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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED APRIL 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to ______________
Commission file number 0-17085
TECHNICLONE CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 95-3698422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14282 FRANKLIN AVENUE, TUSTIN, CALIFORNIA 92780-7017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 508-6000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant was approximately $270,233,000 as of July 21, 2000, based upon
a closing price of $3.09 per share. Excludes 7,257,725 shares of Common Stock
held by executive officers, directors, and shareholders whose ownership exceeds
5% of the Common Stock outstanding as of July 21, 2000.
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APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
94,711,839 shares of Common Stock
as of July 21, 2000
DOCUMENTS INCORPORATED BY REFERENCE.
Part III of the Form 10-K is incorporated by reference from the
Registrant's Definitive Proxy Statement for its 2000 Annual Shareholders'
Meeting.
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TECHNICLONE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED APRIL 30, 2000
TABLE OF CONTENTS
PART I
Item 1. Business 4
Item 2. Properties 21
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders' Matters 22
Item 6. Selected Financial Data 23
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 25
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 30
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 31
PART III
Item 10. Directors and Executive Officers of the Registrant 31
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners
and Management 31
Item 13. Certain Relationships and Related Transactions 31
PART IV
Item 14. Exhibits, Consolidated Financial Statement
Schedules, and Reports on Form 8-K 32
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PART I
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ITEM 1. BUSINESS
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Except for historical information contained herein, this Annual Report
on Form 10-K 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 elsewhere in this Form 10-K, 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. When used in this
Form 10-K, the words "may," "should," "believe," "anticipate," "estimate,"
"expect," their opposites and similar expressions are intended to identify
forward-looking statements. The Company cautions readers that such statements
are not guarantees of future performance or events and are subject to a number
of factors that may tend to influence the accuracy of the statements. Factors
that may cause such a difference include, but are not limited to, those
discussed in "Other Factors Influencing Future Results and Accuracy of
Forward-Looking Statements" at the end of Item 1. Business.
COMPANY OVERVIEW
Techniclone Corporation was incorporated in the State of Delaware on
September 25, 1996. On March 24, 1997, Techniclone International Corporation, a
California corporation (a predecessor company incorporated in June 1981), was
merged with and into Techniclone Corporation. This merger was effected for the
purpose of effecting a change in our state of incorporation from California to
Delaware and making certain changes in our charter documents. Techniclone
Corporation refers to Techniclone International Corporation, its former
subsidiary, Cancer Biologics Incorporated ("CBI"), which was merged into the
Company on July 26, 1994 and its wholly-owned subsidiary Peregrine
Pharmaceuticals, Inc. ("Peregrine"), a Delaware corporation, which was acquired
on April 24, 1997. As used in this Form 10-K, the terms "we", "us", "our" and
"Company" refer to Techniclone Corporation.
Techniclone is a biopharmaceutical company engaged in the research,
development and commercialization of targeted cancer therapeutics. We are
developing product candidates based primarily on collateral (indirect) tumor
targeting for the treatment of solid tumors. In addition, we are in
collaboration with Schering A.G. to develop a direct tumor-targeting agent
(Oncolym(R)) for the treatment of Non-Hodgkins B-cell Lymphoma ("NHL").
Collateral targeting is a strategy that has been developed to take
advantage of characteristics common to all solid tumors. These common tumor
characteristics include the development of a blood supply in all solid tumors in
excess of two millimeters in size in order to support growth. While all solid
tumors in excess of two millimeters in size develop a blood supply, they do not
develop an adequate blood supply. The lack of an adequate blood supply results
in starvation and eventually death of tumor cells farthest from the tumor blood
vessels. These dying and dead tumor cells are known as the necrotic core of the
tumor. Our Collateral Targeting Agents target either intratumoral blood vessels
or structures found in the necrotic core of the tumor.
The most clinically advanced of the Collateral Targeting Agents is
known as Tumor Necrosis Therapy ("TNT"), which utilizes monoclonal antibodies
(targeting molecules that bind to specific structures) that recognize markers
found in the necrotic core of solid tumors. TNT antibodies are potentially
capable of carrying a variety of agents including radiation, chemotherapeutic
agents and cytokines to the interior of solid tumors. A Phase II clinical trial
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for a Tumor Necrosis Therapy agent (called Cotara(TM)) for the treatment of
malignant glioma (brain cancer) is currently being conducted at The Medical
University of South Carolina, Temple University, University of Utah-Salt Lake
City, Carolina Neurosurgery & Spine Associates, Barrow Neurological Institute in
Phoenix, Arizona and the University of Miami. In addition, our Tumor Necrosis
Therapy is being used in a clinical trial for the treatment of pancreatic,
prostate and liver cancers in Mexico City.
The second type of Collateral Targeting Agent that we are developing is
known as Vascular Targeting Agents ("VTAs"). VTAs utilize monoclonal antibodies
and other targeting agents that recognize markers found on tumor blood vessels.
The monoclonal antibody carries an effector molecule that creates a blockage
within the blood vessels that supply oxygen and nutrients to the tumor cells.
Cutting off the blood supply to the tumor results in tumor cell death,
potentially destroying the tumor. VTAs are currently in pre-clinical development
in collaboration with our joint development partner, Oxigene, Inc. and
researchers at the University of Texas Southwestern Medical Center at Dallas.
The third type of Collateral Targeting Agents is known as
Vasopermeation Enhancement Agents ("VEAs"). VEAs currently use the same
targeting agent as TNT to deliver an agent that makes the blood vessels inside
the tumor more leaky (permeable). The increased permeability of the tumor blood
vessels makes it possible to deliver an increased concentration of killing
agents into the tumor where they can potentially kill the living tumor cells.
VEAs are currently in pre-clinical development in collaboration with researchers
at the University of Southern California Medical Center.
Techniclone has taken steps to protect its position in the field of
Collateral Targeting Agents. Techniclone currently has exclusive rights to over
40 issued U.S. and foreign patents protecting various aspects of its Technology
and has additional pending patent applications that it believes will further
strengthen its position in Collateral Targeting.
Our direct tumor-targeting agent, Oncolym(R), for the treatment of
Non-Hodgkins B-cell Lymphoma ("NHL") is being developed by Schering A.G., a
major multinational pharmaceutical company. On March 8, 1999, Techniclone
entered into a license agreement with Schering A.G. with respect to the
development, manufacturing and marketing of our direct tumor targeting agent
candidate, Oncolym(R). The Techniclone clinical trial was halted by Schering
A.G., and Schering A.G. has advised the Company that they currently anticipate
starting a single dose dosing trial with a modified treatment strategy in the
near future. This dose escalation study is designed to measure safety and
efficacy of a single dose of Oncolym(R) in intermediate and high grade
Non-Hodgkins B-cell Lymphoma. Recently, the Company and Schering A.G. have
amended the license agreement whereby Techniclone has agreed to issue shares of
its common stock as prepayment requested and Schering A.G. has agreed to accept
Techniclone Common Stock to Schering A.G. in two tranches as prepayment to cover
the projected clinical trial expenses. The first traunch, which consists of $1.3
million of our Common Stock, will be given to Schering A.G. upon the effective
date of the registration statement. A second traunch, which consists of $1.7
million of our Common Stock, will be given upon the commencement of the Phase
II/III study.
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RECENT DEVELOPMENTS IN OUR BUSINESS STRATEGY
There have been many changes in our management team and the Board of
Directors since November 3, 1999. During November 1999, four of our five Board
members, Messrs. Larry O. Bymaster, Rockell N. Hankin, William C. Shepherd and
Thomas R. Testman, resigned and Mr. Eric S. Swartz and Mr. Carlton M. Johnson
were appointed as new members of the Board. On December 29, 1999, the Board
appointed Mr. Edward J. Legere to also serve on the Board of Directors.
Currently, the Board is comprised of the following four members: Mr. Carlton M.
Johnson, Mr. Edward J. Legere, Mr. Eric S. Swartz, and Dr. Clive R. Taylor. In
November 1999, Mr. Bymaster resigned as President & Chief Executive Officer and
Mr. Steven C. Burke resigned as Chief Financial Officer and Corporate Secretary.
The Board appointed Dr. John N. Bonfiglio, Techniclone's Vice President of
Technology and Business Development, as Interim President and recently appointed
him as President and Chief Executive Officer ("CEO"). In addition, Mr. Steven W.
King was promoted to the position of Vice President of Technology and Product
Development and Mr. Paul J. Lytle was promoted to the position of Vice President
of Finance & Accounting and Corporate Secretary. Techniclone is currently
operating with approximately 18 employees compared to approximately 50 employees
previously employed by the Company in October 1999.
With the recent changes in our management team and the Board of
Directors, we have adopted a new strategic business plan. During the quarter
ended April 30, 2000, our new management team and Board of Directors further
defined our business plans, operations and funding requirements. In the past
five years, significant financial resources have been spent on a Good
Manufacturing Practices ("GMP") infrastructure, corporate facility improvements,
staffing and other support activities. Based on their evaluation of the Company,
the management team and the Board of Directors have implemented the following
plan:
CORPORATE STRUCTURE. Our objective is to focus our resources on
clinical trials and licensing. Our new plan started with the elimination of our
in-house manufacturing activities, which reduced the level of staff and fixed
overhead costs required for our operations. We have also decided to outsource
various clinical trial activities, which will allow us to better predict and
manage our costs on a project specific basis. We will continue to outsource our
research efforts through our agreements with the University of Southern
California Medical Center and the University of Texas Southwestern Medical
Center at Dallas. Techniclone has maintained a core group of employees that will
plan, coordinate and monitor all product development and clinical trial
activities being conducted by outside parties. In addition, the core group of
employees will also maintain the product development activities and technology
transfer activities associated with outsourcing the manufacturing of our product
candidates.
MANUFACTURING. Operating a GMP manufacturing facility requires highly
specialized personnel and equipment that must be maintained on a continual
basis. Although we believe that the Company has derived substantial benefits
from our manufacturing operations, management and the Board of Directors believe
that maintaining a GMP manufacturing facility is not an efficient use of our
resources at this time. We intend to use contract manufacturers with excess
capacity to provide GMP manufacturing of Oncolym(R), Cotara(TM) and other future
products under development. We believe we have manufactured a sufficient
antibody supply to meet our current clinical trial needs for our Oncolym(R) and
Cotara(TM) technologies and have retained key development personnel, who will be
responsible for developing analytical methods and processes that will facilitate
the transfer of technology to contract manufacturers.
