder, and provides for borrowings of up to
$2,000,000 under a line of credit, expiring May 31, 1998. Borrowings under the
line of credit would bear interest at 9% annually and are payable only on the
earlier of (i) completion of a long-term financing or a significant licensing
arrangement (as defined in the agreement) or (ii) at the time the Company can
demonstrate it has sufficient funding to retire the Note, complete the
Oncolym(R) trials and file a BLA for Oncolym(R). If none of these occurs before
January 1, 1999, the Company would not be able to retire the Note, and would be
considered in default. In exchange for providing this commitment, whether or not
the Company borrows under this arrangement, BTD will receive a warrant, expiring
in March 2003, to purchase 500,000 shares of the Company's common stock at $1.00
per share. Should the Company exercise its ability to borrow under this
agreement and be unable to repay the amounts when due, BTD would receive another
warrant to purchase 500,000 shares of the Company's common stock at $1.00 per
share. In addition, if the Company defaults, BTD would obtain all rights and
assume all obligations relating to the LYM-1 and LYM-2 licensing rights that the
Company has with Northwestern University ("Licensing Agreement"). BTD would have
the right to manufacture LYM-1 and LYM-2 and would retain the marketing rights
for North and South America. As part of the foreclosure, BTD would grant
Techniclone worldwide marketing rights for LYM-1 and LYM-2 for the remainder of
the world and would pay Techniclone a 5% royalty on all sales of LYM-1 and LYM-2
on products sold in North and South America. The Company would have an option to
purchase the LYM-1 and LYM-2 licensing and marketing rights from BTD for
$10,000,000, reimbursement of costs as specified in the agreement, issuance of a
warrant to purchase 1,000,000 shares of the Company's common stock for $1.00 per
share and a perpetual royalty of 5% on world-wide sales of the LYM-1, LYM-2 and
related products. BTD, at its option, may transfer amounts advanced under the
commitment into any financing obtained by the Company in the future on the same
terms as the future financing. If BTD elects to transfer the amounts into a
future financing, all terms of this commitment, except the issuance of the
original warrant to purchase 500,000 shares of the Company's common stock at
$1.00 per share would terminate. The Company does not intend to borrow under
this arrangement unless other short term financing, with acceptable terms,
cannot be obtained.
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. 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 November 14, 1997
-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: /ss/ Elizabeth Gorbett-Frost
-----------------------------
By: /ss/ William V. Moding
-----------------------------
-19-
<PAGE> 20
TECHNICLONE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,228,660 $ 2,670,071
Other receivables 360,448 196,476
Inventories, net 172,162 73,799
Prepaid expenses and other current assets 20,138 269,338
------------ ------------
Total current assets 12,781,408 3,209,684
PROPERTY:
Land 1,050,510 1,050,510
Buildings and improvements 3,350,916 3,518,050
Laboratory equipment 1,579,300 1,872,330
Furniture, fixtures and office equipment 396,225 903,244
Construction-in-progress 3,075,458
------------ ------------
6,376,951 10,419,592
Less accumulated depreciation and amortization (1,038,619) (1,397,781)
------------ ------------
Property, net 5,338,332 9,021,811
OTHER ASSETS:
Patents, net 178,815 220,964
Note receivable from officer and shareholder 356,914 375,339
Other 46,001 52,614
------------ ------------
Total other assets 581,730 648,917
------------ ------------
$ 18,701,470 $ 12,880,412
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-20-
<PAGE> 21
TECHNICLONE CORPORATION
CONSOLIDATED BALANCE SHEETS
(continued)
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 707,504 $ 752,982
Construction costs payable 1,735,938
Accrued legal and accounting fees 385,500 516,967
Accrued payroll and related costs 162,487 230,045
Accrued royalties and sponsored research 339,560 94,292
Reserve for contract losses 248,803
Accrued license termination fee 100,000 100,000
Accrued interest 72,844 73,007
Current portion of long-term debt 76,527 115,292
Other current liabilities 70,171 160,435
------------ ------------
Total current liabilities 2,163,396 3,778,958
LONG-TERM DEBT 1,970,065 1,957,008
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value; authorized 5,000,000 shares:
Class B convertible preferred stock, shares outstanding - April