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As part of this new manufacturing strategy, we are looking to sublease
any excess space to further reduce our fixed overhead costs and sell any unused
or idle assets. We are also working with TNCA, LLC, the owner of the Company's
manufacturing facility, who has listed the facility for sale. As the facility
itself and related manufacturing improvements are owned by TNCA LLC, only the
proceeds from the sale of manufacturing equipment will be paid directly to
Techniclone. In addition, if the manufacturing facility is sold by TNCA, LLC,
Techniclone would receive approximately $932,000 as payment on a note receivable
from TNCA, LLC, as of April 30, 2000. The note receivable was received as
partial consideration upon the sale and subsequent leaseback of our facilities
in December 1998. To date, Techniclone has realized a significant reduction of
monthly fixed overhead expenses from the discontinuation of our manufacturing
operations. Techniclone anticipates additional reductions in fixed overhead
costs related to the cessation of manufacturing activities and upon the sale or
subleasing of the manufacturing facility.
LICENSING. We also consider licensing to be an important part of our
strategic business plan. Our management team and the Board of Directors believe
that non-exclusive licensing of our TNT and VTA technology platforms is the
optimal way to maximize the value of these technologies. Because of the
potentially broad range of applications of these technologies and our broad
patent coverage in the VTA, TNT and VEA areas, there is the potential for
multiple products based on these technology platforms. We believe that
opportunities may exist to enter into multiple licenses in areas of our
technologies that we are not actively interested in developing. We believe that
this strategy of entering into multiple strategic alliances for each of our core
technologies is the best way to enhance the probability of seeing a drug
candidate successfully developed.
As evidence of the new strategic business plan, we recently finalized
an agreement to jointly develop and commercialize the overall VTA technology
platform with Oxigene, Inc. As part of the joint development arrangement,
Techniclone and Oxigene, Inc. have formed a joint venture, Arcus Therapeutics,
LLC ("Arcus"), that will focus on merging the vascular targeting technologies of
Oxigene, Inc. and Techniclone. The VTA technology is currently in pre-clinical
development, and the Arcus joint venture is expected to begin clinical studies
within the next two years. The joint venture plans to continue sublicensing the
technology to other companies for applications that would not interfere with the
joint venture's combination strategy. Under the terms of the joint venture,
Techniclone will supply its intellectual property and the expertise of Dr.
Thorpe, along with the most promising lead candidates he has developed to date.
Oxigene, Inc. will provide its expertise in the preclinical and clinical
development areas as well as its next generation tubulin-binding compounds. The
joint venture participants will collaborate on research and development of those
compounds for use in combination with the VTA technology. Pursuant to the joint
venture agreement, Oxigene, Inc. has paid us an up-front cash licensing fee of
$1 million and has purchased $2 million in the current market value of our
Common Stock. Oxigene, Inc. will also be required to pay Techniclone $1 million
in cash and will subscribe for an additional $1 million in Techniclone stock
upon the filing of an Investigational New Drug Application (IND) for the first
clinical candidate developed by Arcus. Based on development success in the joint
venture, Oxigene, Inc. will be required to spend up to $20 million to fund the
development expenses of Arcus. Any further funding of the joint venture
thereafter would be shared by the partners on an equal basis. Additionally under
the terms of the joint venture agreement, any sublicensing fees generated within
the joint venture will be allocated 75% to Techniclone and 25% to Oxigene, Inc.
until we have received $10 million in sublicense fee revenues. Thereafter, the
joint venture partners will share licensing fees on an equal basis. Furthermore,
Techniclone and Oxigene, Inc. will share equally any royalty income or profits
from the joint venture.
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In addition to the joint venture, the Company has signed letters of
intent with SuperGen, Inc. to license a segment of its VTA technology,
specifically related to Vascular Endothelial Growth Factor ("VEGF"), and with
Scotia Pharmaceuticals for VTA technology which is specifically related to
applications of Photodynamic Therapy. The terms of the agreements with SuperGen,
Inc. and Scotia Pharmaceuticals would include an up-front payment and future
milestone payments, plus a royalty on net sales or net profits. Also, we entered
into a 90-day option agreement with a multinational pharmaceutical company to
potentially license a specific use of the TNT technology. The Company is in
continued negotiations with the multinational pharmaceutical company. There can
be no assurances that we will be successful in entering into such licensing
transactions on terms that are mutually acceptable.
The overall goal of our licensing strategy is to develop as many
corporate relationships as possible for the development of our platform
technologies, thus increasing the chances that one or several anti-cancer
products will be commercialized utilizing our technologies. We believe that
there are numerous opportunities for non-exclusive licenses of our TNT and VTA
platform technologies. In addition, by granting non-exclusive licensing to other
companies, we maintain the ability to continue to develop our own products, such
as Cotara(TM), for commercialization. We believe this approach should increase
the revenue potential of these two platform technologies and will allow us to
commercialize our own proprietary anti-cancer products. A more detail discussion
on all of the Company's significant collaboration agreements is further
discussed in the notes to the consolidated financial statements contained
herein.
CLINICAL TRIALS. The most critical aspect of our business plan involves
clinical trials of our various technologies. Techniclone plans to expand the
clinical trials of our Cotara(TM) monoclonal antibody. Currently, a Phase II
clinical trial using Cotara(TM) for the treatment of malignant glioma (brain
cancer) is currently being conducted at The Medical University of South
Carolina, Temple University, University of Utah-Salt Lake City, Carolina
Neurosurgery & Spine Associates, Barrow Neurological Institute in Phoenix,
Arizona and the University of Miami. Additional sites will be added as we
increase patient enrollment during the next few months. In addition, Cotara(TM)
is being used in a clinical trial for the treatment of pancreatic, prostate and
liver cancers in Mexico City. The Mexico City trial was designed as a safety
study to give us information about the drug and its safety profile in humans.
The data obtained from this trial will be useful for designing dosing regimens
and dosing levels for most of the clinical programs under consideration. The
preliminary data from the clinical trial in Mexico City has yielded sufficient
information to help with our plans to initiate two clinical trials in the U.S.
by December 2000. These trials will be for solid tumor indications and will be
designed to take advantage of the drug's safety and efficacy profile. We plan to
continue enrolling patients in the Mexico City trial throughout the calendar
year, which will maximize the quantity and quality of information from this
study.
Berlex Laboratories, U.S. subsidiary of Schering A.G., our strategic
partner for our Non-Hodgkins B-cell Lymphoma drug, Oncolym(R), will shortly
commence patient enrollment for the planned clinical study. This dose escalation
study is designed to measure safety and efficacy of a single dose of Oncolym(R)
in intermediate and high grade Non-Hodgkins B-cell Lymphoma. The study is
designed to test a range of doses in order to optimize the treatment regimen
while evaluating the dosimetry, biodistribution, safety and efficacy of
Oncolym(R). Following the successful completion of the dose escalation study,
Berlex Laboratories will start a Phase II/III clinical trial program designed to
confirm the safety and efficacy of Oncolym(R) in the target patient population.
Our principal executive offices are located at 14282 Franklin Avenue,
Tustin, California 92780-7017, and our telephone number is (714) 508-6000.
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OUR PRODUCTS UNDER DEVELOPMENT
COLLATERAL (INDIRECT) TARGETING AGENTS FOR SOLID TUMOR THERAPY
We have three monoclonal antibody technologies for collateral
(indirect) targeting of solid tumors for cancer therapy, Tumor Necrosis Therapy
(TNT), Vascular Targeting Agents (VTAs), and Vasopermeation Enhancement Agents
(VEAs).
TUMOR NECROSIS THERAPY (TNT). Tumor Necrosis Therapy represents a novel
approach to cancer therapy for the treatment of sold tumors. Instead of
targeting living cancer cells, TNT targets dead and dying cells, which can
account for up to 50% of the mass of a tumor found primarily at the tumor core.
TNT binds to Deoxyribonucleic Acid ("DNA") or DNA-associated proteins, such as
histones, found within the nucleus of every cell. TNT is only able to reach the
DNA target in cells having porous nuclear and cellular membranes, since porosity
is a property uniquely associated with dead and dying cells. As such, DNA
functions as a highly abundant but selective target. This DNA target is not
believed to modulate as do targets associated with other tumor-specific cell
surface antigens that are commonly used as targets with other antibody-based
therapeutic modalities. Once concentrated in necrotic regions throughout the
tumor, radiolabeled TNT can potentially bombard neighboring viable cancer cells
with beta radiation, which has a penetration of 100-300 cell layers for an
extended period of time, resulting in death of the tumor cells surrounding the
necrotic core.
Each successive treatment with TNT potentially kills more cancer cells,
thereby increasing the necrotic area of the tumor. Thus, TNT potentially becomes
more effective upon subsequent doses, contrary to conventional chemotherapy,
which becomes less effective with subsequent doses due to increased drug
resistance. In essence, TNT potentially destroys the tumor from the inside out.
The TNT targeting mechanism could be the basis for a class of new products
effective across a wide-range of solid tumor types, including brain, lung,
colon, breast, liver, prostate and pancreatic cancers.
Our first TNT-based product is an investigational chimeric monoclonal
antibody radiolabeled with the isotope, 131I, trademarked Cotara(TM). The
Company is currently enrolling patients into a Phase II multi-center clinical
trial for the treatment of malignant glioma. In addition, the Company has been
enrolling patients in a Phase I equivalent clinical trial in Mexico City using
TNT for treatment of prostate, liver and pancreatic cancers. The purpose of this
study is to examine safety, dosimetry, and dosing in solid tumors. The clinical
trial is being partially sponsored by a major pharmaceutical company. The
preliminary data from the clinical trial in Mexico City has yielded sufficient
information to help with our plans to initiate two additional clinical trials in
the U.S. by December 2000.
VASCULAR TARGETING AGENTS (VTAS). VTAs are anti-cancer agents that act
by cutting off the supply of oxygen and nutrients to tumor cells. The VTAs act
in a two step process whereby the VTA first binds to the tumor blood vessels and
then induces a blood clot in the tumor blood vessels. The formation of the blood
clot stops the flow of oxygen and nutrients to the tumor cells, resulting in a
wave of tumor cell death.
VTAs have the potential to be effective against a wide variety of solid
tumors since every solid tumor in excess of two millimeters in size forms a
vascular network to enable it to continue growing and since tumor vasculature
markers are believed to be consistent among various tumor types. Another
potential advantage of the VTA technology is that the cells targeted by VTAs do
not mutate to become drug resistant. Drug resistance caused by the instability
and mutability of cancer cells is a significant problem with conventional
therapeutic agents that must directly target the cancer cells of the tumor.
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In pre-clinical animal studies, VTAs have shown that within hours after
administration, clots form in the tumor vasculature and the tumor cells begin to
die. Within days, large tumor masses have been shown to disintegrate and have
left nearby healthy tissue intact and fully functional.
The VTA technology differs from conventional anti-angiogenesis therapy
in that VTAs act by shutting off the supply of oxygen and nutrients to tumor
cells by inducing clot formation in existing tumor-blood vessels. By contrast,
anti-angiogenesis compounds typically work by inhibiting the growth of new tumor
blood vessels. In inhibiting the growth of new tumor blood vessels, tumor growth
may be diminished, but the existing tumor can maintain its bulk by utilizing the
existing tumor blood vessels. The VTA approach, therefore, is designed to
provide a therapeutic effect for the debulking of existing tumors.
During May 2000, the Company entered into a joint venture agreement
with Oxigene, Inc. for the development of the VTA technology. Under the terms of
the joint venture, the Company has agreed to supply its VTA intellectual
property to the joint venture. In exchange for this, Oxigene, Inc. has agreed to
provide its next generation tubulin-binding compounds, funding of up to
$20,000,000 for development costs and milestone payments as further explained in
the notes to our consolidated financial statements. Under the joint venture
agreement, the Company and Oxigene, Inc. have agreed to name the new joint
venture entity Arcus Therapeutics, LLC.
VASOPERMEATION ENHANCEMENT AGENTS (VEAS). Vasopermeation Enhancement
Agents act to enhance the delivery of cancer therapeutics. VEAs use monoclonal
antibodies, such as the TNT antibodies, to deliver molecules that increase the
blood vessel permeability inside the tumor. The increased permeability of the
tumor blood vessels makes it possible to deliver higher concentrations of
chemotherapeutic and immunotherapy agents into the tumor.
In pre-clinical studies, VEAs were able to increase the uptake of drugs
or antibodies within a tumor by 200% to 400%. VEAs are currently in pre-clinical
development in collaboration with researchers at the University of Southern
California Medical Center.
DIRECT TARGETING AGENT FOR NON-SOLID TUMOR THERAPY
ONCOLYM(R). Oncolym(R) is designed as a therapy against Non-Hodgkin's
B-cell Lymphoma cancer. The Oncolym(R) antibody is linked to a radioactive
isotope (131I) and the combined molecule is injected into the blood stream of
the cancer patient where it recognizes and binds to the cancerous lymphoma tumor
sites, thereby delivering the radioactive isotope to the tumor site, with
minimal adverse effects on surrounding healthy tissue. Schering A.G., a major
multinational pharmaceutical company, is responsible for the development,
manufacturing and marketing of our direct tumor targeting agent candidate,
Oncolym(R), as further described in the notes to the consolidated financial
statements.
COMPETITION
The biotechnology and pharmaceutical industries are highly competitive
and any product candidates will have to compete with existing and future cancer
therapies. Our competitive position is based on our proprietary technology,
know-how and U.S. and foreign patents covering our collateral (indirect)
targeting agent technologies (TNT, VTA and VEA) and our direct targeting agent
technology (Oncolym(R)) for the therapeutic treatment of human cancers. We
currently have exclusive rights to over 40 issued U.S. and foreign patents
protecting various aspects of our technology and we have additional pending
patent applications that we believe will further strengthen our intellectual
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property position. We plan to compete on the basis of the advantages of our
technologies, the quality of our products, the protection afforded by our issued
patents and our commitment to research and develop innovative technologies.
Various other companies, some or all of which have larger financial
resources than us, are currently engaged in research and development of
monoclonal antibodies and in cancer prevention and treatment. There can be no
assurance that such companies, other companies or various other academic and
research institutions will not develop and market monoclonal antibody products
or other products to prevent or treat cancer prior to the introduction of, or in
competition with, our present or future products. In addition, there are many
firms with established positions in the diagnostic and pharmaceutical industries
which may be better equipped than us to develop monoclonal antibody technology
or other products to diagnose, prevent or treat cancer and to market their
products. Accordingly, we plan to, whenever feasible, enter into joint venture
relationships with these competing firms or with other firms with appropriate
capabilities for the development and marketing of specific products and
technologies so that our competitive position might be enhanced. There can be no
assurance that research and development by others will not render the Company's
technology or potential products obsolete or non-competitive or result in
treatments superior to any therapy developed by the Company, or that any therapy
developed by the Company will be preferred to any existing or newly developed
technologies.
GOVERNMENT REGULATION OF PRODUCTS
Regulation by governmental authorities in the United States and other
countries is a significant factor in our ongoing research and development
activities and in the production and marketing of our products under
development. The amount of time and expense involved in obtaining necessary
regulatory approval depends upon the type of product. The procedure for
obtaining FDA regulatory approval for a new human pharmaceutical product, such
as Cotara(TM), VTA, VEA and Oncolym(R), involves many steps, including
laboratory testing of those products in animals to determine safety, efficacy
and potential toxicity, the filing with the FDA of a Notice of Claimed
Investigational Exemption for Use of a New Drug prior to the initiation of
clinical testing of regulated drug and biologic experimental products, and
clinical testing of those products in humans. We have filed a Notice of Claimed
Investigational Exemption for Use of a New Drug with the FDA for the production
of Oncolym(R) and Cotara(TM) as a material intended for human use, but have not
filed such a Notice with respect to any other in vivo products. The regulatory
approval process is administered by the FDA's Center for Biologics Research and
Review and is similar to the process used for any new drug product intended for
human use.
The pre-marketing clinical testing program required for approval of a
new drug or biologic typically involves a three-phase process. Phase I consists
of testing for the safety and tolerance of the drug with a small group of
patients, and also yields preliminary information about the effectiveness of the
drug and dosage levels. Phase II involves testing for efficacy, determination of
optimal dosage and identification of possible side effects in a larger patient
group. Phase III clinical trials consist of additional testing for efficacy and
safety with an expanded patient group. After completion of clinical studies for
a biologics product, a Biologics License Application (BLA) is submitted to the
FDA for product marketing approval and for licensing of the product
manufacturing facilities. In responding to such an application, the FDA could
grant marketing approval, request clarification of data contained in the
application or require additional testing prior to approval. We have not, to
date, filed a BLA for any of our product candidates.
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If approval is obtained for the sale of a new drug, FDA regulations
will also apply to the manufacturing process and marketing activities for the
product and may require post-marketing testing and surveillance programs to
monitor the effects of the product. The FDA may withdraw product approvals if
compliance with regulatory standards, including labeling and advertising, is not
maintained or if unforeseen problems occur following initial marketing. The
National Institutes of Health has issued guidelines applicable to the research,
development and production of biological products, such as our product
candidates. Other federal agencies and congressional committees have indicated
an interest in implementing further regulation of biotechnology applications. We
cannot predict, however, whether new regulatory restrictions on the
manufacturing, marketing, and sale of biotechnology products will be imposed by
state or federal regulators and agencies.
In addition, we are subject to regulation under state, federal, and
international laws and regulations regarding occupational safety, laboratory
practices, the use and handling of radioactive isotopes, environmental
protection and hazardous substance control, and other regulations. Our clinical
trial and research and development activities involve the controlled use of
hazardous materials, chemicals and radioactive compounds. Although we believe
that our safety procedures for handling and disposing of such materials comply
with the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, we could be held liable for any
damages that result and any such liability could exceed the financial resources
of the Company. In addition, disposal of radioactive materials used in our
clinical trials and research efforts may only be made at approved facilities.
Our product candidates, if approved, may also be subject to import laws
in other countries, the food and drug laws in various states in which the
products are or may be sold and subject to the export laws of agencies of the
United States government.
The Company believes that it is in material compliance with all
applicable laws and regulations including those relating to the handling and
disposal of hazardous and toxic waste.
During fiscal year 1999, the Office of Orphan Products Development of
the FDA determined that Oncolym(R) and Cotara(TM) qualify for orphan designation
for the treatment of intermediate and high-grade Non-Hodgkins B-cell Lymphoma
and for the treatment of glioblastoma multiforme and anaplastic astrocytoma
(brain cancer), respectively. The 1983 Orphan Drug Act (with amendments passed
by Congress in 1984, 1985, and 1988) includes various incentives that have
stimulated interest in the development of orphan drug and biologic products.
These incentives include a seven-year period of marketing exclusivity for
approved orphan products, tax credits for clinical research, protocol
assistance, and research grants. Additionally, legislation re-authorizing FDA
user fees also created an exemption for orphan products from fees imposed when
an application to approve the product for marketing is submitted.
OUR PATENTS AND TRADE SECRETS
We have relied on the internal achievements, as well as the direct
sponsorship of university researchers, for development of our platform
technologies. We currently have exclusive rights to over 40 issued U.S. and
foreign patents protecting various aspects of our technology and additional
pending patent applications that we believe will further strengthen our position
in collateral targeting. We believe we will continue to learn, on a timely
basis, of advances in the biological sciences which might complement or enhance
our existing technologies. We intend to pursue opportunities to license our
platform technologies and any advancements or enhancements, as well as to pursue
the incorporation of our technologies in the development of our own products.
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We have filed several patent applications either directly or as a
co-sponsor/licensee. The Company treats particular aspects of the production and
radiolabeling of monoclonal antibodies and related technologies as trade
secrets. We intend to pursue patent protection for inventions related to
antibody-based technologies that we cannot protect as trade secrets.
Some of the Company's antibody production and use methods are patented
by independent third parties. We are currently negotiating with certain third
parties to acquire licenses needed to produce and commercialize chimeric and
human antibodies, including the Company's TNT antibody. These licenses are
generally available from the licensors to all interested parties. The terms of
the licenses, obtained and expected to be obtained, are not expected to
significantly impact the cost structure or marketability of chimeric or human
based products.
In general, the patent position of a biotechnology firm is highly
uncertain and no consistent policy regarding the breadth of allowed claims has
emerged from the actions of the U.S. Patent Office with respect to biotechnology
patents. Accordingly, there can be no assurance that the Company's patents,
including those issued and those pending, will provide protection against
competitors with similar technology, nor can there be any assurance that such
patents will not be infringed upon or designed around by others.
International patents relating to biologics are numerous and there can
be no assurance that current and potential competitors have not filed or in the
future will not file patent applications or receive patents relating to products
or processes utilized or proposed to be used by the Company. In addition, there
is certain subject matter which is patentable in the United States but which may
not generally be patentable outside of the United States. Statutory differences
in patentable subject matter may limit the protection the Company can obtain on
some of its products outside of the United States. These and other issues may
prevent the Company from obtaining patent protection outside of the United
States. Failure to obtain patent protection outside the United States may have a
material adverse effect on the Company's business, financial condition and
results of operations.
We know of no third party patents which are infringed by our present
activities or which would, without infringement or license, prevent the pursuit
of our business objectives. However, there can be no assurances that such
patents have not been or will not be issued and, if so issued, that we will be
able to obtain licensing arrangements for necessary technologies on terms
acceptable to the Company. We also intend to continue to rely upon trade secrets
and improvements, unpatented proprietary know-how, and continuing technological
innovation to develop and maintain our competitive position in research and
diagnostic products. We typically place restrictions in our agreements with
third parties, which contractually restricts their right to use and disclose any
of the Company's proprietary technology with which they may be involved. In
addition, we have internal non-disclosure safeguards, including confidentiality
agreements, with our employees. There can be no assurance, however, that others
may not independently develop similar technology or that the Company's secrecy
will not be breached.