30, 1997, 2,200 shares, and January 31, 1998, 2,150 shares;
(liquidation preference of $2,600,616 at January 31, 1998) 2 2
Class C convertible preferred stock, shares outstanding - April
30, 1997, 12,000 shares and January 31, 1998, 10,871
shares; (liquidation preference of $10,917,165 at January
31, 1998) 12 11
Common stock - $.001 par value; authorized 60,000,000
shares; outstanding - April 30, 1997, 27,248,652 shares;
January 31, 1998, 28,654,565 shares 27,249 28,655
Additional paid-in capital (Note 8) 72,391,736 76,774,341
Accumulated deficit (Note 8) (57,374,408) (69,181,981)
------------ ------------
15,044,591 7,621,028
Less notes receivable from sale of common stock (476,582) (476,582)
------------ ------------
Total stockholders' equity 14,568,009 7,144,446
------------ ------------
$ 18,701,470 $ 12,880,412
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-21-
<PAGE> 22
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
1997 1998 1997 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Net product sales and royalties $ $ $ $ 4,300
Interest and other income 59,962 107,815 232,307 467,324
------------ ------------ ------------ ------------
Total revenues 59,962 107,815 232,307 471,624
COSTS AND EXPENSES:
Cost of sales
4,300
Research and development 685,106 1,928,150 2,023,381 5,320,268
General and administrative:
Unrelated entities 662,037 1,088,655 1,783,658 3,520,636
Affiliates (Note 4) 85,000 216,012 133,001
Interest 50,685 51,316 100,417 154,015
------------ ------------ ------------ ------------
Total costs and expenses 1,482,828 3,068,121 4,123,468 9,132,220
NET LOSS- before preferred stock
accretion and dividends (1,422,866) (2,960,306) (3,891,161) (8,660,596)
Preferred stock accretion and dividends:
Imputed dividends for Class B
Preferred Stock (103,505) (64,303) (434,450) (215,333)
Accretion of Class C Preferred
Stock Discount (716,139) (2,293,422)
Imputed Dividends for Class
C Preferred Stock (207,126) (638,222)
------------ ------------ ------------ ------------
NET LOSS - Applicable to
Common Stock (Note 2) $ (1,526,371) $ (3,947,874) $ (4,325,611) $(11,807,573)
============ ============ ============ ============
Weighted Average Shares
Outstanding (Note 2) 21,549,001 27,873,599 21,164,263 27,560,325
============ ============ ============ ============
NET LOSS PER SHARE-
BASIC AND DILUTED
(Notes 3 and 4) $ (0.07) $ (0.14) $ (0.20) $ (0.43)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-22-
<PAGE> 23
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN-
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------ ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT
APRIL 30, 1997 14,200 $ 14 27,248,652 $ 27,249 $ 72,391,736
Common stock issued
upon exercise of stock
options (unaudited) 27,750 28 36,381
Common stock issued for
cash (unaudited) 143,979 144 549,856
Common stock issued for
services (unaudited) 10,623 11 44,156
Stock-based
compensation
(unaudited) 398,474
Class C preferred stock
offering costs
(unaudited) (115,193)
Conversion of Class B
and Class C preferred
stock (unaudited) (1,904) (2) 1,223,561 1,223 (1,221)
Accretion of Class B and
Class C preferred stock
discount and dividends
(unaudited) 392 1 3,137,152
Additional consideration
on Class C preferred
stock (unaudited) 333 333,000
Net loss
(unaudited)
------------ ------------ ------------ --------- ------------
BALANCE AT
JANUARY 31, 1998 13,021 $ 13 28,654,565 $ 28,655 $ 76,774,341
(unaudited) ======== ======== ========== ========= ============
</TABLE>
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
ACCUMU- FROM
LATED SALE OF
DEFICIT STOCK TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE AT
APRIL 30, 1997 $(57,374,408) $ (476,582) $ 14,568,009
Common stock issued
upon exercise of stock
options (unaudited) 36,409
Common stock issued for
cash (unaudited) 550,000
Common stock issued for
services (unaudited) 44,167
Stock-based
compensation
(unaudited) 398,474
Class C preferred stock
offering costs
(unaudited) (115,193)
Conversion of Class B
and Class C preferred
stock (unaudited)
Accretion of Class B and
Class C preferred stock
discount and dividends
(unaudited) (3,146,977) (9,824)
Additional consideration
on Class C preferred
stock (unaudited) 333,000
Net loss
(unaudited) (8,660,596) (8,660,596)
------------ ------------ ------------
BALANCE AT
JANUARY 31, 1998 $(69,181,981) $ (476,582) $ 7,144,446
(unaudited) ============ ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-23-
<PAGE> 24
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
1997 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM
OPERATING EXPENSES:
Net loss $(3,891,161) $(8,660,596)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 255,613 468,626
Stock based compensation expense 395,832 398,474
Additional consideration on Class C
preferred stock 333,000
Common 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 63,199 163,972
Inventories, net (181,430) (97,453)
Prepaid expenses and other current 11,911 (249,200)
assets
Accounts payable and accrued legal
and accounting (24,459) 1,912,883
Accrued royalties and sponsored 20,000 (245,268)
research
Accrued expenses and other current
liabilities 77,589 157,985
----------- -----------
Net cash used in operating activities (3,272,906) (5,826,397)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of short-term
investments 3,898,888
Purchase of short-term investments (997,118)
Increase in other assets (34,332) (97,187)
Property acquisitions (2,620,738) (4,122,105)
----------- -----------
Net cash provided by (used in) investing
activities 246,700 (4,219,292)
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
-24-
<PAGE> 25
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
1997 1998
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM
FINANCING ACTIVITIES:
Note receivable to shareholder $ (350,000) $
Principal payments on long-term debt (26,120) (72,373)
Proceeds from issuance of long-term debt 1,020,000 98,081
Proceeds from sale of common stock 268,600 586,409
Payment of Class C preferred stock offering
costs and fractional share dividends (125,017)
------------ ------------
Net cash provided by financing
activities 912,480 487,100
------------ ------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (2,113,726) (9,558,589)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 4,179,313 12,228,660
------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 2,065,587 $ 2,670,071
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 83,941 $ 153,852
============ ============
Income taxes paid $ 1,034 $ 1,600
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-25-
<PAGE> 26
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) The accompanying unaudited 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 nine months of fiscal 1998 and has an
accumulated deficit of approximately $69,182,000 at January 31, 1998.
Historically, the Company has relied on third party and investor funds
to fund its operations and clinical trials, and additional funds will be
required in the near term 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
consider bankruptcy issues, scale back operations, which would have a
material adverse effect on the Company or seek judicial reorganization
and protection from its creditors. 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 will be required and, ultimately to attain successful operations.
During the year ended April 30, 1997, the Company received funding
through the issuance of preferred stock, which has resulted in cash and
cash equivalents balance of approximately $2,670,000 as of January 31,
1998. Management believes that additional capital must be raised to
support the Company's continued operations and other short-term cash
needs.
The Company is actively pursuing various short-term and long-term
financings with lending institutions, venture funds and private
investors. The Company is pursuing short-term funding for amounts
between $2,000,000 and $6,000,000 and long-term funding for gross
proceeds between $20,000,000 and $60,000,000.
At March 14, 1998, the Company had firm commitments providing for
borrowings aggregating $2,500,000 from two lending sources. One of these
commitments provides for an extension of time until June 30, 1998, to
pay outstanding construction costs of approximately $1,900,000 (as of
March 1, 1998) and provides for immediate funding of $500,000 for
working capital purposes. Under this commitment, the construction costs
and any additional funding would be due on June 30, 1998, would bear
interest at a bank's prime rate plus 5% and would be collateralized by
the Company's facilities. Interest on the borrowings would be payable in
common stock of the Company at $1.00 per share. In addition, in exchange
for this commitment, the lender would receive a warrant, expiring in
March 2001, to purchase up to 240,000 shares of the Company's common
stock at $.5625 per share. The Company expects that it will exercise its
rights to defer the payment of $1,900,000 and to provide immediate
funding of $500,000.
The other commitment is with Biotechnology Development, Ltd. (BTD), an
affiliate of a significant shareholder, and provides for borrowings of
up to $2,000,000 under a line of credit, expiring May 31, 1998.