MANUFACTURING AND PRODUCTION OF OUR PRODUCTS
CONTRACT MANUFACTURING. Prior to February 2000, the Company operated
its own GMP manufacturing facility. Operating a GMP manufacturing facility
requires highly specialized personnel and equipment that must be maintained on a
continual basis. Although we believe that the Company derived substantial
benefits from its manufacturing operations, in February 2000, management and the
Board of Directors decided that maintaining a GMP manufacturing facility was not
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an efficient use of our resources at this time. Consequently, in February 2000,
we shut down our GMP manufacturing facility. We intend to use contract
manufacturers with excess capacity to provide GMP manufacturing of Oncolym(R),
Cotara(TM) and other future products under development. We believe we have
manufactured a sufficient antibody supply to meet our current clinical trial
needs for our Oncolym(R) and Cotara(TM) technologies and have retained key
development personnel, who will be responsible for developing analytical methods
and processes that will facilitate the transfer of technology to contract
manufacturers. We believe that adequate antibody production expertise and
capacity is competitively available in the industry from contract manufacturers
to fulfill the Company's current and future antibody needs. There can be no
assurance that material produced by contract manufacturers will be suitable for
human use in clinical trials or that commercial supply will be available to meet
the demand for our products.
RADIOLABELING. Once the TNT and Oncolym(R) antibodies have been
manufactured by contract manufacturers, the antibodies are shipped to facilities
for radiolabeling (the process of attaching the radioactive agent, 131I, to the
antibody). From the radiolabeling facilities, the radiolabeled TNT and
Oncolym(R) antibodies are shipped directly to the clinical sites for use in
clinical trials.
We have contracted with two separate radiolabeling facilities for
labeling our clinical trial material. These facilities are not currently capable
of handling significantly increased clinical trial labeling production and
labeling for the commercial market. We are currently in the process of
developing a program which will enable our Oncolym(R) and TNT products to be
labeled with 131I in sufficient quantities for use in expanded clinical trials
and for commercial supply. Any commercial radiolabeling supply arrangement will
require the investment of significant funds by the Company in order for a
radiolabeling vendor to develop the expanded facilities necessary to support the
Company's products. There can be no assurance that material produced by these
two radiolabeling facilities will be suitable for human use in clinical trials
or that commercial supply will be available to meet the demand for radiolabeled
product.
RAW MATERIALS. Various common raw materials are used in the manufacture
of our products and in the development of our technologies. These raw materials
are generally available from several alternate distributors of laboratory
chemicals and supplies. The Company has not experienced any significant
difficulty in obtaining these raw materials and does not consider raw material
availability to be a significant factor in its business. The Company uses
purified materials with strict requirements for sterility and pyrogenicity.
MARKETING OF OUR POTENTIAL PRODUCTS
We intend to sell our products, if approved, in the United States and
internationally in collaboration with marketing partners. Schering A.G. is our
partner to market and distribute the Oncolym(R) product. If the FDA approves TNT
or our other product candidates under development, the marketing of these
product candidates will be contingent upon the Company entering into an
agreement with a company to market our products or upon the Company recruiting,
training and deploying its own sales force. We do not presently possess the
resources or experience necessary to market TNT or our other product candidates.
Other than the agreement with Schering A.G., we have no arrangements for the
distribution of our product candidates, and there can be no assurance that we
will be able to enter into any such arrangements in a timely manner or on
commercially favorable terms, if at all. If we are successful in obtaining FDA
approval for one or more of our product candidates, our ability to market the
product will be contingent upon either licensing or entering into a marketing
agreement with a large company or upon our recruiting, developing, training and
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deploying our own sales force. Development of an effective sales force requires
significant financial resources, time, and expertise. There can be no assurance
that the Company will be able to obtain the financing necessary to establish
such a sales force in a timely or cost effective manner or that such a sales
force will be capable of generating demand for the Company's product candidates.
OUR EMPLOYEES
As of July 21, 2000, the Company employed 18 full-time employees, which
included 14 technical and support employees who carry out the research, product
development and clinical trials of the Company and 4 administrative employees
including the President and CEO. Our staff includes three Ph.D.'s and one M.D.
level person. The Company believes its relationships with its employees are
good. The Company's employees are not represented by a collective bargaining
organization and the Company has not experienced a work stoppage. The Company
expects to add approximately seven additional employees during the year ending
April 30, 2001 to facilitate the expansion of its clinical trial programs and
other corporate operations.
OTHER FACTORS INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD-
LOOKING STATEMENTS
The following discussion outlines certain factors that could affect the
Company's financial statements for fiscal 2001 and beyond and cause them to
differ materially from those that may be set forth in forward-looking statements
made by or on behalf of the Company.
IF WE CANNOT OBTAIN ADDITIONAL FUNDING, OUR PRODUCT DEVELOPMENT AND
COMMERCIALIZATION EFFORTS MAY BE REDUCED OR DISCONTINUED.
At July 21, 2000, we had $12,762,000 in cash and cash equivalents. We
have expended substantial funds on the development of our product candidates and
for clinical trials. As a result, we have had negative cash flows from
operations since inception and expect the negative cash flows from operations to
continue until we are able to generate sufficient revenue from the sale and/or
licensing of our products. Although we have sufficient cash on hand to meet our
obligations on a timely basis through at least the next 12 months, we will
continue to require additional funding to sustain our research and development
efforts, provide for future clinical trials, expand our manufacturing and
product commercialization capabilities, and continue our operations until we are
able to generate sufficient revenue from the sale and/or licensing of our
products.
We plan to obtain required financing through one or more methods
including, obtaining additional equity or debt financing and negotiating
additional licensing or collaboration agreements with another company. There can
be no assurances that we will be successful in raising such funds on terms
acceptable to us, or at all, or that sufficient additional capital will be
raised to complete the research, development, and clinical testing of our
product candidates.
During June 1998, we secured access to a Common Stock Equity Line
(Equity Line) with two institutional investors. Under the amended terms of the
Equity Line, which was amended on June 2, 2000, the Company may, in its sole
discretion, and subject to certain restrictions, periodically sell ("Put")
shares of the Company's Common Stock until all common shares previously
registered under the Equity Line have been exhausted. As of July 21, 2000, the
Company had approximately 7,055,000 shares available for issuance under the
Equity Line. At a market price of $3.50 per share, the Company could raise more
than an additional $17,000,000 under its existing Equity Line. In addition, up
to $2,800,000 of Puts can be made every month if the Company's closing bid price
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is $2.00 or higher during the 10-day pricing period. If the closing bid price is
between $1.00 and $2.00, then the Company can Put up to $1,500,000 per month and
if the Company's closing bid price falls below $1.00 on any trading day during
the ten trading days prior to the Put, the Company's ability to access funds
under the Equity Line in the Put is limited to 15% of what would otherwise be
available. If the closing bid price of the Company's Common Stock falls below
$0.50 or if the Company is delisted from The Nasdaq SmallCap Market, the Company
would have no access to funds under the Equity Line.
The Company believes it has sufficient cash on hand (excluding any
future draws under the Equity Line and anticipated amounts to be received from
signed letters of intent to enter into collaboration agreements with SuperGen,
Inc. and Scotia Pharmaceutical Holdings), to meet its obligations on a timely
basis for at least the next 12 months. Each letter of intent provides for an
exclusive period for the completion of a definitive agreement and will be
subject to customary closing conditions. Although the Company believes it will
enter into definitive agreements and will receive the related up-front payments
under the terms as defined in the letters of intent, there can be no assurance
that definitive agreements will be executed.
WE HAVE HAD SIGNIFICANT LOSSES AND WE ANTICIPATE FUTURE LOSSES.
All of our products are currently in development, preclinical studies
or clinical trials, and no revenues have been generated from commercial product
sales. To achieve and sustain profitable operations, we must successfully
develop and obtain regulatory approval for our products, either alone or with
others, and must also manufacture, introduce, market and sell our products. The
costs associated with clinical trials, contract manufacturing and contract
isotope combination services are very expensive and the time frame necessary to
achieve market success for our products is long and uncertain. We do not expect
to generate significant product revenues for at least the next 12 months. There
can be no guarantee that we will ever generate product revenues sufficient to
become profitable or to sustain profitability.
PROBLEMS IN PRODUCT DEVELOPMENT MAY CAUSE OUR CASH DEPLETION RATE TO INCREASE.
Our ability to obtain financing and to manage expenses and our cash
depletion rate is key to the continued development of product candidates and the
completion of ongoing clinical trials. Our cash depletion rate will vary
substantially from quarter to quarter as we fund non-recurring items associated
with clinical trials, product development, antibody manufacturing, isotope
combination services, patent legal fees and various consulting fees. If we
encounter unexpected difficulties with our operations or clinical trials, we may
have to expend additional funds, which would increase our cash depletion rate.
OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION EFFORTS MAY NOT BE SUCCESSFUL.
Since inception, we have been engaged in the development of drugs and
related therapies for the treatment of people with cancer. Our product
candidates have not received regulatory approval and are generally in the early
stages of development. If the initial results from any of the clinical trials
are poor, those results will adversely affect our ability to raise additional
capital, which will affect our ability to continue full-scale research and
development for our antibody technologies. In addition, our product candidates
may take longer than anticipated to progress through clinical trials or patient
enrollment in the clinical trials may be delayed or prolonged significantly,
thus delaying the clinical trials. Delays in patient enrollment will result in
increased costs and further delays. If we experience any such difficulties or
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delays, we may have to reduce or discontinue development, commercialization or
clinical testing of some or all of our product candidates. In addition, product
candidates resulting from our research and development efforts, if any, are not
expected to be available commercially for at least the next year. Also, our
products currently in clinical trials represent a departure from more commonly
used methods for cancer treatment. These products, if approved, may experience
under-utilization by doctors who are unfamiliar with their application in the
treatment of cancer. As with any new drug, doctors may be inclined to continue
to treat patients with conventional therapies, in most cases chemotherapy,
rather than new alternative therapies. We or our marketing partner may be
required to implement an aggressive education and promotion plan with doctors in
order to gain market recognition, understanding and acceptance of our products.
In addition, our product candidates, if approved, may prove impracticable to
manufacture in commercial quantities at a reasonable cost and/or with acceptable
quality. Any of these factors could negatively affect our financial position and
results of operations. Accordingly, we cannot guarantee that our product
development efforts, including clinical trials, or commercialization efforts
will be successful or that any of our products, if approved, can be successfully
marketed.
OUR DEPENDENCY ON A LIMITED NUMBER OF SUPPLIERS MAY NEGATIVELY IMPACT OUR
ABILITY TO COMPLETE CLINICAL TRIALS AND MARKET OUR PRODUCTS.
We currently procure, and intend in the future to procure, our antibody
radioactive isotope combination services ("radiolabeling") under negotiated
contracts with two entities for clinical trials. We cannot guarantee that these
suppliers will be able to qualify their facilities or label and supply antibody
in a timely manner. Prior to commercial distribution of any of our products, if
approved, we will be required to identify and contract with a company for
commercial antibody manufacturing and radioactive isotope combination services.
We also currently rely on, and expect in the future to rely on, our current
suppliers for all or a significant portion of the raw material requirements for
our antibody products. An antibody that has been combined with a radioactive
isotope cannot be stockpiled against future shortages. Accordingly, any change
in our existing or future contractual relationships with, or an interruption in
supply from, any such third-party service provider or antibody supplier could
negatively impact our ability to complete ongoing clinical trials and to market
our products, if approved.
IF OUR RELATIONSHIP WITH SCHERING A.G. TERMINATES, IT COULD ADVERSELY AFFECT
OUR BUSINESS.
In March 1999, we entered into a license agreement with Schering A.G.
for the worldwide development, marketing and distribution of our direct tumor
targeting agent product candidate, Oncolym(R). The license agreement was amended
in June 2000. Under the agreement, Schering A.G. has assumed control of the
clinical development program, regulatory approvals in the United States and all
foreign countries and sales and marketing of this product candidate. We are
relying on Schering A.G. to apply its expertise and know-how to the development,
launch and sale of this product candidate. If Schering A.G. decides to
discontinue the development of this product candidate and terminates our license
agreement, we may have to look for another partner or discontinue development
and commercialization and clinical testing of this product candidate, which
could negatively affect our operations and financial performance.
WE DO NOT HAVE A SALES FORCE TO MARKET OUR PRODUCTS, IF APPROVED.
At the present time, we do not have a sales force to market any of our
products, if they are approved. We intend to sell our products in the United
States and internationally in collaboration with one or more marketing partners.
If we receive approval from the United States Food and Drug Administration for
our initial product candidates, the marketing of these products will be
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contingent upon our ability to either license or enter into a marketing
agreement with a large company or our ability to recruit, develop, train and
deploy our own sales force. We do not presently possess the resources or
experience necessary to market any of our product candidates. Other than an
agreement with Schering A.G. with respect to the marketing of our direct tumor
targeting agent product candidate, Oncolym(R), we presently have no agreements
for the licensing or marketing of our product candidates, and we cannot assure
that we will be able to enter into any such agreements in a timely manner or on
commercially favorable terms, if at all. Development of an effective sales force
requires significant financial resources, time and expertise. We cannot assure
that we will be able to obtain the financing necessary 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 our product candidates, if and
when they are approved.
WE MAINTAIN ONLY LIMITED PRODUCT LIABILITY INSURANCE AND MAY BE EXPOSED TO
CLAIMS IF OUR INSURANCE COVERAGE IS INSUFFICIENT.
The manufacture and sale of human therapeutic products involves an
inherent risk of product liability claims. We maintain limited product liability
insurance. We cannot assure that we will be able to maintain existing insurance
or obtain additional product liability insurance on acceptable terms or with
adequate coverage against potential liabilities. Product liability insurance is
expensive, difficult to obtain and may not be available in the future on
acceptable terms, if at all. Our inability to obtain sufficient insurance
coverage on reasonable terms or to otherwise protect against potential product
liability claims in excess of our insurance coverage, if any, or a product
recall could negatively impact our financial position and results of operations.
THE LIQUIDITY OF OUR COMMON STOCK WILL BE ADVERSELY AFFECTED IF OUR COMMON STOCK
IS DELISTED FROM THE NASDAQ SMALLCAP MARKET.
The Common Stock of the Company is presently traded on The Nasdaq
SmallCap Market. To maintain inclusion on The Nasdaq SmallCap Market, we must
continue to have either net tangible assets of at least $2,000,000, market
capitalization of at least $35,000,000, or net income (in either our latest
fiscal year or in two of our last three fiscal years) of at least $500,000. In
addition, we must meet other requirements, including, but not limited to, having
a public float of at least 500,000 shares and $1,000,000, a minimum closing bid
price of $1.00 per share of Common Stock (without falling below this minimum bid
price for a period of 30 consecutive trading days), at least two market makers
and at least 300 stockholders, each holding at least 100 shares of Common Stock.
If we are delisted by the The Nasdaq SmallCap Market, the market value of the
Common Stock could fall and holders of Common Stock would likely find it more
difficult to dispose of their Common Stock.
THE SALE OF SUBSTANTIAL SHARES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
As of July 21, 2000, we had approximately 94,712,000 shares of Common
Stock outstanding. There are no shares of Class B or Class C preferred stock
outstanding. We could issue approximately 16,852,000 additional shares of Common
Stock upon the exercise of outstanding options and warrants at an average
exercise price of $1.88 for proceeds of up to approximately $31,632,000. In
addition, the Company has reserved for future issuance approximately 7,055,000
shares of Common Stock under the Equity Line.
The exercise price of outstanding options and warrants and the purchase
price for the shares of Common Stock and warrants to be issued under the Equity
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Line are at a significant discount to the market price. The sale and issuance of
these shares of Common Stock, as well as subsequent sales of shares of Common
Stock in the open market, may cause the market price of our Common Stock to fall
and might impair our ability to raise additional capital through sales of equity
or equity-related securities, whether under the Equity Line or otherwise.
OUR HIGHLY VOLATILE STOCK PRICE AND TRADING VOLUME MAY ADVERSELY AFFECT THE
LIQUIDITY OF THE COMMON STOCK.
The market price of the Common Stock, and the market prices of
securities of companies in the biotechnology industry generally, has been highly
volatile and is likely to continue to be highly volatile. Also, the trading
volume in the Common Stock has been highly volatile, ranging from as few as
76,000 shares per day to as many as 29 million shares per day over the past
year, and is likely to continue to be highly volatile. The market price of the
Common Stock may be significantly impacted by many factors, including
announcements of technological innovations or new commercial products by us or
our competitors, disputes concerning patent or proprietary rights, publicity
regarding actual or potential medical results relating to products under
development by us or our competitors and regulatory developments and product
safety concerns in both the United States and foreign countries. These and other
external factors have caused and may continue to cause the market price and
demand for our Common Stock to fluctuate substantially, which may limit or
prevent investors from readily selling their shares of Common Stock and may
otherwise negatively affect the liquidity of our Common Stock.
WE MAY NOT BE ABLE TO COMPETE WITH OUR COMPETITORS IN THE BIOTECHNOLOGY
INDUSTRY.
The biotechnology industry is intensely competitive. It is also subject
to rapid change and sensitive to new product introductions or enhancements. We
expect to continue to experience significant and increasing levels of
competition in the future. Some or all of these companies may have greater
financial resources, larger technical staffs, and larger research budgets than
we have, as well as greater experience in developing products and running
clinical trials. In addition, there may be other companies which are currently
developing competitive technologies and products or which may in the future
develop technologies and products which are comparable or superior to our
technologies and products. Accordingly, we cannot assure that we will be able to
compete successfully with our existing and future competitors or that
competition will not negatively affect our financial position or results of
operations in the future.
WE MAY NOT BE SUCCESSFUL IF WE ARE UNABLE TO OBTAIN AND MAINTAIN PATENTS AND
LICENSES TO PATENTS.
Our success depends, in large part, on our ability to obtain or
maintain a proprietary position in our products through patents, trade secrets
and orphan drug designations. We have been granted several United States patents
and have submitted several United States patent applications and numerous
corresponding foreign patent applications, and have also obtained licenses to
patents or patent applications owned by other entities. However, we cannot
assure that any of these patent applications will be granted or that our patent
licensors will not terminate any of our patent licenses. We also cannot
guarantee that any issued patents will provide competitive advantages for our
products or that any issued patents will not be successfully challenged or
circumvented by our competitors. Although we believe that our patents and our
licensors' patents do not infringe on any third party's patents, we cannot be
certain that we can avoid litigation involving such patents or other proprietary
rights. Patent and proprietary rights litigation entails substantial legal and
other costs, and we may not have the necessary financial resources to defend or
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prosecute our rights in connection with any litigation. Responding to, defending
or bringing claims related to patents and other intellectual property rights may
require our management to redirect our human and monetary resources to address
these claims and may take years to resolve.
OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION EFFORTS MAY BE REDUCED OR
DISCONTINUED DUE TO DELAYS OR FAILURE IN OBTAINING REGULATORY APPROVALS.
We will need to do substantial additional development and clinical
testing prior to seeking any regulatory approval for commercialization of our
product candidates. Testing, manufacturing, commercialization, advertising,
promotion, export and marketing, among other things, of our proposed products
are subject to extensive regulation by governmental authorities in the United
States and other countries. The testing and approval process requires
substantial time, effort and financial resources and we cannot guarantee that
any approval will be granted on a timely basis, if at all. Companies in the
pharmaceutical and biotechnology industries have suffered significant setbacks
in conducting advanced human clinical trials, even after obtaining promising
results in earlier trials. Furthermore, the United States Food and Drug
Administration 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. Even if regulatory approval of a product is granted,
such approval may entail limitations on the indicated uses for which it may be
marketed. Accordingly, we may experience difficulties and delays in obtaining
necessary governmental clearances and approvals to market our products, and we
may not be able to obtain all necessary governmental clearances and approvals to
market our products. At least initially, we intend, to the extent possible, to
rely on licensees to obtain regulatory approval for marketing our products. The
failure by us or our licensees to adequately demonstrate the safety and efficacy
of any of our product candidates under development could delay, limit or prevent
regulatory approval of the product, which may require us to reduce or
discontinue development, commercialization or clinical testing of some or all of
our product candidates.
OUR MANUFACTURING AND USE OF HAZARDOUS AND RADIOACTIVE MATERIALS MAY RESULT IN
OUR LIABILITY FOR DAMAGES, INCREASED COSTS AND INTERRUPTION OF ANTIBODY
SUPPLIES.
The manufacturing and use of our products require the handling and
disposal of the radioactive isotope, 131I. We currently rely on, and intend in
the future to rely on, our current contract manufacturers to combine antibodies
with radioactive 131I isotope in our products and to comply with various local,
state, national or international regulations regarding the handling and use of
radioactive materials. Violation of these regulations by these companies or a
clinical trial site could significantly delay completion of the trials.
Violations of safety regulations could occur with these manufacturers, so there
is also a risk of accidental contamination or injury. Accordingly, we could be
held liable for any damages that result from an accident, contamination or
injury caused by 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. In addition, we may incur substantial costs to comply
with environmental regulations. In the event of any noncompliance or accident,
the supply of antibodies for use in clinical trials or commercial products could
also be interrupted.
OUR OPERATIONS AND FINANCIAL PERFORMANCE COULD BE NEGATIVELY AFFECTED IF WE
CANNOT ATTRACT AND RETAIN KEY PERSONNEL.