Borrowings under the line of credit would bear interest at 9% annually
and are payable only on the earlier of (i) completion of a long-term
financing or a significant licensing arrangement (as defined in the
agreement) or (ii) at the time the Company can demonstrate it has
sufficient funding to retire the Note, complete the Oncolym(R) trials
and file a BLA for Oncolym(R). If none of these occurs before January 1,
1999, the Company would not be able to retire the Note and would be
considered in default. In exchange for providing this commitment, BTD
will receive a warrant, expiring in March 2003, to purchase 500,000
shares of the Company's common stock at $1.00 per share. Should the
Company exercise its ability to borrow under this agreement and be
unable to repay the amounts when due, BTD would receive another warrant
to purchase 500,000 shares of the Company's common stock at $1.00 per
share. In addition, if the Company defaults, BTD would obtain all rights
and assume all obligations relating to the LYM-1 and LYM-2 licensing
rights that the Company has with Northwestern University ("Licensing
Agreement"). BTD would have the right to manufacture LYM-1 and LYM-2 and
would retain the marketing rights for North and South America.
-26-
<PAGE> 27
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
As part of the foreclosure, BTD would grant Techniclone worldwide
marketing rights for LYM-1 and LYM-2 for the remainder of the world and
would pay Techniclone a 5% royalty on all sales of LYM-1 and LYM-2 on
products sold in North and South America. The Company would have an
option to purchase the LYM-1 and LYM-2 licensing rights from BTD for
$10,000,000, reimbursement of costs as specified in the agreement,
issuance of a warrant to purchase 1,000,000 shares of the Company's
common stock for $1.00 per share and a perpetual royalty of 5% on
world-wide sales of the LYM-1, LYM-2 and related products. BTD, at its
option, may transfer amounts advanced under the commitment into any
financing obtained by the Company in the future on the same terms as the
future financing. If BTD elects to transfer the amounts into a future
financing, all terms of this commitment, except the issuance of the
original warrant to purchase 500,000 shares of the Company's common
stock at $1.00 per share would terminate. The Company does not intend to
borrow under this arrangement unless other short term financing with
acceptable terms cannot be obtained. If the Company does not borrow
under this arrangement, BTD will still receive a warrant to purchase
500,000 shares of the Company's common stock at $1.00 per share for
making the commitment available to the Company.
The Company is also pursuing funding for up to $4,000,000 from private
investors under a secured convertible debt arrangement and funding for
up to $4,250,000 under a securitized debt arrangement. As of March 14,
1998, no commitments have been received under either of these
arrangements. Should sufficient funding be obtained under either of
these arrangements, borrowings under the $2,000,000 commitment described
above would not be made.
In addition to the short term financing arrangements described above,
the Company is actively pursuing licensing arrangements with various
well established companies and is pursuing long-term financing
arrangements with private investors and venture firms. The Company is
seeking financing for gross proceeds of amounts between $20,000,000 and
$60,000,000 from these groups.
One of the financings with a private investor group would provide for
aggregate funding of $60,000,000 in gross proceeds. Of this amount, the
Company expects that approximately $20,000,000 in gross proceeds will be
in the form of a convertible debenture and the remaining $40,000,000 in
gross proceeds will be in the form of a minority interest in a newly
formed Techniclone European operating subsidiary. Completion of this
financing is subject to the satisfactory completion of the due diligence
process and resolution of issues relating to the U.S. and European tax
aspects of the transaction by the investor group.
The Company is also in preliminary discussions regarding long-term
financings with other potential investors.
With the exception of the two aforementioned short term funding
commitments, there can be no assurances that any financings will be
completed in a timely manner or at all. The Company's future success is
dependent upon raising additional money to provide for the operations
necessary operations of the Company. If the Company is unable to obtain
additional financing, there would be a material adverse effect on the
Company's business, financial position and results of operations.
The Company believes that it has sufficient cash on hand and available
pursuant to the financing commitments described above to meet its
obligations on a timely basis through June 30, 1998.
-27-
<PAGE> 28
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(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 January 31, 1998, and
the consolidated results of its operations and its consolidated cash
flows for the three month and nine months periods ended January 31, 1998
and 1997. 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.
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.
(3) The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings per Share" in the quarter ended January 31, 1998.
Under SFAS No. 128, the Company disclosed basic loss per share and
diluted loss per share. The adoption of this standard will have no
effect on the basic or diluted earnings per share for periods in which
the Company incurs losses 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 No.