Our success is dependent, in part, upon a limited number of key
executive officers and technical personnel remaining employed with us, including
Dr. John N. Bonfiglio, our President and Chief Executive Officer, and Dr.
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Terrence Chew, our V.P. of Clinical and Regulatory Affairs. We also believe that
our future success will depend largely upon our ability to attract and retain
highly-skilled research and development and technical personnel. We face intense
competition in our recruiting activities, including competition from larger
companies with greater resources. We do not know if we will be successful in
attracting or retaining skilled personnel. The loss of certain key employees or
our inability to attract and retain other qualified employees could negatively
affect our operations and financial performance.
ITEM 2. PROPERTIES
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The Company's corporate, research and development, and clinical trial
operations are located in two Company-leased office and laboratory buildings
with aggregate square footage of approximately 47,770 feet. The facilities are
adjacent to one another and are located at 14272 and 14282 Franklin Avenue,
Tustin, California 92780-7017. The Company makes combined monthly lease payments
of approximately $56,250 for these facilities with a 3.35% rental increase every
two years beginning December 2000. The lease has a twelve-year term with two
five-year extensions. Monthly rental income from sub-tenants is $9,000. The
Company is actively pursuing a tenant to sublease 14282 Franklin Avenue and any
other excess space not currently required by the Company. The Company believes
its facilities are adequate for its current needs and that suitable additional
substitute space would be available if needed.
ITEM 3. LEGAL PROCEEDINGS
-----------------
During March 2000, the Company was served with a notice of lawsuit
filed in Orange County Superior Court for the State of California by a former
officer of the Company who resigned from the Company on November 3, 1999. The
lawsuit alleges a single cause of action for breach of contract. A Director of
the Company was also served with a notice of lawsuit, but such claims do not
appear to be directed toward the Company. A hearing was held on July 21, 2000 in
which the Superior Court judge approved a plaintiff request for a writ of
attachment and required the plaintiff to post a $15,000 bond in connection with
that writ. The case is in the early stages of investigation and the Company is
unable to evaluate the likelihood of an unfavorable outcome. The Company intends
to vigorously contest the underlying complaint.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
There were no matters submitted to a vote of security holders during
the quarter ended April 30, 2000.
21
<PAGE>
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS
-----------------------------------------------------------------------
Prior to 1991, the Company was listed on the National Market System of
The Nasdaq Stock Market. In 1991 the Company was delisted because it did not
meet certain financial standards established by The Nasdaq Stock Market. Since
April 1, 1996, Techniclone's Common Stock has been traded on the SmallCap market
of The Nasdaq Stock Market under the trading symbol "TCLN". The following table
shows the high and low sales price of Techniclone's Common Stock for each
quarter in the two years ended April 30, 2000:
Common Stock Sales Price
High Low
-------------- ---------------
FISCAL YEAR 2000
Quarter Ended April 30, 2000 $16.63 $2.56
Quarter Ended January 31, 2000 $5.56 $0.25
Quarter Ended October 31, 1999 $1.13 $0.28
Quarter Ended July 31, 1999 $2.00 $0.94
FISCAL YEAR 1999
Quarter Ended April 30, 1999 $1.44 $0.81
Quarter Ended January 31, 1999 $1.56 $0.94
Quarter Ended October 31, 1998 $2.00 $0.63
Quarter Ended July 31, 1998 $2.66 $0.66
As of July 21, 2000, the number of shareholders of record of the
Company's Common Stock was 5,574.
The Company has a limited operating history and only nominal revenues
to date. No dividends on Common Stock have been declared or paid by the Company.
The Company intends to employ all available funds for the development of its
business and, accordingly, does not intend to pay any cash dividends in the
foreseeable future.
SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by the Company during the
quarterly period commencing on February 1, 2000 and ending on April 30, 2000
involving issuances and sales of the Company's securities that were not
registered under the Securities Act of 1933, as amended (the "Securities Act").
During February 2000, the Company issued an aggregate of 1,596,255
shares of the Company's Common Stock to the two institutional investors and the
Placement Agent under the Equity Line for an aggregate purchase price of
$4,325,000, pursuant to an Equity Line draw and also issued warrants to the two
institutional investors and the Placement Agent to purchase up to 159,622 shares
of Common Stock at exercise prices ranging from $2.45 to $3.40 per share, which
warrants are immediately exercisable and expire on December 31, 2004.
On various dates during the quarter ended April 30, 2000, the Company
issued an aggregate of 689,277 shares of the Company's Common Stock to two
institutional investors upon the cashless exercise of 786,290 warrants issued
under the Equity Line.
22
<PAGE>
On February 15, 2000, the Company issued 15,575 shares of Common Stock
to one unaffiliated investor under the Company's 5% Adjustable Convertible Class
C Preferred Stock upon the exercise of 15,575 warrants for an aggregate purchase
price of $10,000.
On February 18, 2000, the Company issued 95,000 shares of Common Stock
to a construction contractor upon the exercise of 95,000 warrants at an exercise
price $1.38. The warrants were issued in July 1998 for an extension of time to
pay construction costs incurred.
On February 23, 2000, the Company issued 44,014 shares of Common Stock
to one private placement investor upon the exercise of 44,014 warrants at an
exercise price of $1.00 per share. The warrants were issued in conjunction with
a private placement entered into in April 1998.
On various dates during the quarter ended April 30, 2000, the Company
issued 98,282 shares of Common Stock to four unaffiliated investors under the
Company's Class B Preferred Stock Agreement upon the cashless exercise of
141,272 warrants at an exercise price of $3.07 per share.
The issuance of the securities of the Company in each of the above
transactions was deemed to be exempt from registration under the Securities Act
by virtue of Section 4(2) thereof or Regulation D promulgated thereunder, as a
transaction by an issuer not involving a public offering. The recipient of such
securities either received adequate information about the Company or had access,
through employment or other relationships with the Company, to such information.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following selected financial data has been derived from audited
consolidated financial statements of the Company for each of the five years in
the period ended April 30, 2000. These selected financial summaries should be
read in conjunction with the financial information contained for each of the
three years in the period ended April 30, 2000, included in the consolidated
financial statements and notes thereto, Management's Discussion and Analysis of
Results of Operations and Financial Condition, and other information provided
elsewhere herein.
23
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED APRIL 30,
<CAPTION>
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Licensing fees ......................... $ - $ - $ - $ - $ 3,000,000
Interest and other income .............. 369,000 380,000 534,000 346,000 143,000
------------- ------------- ------------- ------------- -------------
Total revenues .................... 369,000 380,000 534,000 346,000 3,143,000
COSTS AND EXPENSES:
Research and development ............... 8,075,000 8,795,000 7,644,000 2,912,000 1,682,000
License fee ............................ - 4,500,000 - - -
General and administrative
Unrelated entities ................ 2,798,000 4,448,000 3,819,000 2,274,000 948,000
Affiliates ........................ - - - 266,000 171,000
Stock-based compensation ............... 1,438,000 455,000 438,000 773,000 -
Loss on disposal of property ........... 327,000 1,247,000 161,000 - -
Provision for note receivable .......... 1,863,000 - - - -
Interest ............................... 382,000 428,000 296,000 148,000 17,000
Purchased in-process research and
development ....................... - - - 27,154,000 -
------------- ------------- ------------- ------------- -------------
Total costs and expenses ......... 14,883,000 19,873,000 12,358,000 33,527,000 2,818,000
------------- ------------- ------------- ------------- -------------
NET INCOME (LOSS) ...................... $(14,514,000) $(19,493,000) $(11,824,000) $(33,181,000) $ 325,000
============= ============= ============= ============= =============
Net income (loss) before preferred stock
accretion and dividends .............. $(14,514,000) $(19,493,000) $(11,824,000) $(33,181,000) $ 325,000
Preferred stock accretion and dividends:
Accretion of Class B and Class C
Preferred Stock discount ............ - (531,000) (2,476,000) - (5,327,000)
Imputed dividends for Class B and
Class C Preferred Stock ............. (2,000) (15,000) (965,000) (544,000) (561,000)
------------- ------------- ------------- ------------- -------------
NET LOSS APPLICABLE TO COMMON
STOCK .............................. $(14,516,000) $(20,039,000) $(15,265,000) $(33,725,000) $ (5,563,000)
============= ============= ============= ============= =============
WEIGHTED AVERAGE SHARES
OUTSTANDING ......................... 81,195,049 66,146,628 30,947,758 21,429,858 18,466,359
============= ============= ============= ============= =============
BASIC AND DILUTED LOSS
PER SHARE ........................... $ (0.18) $ (0.30) $ (0.49) $ (1.57) $ (0.30)
============= ============= ============= ============= =============
</TABLE>
<TABLE>
CONSOLIDATED BALANCE SHEET DATA
APRIL 30,
<CAPTION>
2000 1999 1998 1997 1996
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Cash and Cash Equivalents .............. $ 4,131,000 $ 2,385,000 $ 1,736,000 $ 12,229,000 $ 4,179,000
Working Capital (Deficit) .............. $ (3,668,000) $ (2,791,000) $ (2,508,000) $ 10,618,000 $ 7,461,000
Total Assets ........................... $ 5,953,000 $ 7,370,000 $ 12,039,000 $ 18,701,000 $ 10,776,000
Long-Term Debt ......................... $ 89,000 $ 3,498,000 $ 1,926,000 $ 1,970,000 $ 987,000
Accumulated Deficit .................... $(107,194,000) $ (92,678,000) $ (72,639,000) $ (57,374,000) $ (23,649,000)
Stockholders' Equity (Deficit).......... $ (2,721,000) $ (2,133,000) $ 5,448,000 $ 14,568,000 $ 8,965,000
</TABLE>
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
The following discussion is included to describe the Company's
financial position and results of operations for each of the three years in the
period ended April 30, 2000. The consolidated financial statements and notes
thereto contain detailed information that should be referred to in conjunction
with this discussion.
OVERVIEW. Techniclone Corporation is a biopharmaceutical company
engaged in the research, development and commercialization of targeted cancer
therapeutics. We develop product candidates based primarily on our proprietary
collateral (indirect) tumor targeting technologies for the treatment of solid
tumors and a direct tumor targeting agent for the treatment of refractory
malignant lymphoma. As shown in the Company's consolidated financial statements,
the Company incurred operating losses during fiscal 2000, 1999 and 1998 and has
an accumulated deficit at April 30, 2000.
YEAR ENDED APRIL 30, 2000 COMPARED TO THE YEAR ENDED APRIL 30, 1999
Before we discuss the Company's total expenses (cash and non-cash
expenses), we would like to discuss the Company's operational burn rate (cash
expenses for operations) for the last six months of fiscal year ended April 30,
2000 compared to the same period in the prior year. We have used the most recent
six month period to compare the Company's burn rate as such period is most
indicative of the current level of support staff at the Company's facilities. As
shown in the schedule below, the Company's operational burn rate has decreased
$1,885,000 or approximately 33% for the current six-month period ended April 30,
2000 compared to the same period in the prior year. As further shown in the
below schedule, the average monthly operational burn rate has decreased $314,000
(33%) per month for each month in the six months ended April 30, 2000 compared
to the same average monthly periods in the prior year. The decrease in cash
expenses primarily relates to a decrease in general and administrative costs as
a result of fewer employees combined with a decrease in manufacturing expenses
associated with shutting down the Company's manufacturing facility and related
ancillary services. Moving forward, the Company has listed its excess space for
sublease and plans to consolidate its operations in one building to further
reduce its fixed operational burn rate. However, our total operational burn rate
will vary substantially from quarter to quarter based on patient enrollment
rates of our clinical trial programs and the funding of non-recurring items,
which may include but are not limited to, items associated with product
development, contract manufacturing, contract radiolabeling and the related
commercial scale-up efforts of contract manufacturing and contract
radiolabeling.
SIX MONTHS ENDED APRIL 30,
-----------------------------
2000 1999
------------- -------------
Net loss (six month period) $ (5,863,000) $(12,683,000)
Less non-cash (and non reoccurring) expenses:
Loss on disposal of assets 325,000 1,240,000
Buyback of licensing rights - 4,500,000
Depreciation and amortization 261,000 367,000
25
<PAGE>
SIX MONTHS ENDED APRIL 30,
-----------------------------
2000 1999
------------- -------------
Stock-based compensation expense and stock
issued for interest, services and under
severance agreements $ 1,279,000 $ 492,000
Other severance expenses 213,000 414,000
------------- -------------
Net operational burn rate for the six months
ended April 30, $ (3,785,000) $ (5,670,000)
============= =============
Net average monthly operational burn rate based
on the six months ended April 30, $ (631,000) $ (945,000)
============= =============
The Company incurred a net loss of approximately $14,514,000 for the
fiscal year ended April 30, 2000, as compared to a net loss of approximately
$19,493,000 for the fiscal year ended April 30, 1999. The decrease in net loss
of approximately $4,979,000 or 26% in fiscal 2000 is primarily attributable to a
decrease in total costs and expenses of $4,990,000 offset by a decrease in
interest and other income of $11,000 as further detailed in the below schedule.
<TABLE>
<CAPTION>
CURRENT YEAR
INCREASE
(DECREASE)
YEAR ENDED YEAR ENDED COMPARED TO
APRIL 30, 2000 APRIL 30, 1999 THE PRIOR YEAR
-------------- -------------- --------------
<S> <C> <C> <C>
COSTS AND EXPENSES:
Research and development $ 8,075,000 $ 8,795,000 $ (720,000)
License fee - 4,500,000 (4,500,000)
General and administrative 2,798,000 4,448,000 (1,650,000)
Stock-based compensation (non-cash) 1,438,000 455,000 983,000
Loss on disposal of property and write-down
of property held for sale 327,000 1,247,000 (920,000)
Interest 382,000 428,000 (46,000)
Provision for note receivable 1,863,000 - 1,863,000
-------------- -------------- --------------
Total costs and expenses 14,883,000 19,873,000 (4,990,000)
INTEREST AND OTHER INCOME 369,000 380,000 (11,000)
-------------- -------------- --------------
NET LOSS $ (14,514,000) $(19,493,000) $ (4,979,000)
============== ============== ==============
</TABLE>
The decrease in research and development expenses of $720,000 (8%)
during the year ended April 30, 2000 compared to the same period in the prior
year resulted primarily from decreased payroll, consulting and other ancillary
costs of the manufacturing facility, which was shut down during fiscal year
2000. Costs to support a GMP manufacturing facility require highly specialized
personnel and equipment that must be maintained on a continual basis. Although
we believe that the Company has derived substantial benefits from our
manufacturing operations, we believe that maintaining a GMP manufacturing
facility is not an efficient use of our resources at this time. We intend to use
contract manufacturers to provide GMP manufacturing of Oncolym(R), Cotara(TM)
and other future products under development. Techniclone has manufactured a
sufficient antibody supply to meet our current clinical trial needs for our
Oncolym(R) and Cotara(TM) technologies and we have retained key development
personnel who will be responsible for developing analytical methods and
processes that will facilitate the transfer of technology to contract
manufacturers. In addition, clinical trial expenses decreased in the current
year primarily as a result of the Oncolym(R) Phase II/III clinical trial being
halted by Schering A.G. during fiscal 2000 combined with slower patient
enrollment into the Cotara(TM) brain study from November 1999 through February
2000 due to the Company's limited amount of cash on hand during that period of
time. The Oncolym(R) dosing trial is scheduled to commence in the near future by
26
<PAGE>
Schering A.G. and the Cotara(TM) brain study is currently being conducted at six
clinical trial sites throughout the U.S. The Company believes clinical trial
expenses will increase during fiscal year 2001 as the Company anticipates
starting two additional solid tumor trials by December 2000 using its Cotara(TM)
product and as the Oncolym(R) clinical study is scheduled to commence in the
near future. The above current year decreases in research and development
expenses were offset by an increase in product development expenses related to
the Cotara(TM) and Oncolym(R) antibodies, increased radiolabeling development
expenses and increased sponsored research fees paid to the University of Texas
Southwestern Medical Center and the University of Southern California Medical
Center.
The decrease in license fee expense of $4,500,000 is due to the one
time expense incurred in the prior year ended April 30, 1999 when the Company
re-acquired certain Oncolym(R) rights from Biotechnology Development Ltd.
("BTD"). On the same day, the rights were licensed to Schering A.G. under a
separate agreement. No similar events occurred in the current fiscal year ended
April 30, 2000.
The decrease in general and administrative expenses of $1,650,000 (37%)
during the year ended April 30, 2000 in comparison to the prior year ended April
30, 1999 is primarily due to decreased severance expenses and payroll costs
associated with Company layoffs and resignations during the middle of fiscal
year 2000. On November 3, 1999, the Company's former Chief Executive Officer and
Chief Financial Officer resigned and such positions were replaced with internal
positions, thus decreasing the quarterly general and administrative personnel
costs. In addition, the Company had a current year decrease in legal fees,
consulting fees, shareholder meeting costs and other reductions in general
expenses due to the Company's cost containment efforts to reduce the Company's
administrative costs. The Company expects general and administrative expenses
(excluding stock-based compensation) to decrease in fiscal year 2001 as all
severance agreements have been completed and as the Company has decreased its
overall headcount and aggregate gross salaries in the Administration Department.
Excluding severance expenses of $735,000 and $1,249,000 for fiscal years ended
April 30, 2000 and 1999 (related to two former officers of the Company),
respectively, the Company's average monthly burn rate for general and
administrative expenses decreased $95,000 or 36% per month from $267,000 per
month during fiscal year 1999 to $172,000 per month during fiscal year 2000.
Stock-based compensation (a non-cash expense) increased by $983,000
(216%) in the current year compared to the same period in the prior year
primarily due to the expense recorded for the estimated fair value (utilizing
the Black-Scholes valuation model) of a warrant to purchase up to 750,000 shares
of Common Stock issued to Swartz Private Equity, LLC (SPE) in exchange for a
commitment by SPE to fund a $35,000,000 equity line financing over a three year
term. This agreement was entered into and approved by the previous Board of
Directors. Mr. Eric Swartz, a member of the Board of Directors, maintains a 50%
ownership in Swartz Private Equity, LLC. In addition, the Company incurred
additional stock-based compensation expense in the current year ended April 30,
2000 compared to the same period in the prior year for certain milestone based
options which were achieved during the current fiscal year.
The loss on disposal of assets and write-down of property held for sale
decreased in the current year ended April 30, 2000 by $920,000 (74%) primarily
due to the sale and subsequent leaseback transaction for the Company's
facilities in December 1998, whereby the Company removed the net book value of
land, buildings and building improvements of $7,014,000 from the consolidated
financial statements and recorded a loss on sale of $1,171,000, which included
selling expenses of $257,000. The above expense was offset by a current year
increase in expenses for the disposal of laboratory equipment held for sale.
27
<PAGE>
During fiscal year 2000, the Company expensed $267,000 in accordance with SFAS
121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF" for laboratory equipment held for sale, which is
stated at the lower of the net book value or fair value of the related asset.
The Company anticipates it will dispose of such assets held for sale within the
next twelve months.
Interest expense decreased $46,000 (11%) during the year ended April
30, 2000 in comparison to the year ended April 30, 1999 primarily due the lack
of interest paid on an extension of time to pay construction costs (to enhance
the Company's manufacturing facility) in the current fiscal year ended April 30,
2000, which was paid in the prior year, combined with the lack of interest on
mortgage debt for the Company's two facilities, which was paid off in December
1998 in conjunction with the sale leaseback transaction. The above current year
decreases in interest expense were off-set by a current year increase in
interest expense on a $3,300,000 note payable issued to BTD, which was issued
when the Company re-acquired certain Oncolym(R) rights in March 1999.
The provision for a note receivable of $1,863,000 (a non-cash expense)
pertains to a note receivable from the buyer of the Company's leased facilities.
During December 1998, the Company completed the sale and subsequent leaseback of
its two facilities and recorded an initial note receivable from buyer of
$1,925,000 as partial consideration from the sale. In accordance with the
related lease agreement, if the Company was to default under the lease
agreement, the note receivable shall be deemed to be immediately satisfied in
full and the buyer shall have no further obligation to the Company for the note
receivable balance. Although the Company had made all payments under the lease
agreement and had not defaulted under any terms of the lease agreement, the
Company established a 100% allowance for the note receivable in the amount of
$1,863,000 during October 1999 when the Company had a limited amount of cash on
hand. The Company will continue to adjust the estimated allowance and record
interest income on the note receivable as payments are received. The Company has
received all payments through July 2000.
Interest and other income decreased $11,000 or 3% during fiscal year
2000 compared to the prior year primarily due to a decrease in rental income.
The Company has recently leased out approximately 8,000 square feet of its
facilities and all remaining excess space is currently being listed for sale by
the owner of the buildings and is also being listed for sublease by the Company.
If the Company is able to sublease the excess space, rental income will increase
in future months which will reduce the Company's overall burn rate. The Company
does not expect to generate product sales for at least the next year.
YEAR ENDED APRIL 30, 1999 COMPARED TO YEAR ENDED APRIL 30, 1998
The Company incurred a net loss of approximately $19,493,000 for the
fiscal year ended April 30, 1999, as compared to a net loss of approximately
$11,824,000 for the fiscal year ended April 30, 1998. The increased net loss of
approximately $7,669,000 in 1999 is primarily attributable to an increase in
total costs and expenses of $7,515,000 combined with a decrease in interest and
other income of $154,000.