130, "Reporting Comprehensive Income", which requires businesses to
disclose comprehensive income and its components in their general
purpose financial statements. SFAS No. 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 No. 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.
In June 1997, the Financial Accounting Standards Board also issued SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related
Information". SFAS No. 131 establishes standards of reporting by
publicly held businesses and disclosures of information about operating
segments in annual financial statements, and to a lesser extent, in
interim financial reports issued to shareholders. SFAS No. 131 is
effective for the Company for the fiscal year ending April 30, 1998. The
Company does not believe adoption of this new standard will have a
significant impact on its financial statement disclosure.
-28-
<PAGE> 29
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(4) During the nine month period ended January 31, 1997, the Company
reported certain legal costs incurred as "General and Administrative
expense-Affiliates" in the accompanying consolidated statements of
operations because the costs were from a firm in which one of the
Company's Board of Directors was also a principal. As of October 27,
1997, the individual discontinued his service as a member of the
Company's Board of Directors. Accordingly, fees incurred by the Company
from such firm subsequent to October 27, 1997, have been classified in
"General and Administrative expense-Unrelated entities", in the
accompanying consolidated statements of operations.
(5) Net loss per share is calculated by adding the net loss for the three
and nine-month periods 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 nine-month period divided by
the weighted average number of shares of common stock outstanding during
the quarter and nine-month period. Shares issuable upon the exercise of
common stock warrants and options have been excluded from the three and
nine-month periods ended January 31, 1998 and 1997 per share calculation
because their effect is antidilutive. Accretion of the Class B and Class
C Preferred Stock dividends and issue discount amounted to $987,568 and
$103,505 for the quarters ended January 31, 1998 and 1997 and $3,146,977
and $434,450 for the nine-month periods ended January 31, 1998 and 1997,
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. The Class C Preferred 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 20% through March 25, 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.
-29-
<PAGE> 30
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(7) Subsequent to January 31, 1998, several shares of the Company's Class B
Preferred Stock and Class C Preferred Stock were converted into common
stock of the Company. As of March 10, 1998, all of the Class B Preferred
Stock had been converted into common stock of the Company, which
resulted in the issuance of approximately 4,336,407 shares of common
stock during the period from February 1, 1998 through March 10, 1998.
Subsequent to January 31, 1998 and through March 10, 1998, 4,315 shares
of Class C Preferred Stock were converted for 8,859,087 shares of common
stock of the Company. At March 10, 1998, 6,556 shares of Class C
Preferred Stock remained outstanding. In conjunction with these
conversions, warrants were issued to the Class C Preferred stockholders
to purchase 2,214,734 shares of the Company's common stock, which will
be priced on March 24, 1998 at 110% of the conversion cap as defined in
the Class C Preferred Stock agreement. As of March 10, 1998, if all
convertible instruments were converted into common stock, the Company
would be obligated to issue stock in excess of its authorized number of
common shares. The Company has scheduled a Shareholder Meeting for April
23, 1998, to approve an increase in its authorized common stock from
60,000,000 shares to 120,000,000 shares.
(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
January 31, 1998, 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.
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) During the quarter ended January 31, 1998, the Company terminated its
agreement with Alpha Therapeutic Corporation ("Alpha") and reacquired
all of Alpha's rights in Oncolym(R) by entering into a Termination
Agreement which requires certain fixed payments, milestone payments and
royalties on future sales of Oncolym(R). As a result of this
transaction, the Company made an initial payment of $260,000 for
termination fees and wrote off inventory of approximately $241,000 and a
contract loss and inventory reserves of aggregating $294,000.
-30-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE PERIOD ENDED 04/30/97 AND FORM 10-Q FOR THE PERIOD ENDED 01/31/98.
</LEGEND>
<CIK> 0000704562
<NAME> TECHNICLONE CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> JAN-31-1998
<EXCHANGE-RATE> 1,000
<CASH> 2,670
<SECURITIES> 0
<RECEIVABLES> 196
<ALLOWANCES> 0
<INVENTORY> 74
<CURRENT-ASSETS> 3,210
<PP&E> 10,420
<DEPRECIATION> 1,398
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0
0
<COMMON> 29
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<TOTAL-LIABILITY-AND-EQUITY> 12,880
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<EPS-PRIMARY> (0.43)<F1>
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<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
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