The increase in total costs and expenses of $7,515,000 from fiscal year
1998 to fiscal year 1999 is primarily attributable to an increase in license
fees of $4,500,000 recorded in fiscal year 1999 to re-acquire certain marketing
rights with respect to Oncolym(R) from BTD, an increase in loss on disposal of
property of $1,086,000, primarily related to the sale of the Company's two
buildings, which were subsequently leased back, an increase in research and
development expenses of $1,151,000, primarily related to increased clinical
trial costs, an increase in general and administrative expenses of $646,000,
(including stock-based compensation) primarily related to severance arrangements
with the Company's former officers, and an increase in interest expense of
$132,000, related to greater interest bearing debt outstanding during the year.
28
<PAGE>
The increase in research and development expenses of $1,151,000 during
the year ended April 30, 1999 compared to the same period in the prior year
resulted primarily from increased costs to support the Company's clinical trial
programs for its Oncolym(R) and TNT products, partially offset by a decrease in
license fees paid to Alpha Therapeutic Corporation ("Alpha") of $510,000 to
re-acquire certain licensing rights with respect to Oncolym(R).
General and administrative expenses increased approximately $646,000
(including stock-based compensation) during the year ended April 30, 1999 in
comparison to the prior year ended April 30, 1998. The increase in general and
administrative expenses resulted primarily from expenses recorded in fiscal year
1999 of $1,249,000 under severance arrangements with the Company's former Chief
Executive Officer and former V.P. of Operations and Administration, of which
$760,000 was considered a non-cash expense. The increase in severance expense
was partially offset by a decrease of $325,000 related to additional
consideration paid to the Company's Class C Preferred stockholders in fiscal
year 1998 combined with a net decrease in other general and administrative
expenses of $278,000 in fiscal year 1999.
Interest expense increased approximately $132,000 during the year ended
April 30, 1999 in comparison to the year ended April 30, 1998 due to higher
levels of interest-bearing debt outstanding during the year. During fiscal year
1999, the Company re-acquired certain Oncolym(R) rights from BTD and issued a
note payable for $3,300,000, which bears simple interest at 10% per annum and is
due and payable in full on March 1, 2001. In addition, during fiscal year 1999,
the Company entered into a short-term note agreement to finance certain
construction costs incurred to enhance the Company's manufacturing facilities,
which also contributed to the increase in interest expense.
Interest and other income decreased $154,000 during fiscal year 1999
compared to the prior year primarily due to a decrease in interest income of
$204,000 partially offset by an increase in grant revenue of $67,000 from a
major international pharmaceutical company for the TNT Phase I clinical trial in
Mexico City.
LIQUIDITY AND CAPITAL RESOURCES
As of July 21, 2000, the Company had $12,762,000 in cash and cash
equivalents. The Company has financed its operations primarily through the sale
of Common Stock, which has been supplemented with payments received from various
licensing deals. During fiscal year 2000, the Company received net proceeds of
$10,999,000 primarily from the sale of Common Stock and from the exercise of
stock options and warrants. Subsequent to April 30, 2000, the Company received
gross proceeds of $7,800,000 under the Equity Line in exchange for 3,464,419
shares of the Company's Common Stock, including commission shares. Without
obtaining additional financing or entering into additional licensing
arrangements for the Company's other product candidates, the Company believes
that it has sufficient cash on hand (excluding any future draws under the Equity
Line), to meet its obligations on a timely basis for at least the next 12
months.
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 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 and radiolabeling
continues. As a result of increased activities in connection with the clinical
trials for Cotara(TM) and Oncolym(R), and the development costs associated with
Vasopermeation Enhancement Agents (VEAs), the Company expects that the monthly
29
<PAGE>
negative cash flow will continue. The development of the Company's Vascular
Targeting Agent (VTA) technology will be funded primarily by Oxigene, Inc. under
a joint venture agreement entered into during May 2000, whereby Oxigene, Inc.
will be funding up to $20,000,000 in development costs.
The Company has the ability, subject to certain conditions, to obtain
future funding under the Equity Line, as amended on June 2, 2000, whereby, the
Company may, in its sole discretion, and subject to certain restrictions,
periodically sell ("Put") shares of the Company's Common Stock until all common
shares previously registered under the Equity Line have been exhausted. As of
July 21, 2000, the Company had approximately 7,055,000 shares registered and
available under the Equity Line for future Puts. Under the amendment, up to
$2,800,000 of Puts can be made every month if the Company's closing bid price is
$2.00 or higher during the 10-day pricing period. If the Company's closing bid
price is between $1.00 and $2.00, then the Company can Put up to $1,500,000 per
month and if the Company's closing bid price falls below $1.00 on any trading
day during the ten trading days prior to the Put, the Company's ability to
access funds under the Equity Line in the Put is limited to 15% of what would
otherwise be available. If the closing bid price of the Company's Common Stock
falls below $0.50 or if the Company is delisted from The Nasdaq SmallCap Market,
the Company would have no access to funds under the Equity Line. Future Puts are
priced at a discount equal to the greater of 17.5% of the lowest closing bid
price during the ten trading days immediately preceding the date on which such
shares are sold to the institutional investors or $0.20. At the time of each
Put, the investors will be issued warrants, exercisable only on a cashless basis
and expiring on December 31, 2004, to purchase up to 15% of the amount of Common
Stock issued to the investors at the same price as the shares of Common Stock
sold in the Put.
IMPACT OF THE YEAR 2000
In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
its critical information technology and non-information technology systems and
believes those systems successfully responded to the Year 2000 date change. The
Company expensed less than $50,000 in connection with remediating its systems.
The Company is not aware of any material problems resulting from Year 2000
issues, its internal systems, or the products and services of third parties. The
Company will continue to monitor its critical computer applications and those of
its suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
A significant change in interest rates would not have a material
adverse effect on the Company's financial position or results of operations due
to the amount of cash on hand at April 30, 2000, which consists of highly liquid
investments, and as the Company's debt instruments have fixed interest rates and
terms.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Reference is made to the financial statements included in this Report
at pages F-1 through F-28.
30
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
FINANCIAL DISCLOSURES
---------------------
Not applicable.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this Item is incorporated herein by
reference from the Company's definitive proxy statement for the Company's 2000
Annual Shareholders' Meeting.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this Item is incorporated herein by
reference from the Company's definitive proxy statement for the Company's 2000
Annual Shareholders' Meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this Item is incorporated herein by
reference from the Company's definitive proxy statement for the Company's 2000
Annual Shareholder's Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
On December 29, 1999, Swartz Investments, LLC and BTD agreed to provide
interim funding to the Company for up to $500,000 to continue the operations of
the Company and to avoid the Company from filing for protection from its
creditors. During this period of time, the closing stock price was $0.41 per
share, the Company had minimal amount of cash on hand, significant payables to
vendors and patent attorneys, and the Company was near a time of being delisted
from The NASDAQ Stock Market. During January, the Company entered into the final
agreement, a Regulation D Subscription Agreement, whereby the Company received
$500,000 in exchange for an aggregate of 2,000,000 shares of Common Stock and
issued warrants to purchase up to 2,000,000 shares of Common Stock at $0.25 per
share. Mr. Eric Swartz, a member of the Board of Directors, maintains a 50%
ownership in Swartz Investments, LLC. BTD is controlled by Mr. Edward J. Legere,
who is also a member of the Board of Directors.
31
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
--------------------------------------------------------------------
FORM 8-K
--------
(a) (1) Consolidated Financial Statements
The financial statements and schedules listed below are filed as part
of this Report:
Page
----
Report of Independent Auditors, Ernst & Young LLP F-1
Independent Auditors' Report, Deloitte & Touche LLP F-2
Consolidated Balance Sheets as of F-3
April 30, 2000 and 1999
Consolidated Statements of Operations F-5
for each of the three years in the period
ended April 30, 2000
Consolidated Statements of Stockholders' F-6
Equity (Deficit) for each of the three
years in the period ended April 30, 2000
Consolidated Statements of Cash Flows F-7
for each of the three years in the period
ended April 30, 2000
Notes to Consolidated Financial Statements F-9
(2) Financial Statement Schedules
-----------------------------
II Valuation and Qualifying Accounts F-28
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
32
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL PAGE
NUMBER DESCRIPTION NO.
-------- ------------------------------------------------------------- ---------------
<S> <C> <C>
3.1 Certificate of Incorporation of Techniclone Corporation, a
Delaware corporation (Incorporated by reference to Exhibit B
to the Company's 1996 Proxy Statement as filed with the
Commission on or about August 20, 1996).
3.2 Bylaws of Techniclone Corporation, a Delaware corporation
(Incorporated by reference to Exhibit C to the Company's 1996
Proxy Statement as filed with the Commission on or about
August 20, 1996).
3.3 Certificate of Designation of 5% Adjustable Convertible Class
C Preferred Stock as filed with the Delaware Secretary of
State on April 23, 1997. (Incorporated by reference to
Exhibit 3.1 contained in Registrant's Current Report on Form
8-K as filed with the Commission on or about May 12, 1997).
4.1 Form of Certificate for Common Stock (Incorporated by
reference to the exhibit of the same number contained in
Registrants' Annual Report on Form 10-K for the year end
April 30, 1988).
4.4 Form of Subscription Agreement entered into with Series B
Convertible Preferred Stock Subscribers (Incorporated by
reference to Exhibit 4.1 contained in Registrant's Report on
Form 8-K dated December 27, 1995, as filed with the
Commission on or about January 24, 1996).
4.5 Registration Rights Agreement dated December 27, 1995, by and
among Swartz Investments, Inc. and the holders of the
Registrant's Series B Convertible Preferred Stock
(incorporated by reference to Exhibit 4.2 contained in
Registrant's Current Report on Form 8-K dated December 27,
1995 as filed with the Commission on or about January 24,
1996).
4.6 Warrant to Purchase Common Stock of Registrant issued to
Swartz Investments, Inc. (Incorporated by reference to
Exhibit 4.3 contained in Registrant's Current Report on Form
8-K dated December 27, 1995 as filed with the Commission on
or about January 24, 1996).
4.7 5% Preferred Stock Investment Agreement between Registrant
and the Investors (Incorporated by reference to Exhibit 4.1
contained in Registrant's Current Report on Form 8-K as filed
with the Commission on or about May 12, 1997).
4.8 Registration Rights Agreement between the Registrant and the
holders of the Class C Preferred Stock (Incorporated by
reference to Exhibit 4.2 contained in Registrant's Current
Report on Form 8-K as filed with the Commission on or about
May 12, 1997).
33
<PAGE>
EXHIBIT SEQUENTIAL PAGE
NUMBER DESCRIPTION NO.
-------- ------------------------------------------------------------- ---------------
4.9 Form of Stock Purchase Warrant to be issued to the holders of
the Class C Preferred Stock upon conversion of the Class C
Preferred Stock (Incorporated by reference to Exhibit 4.3
contained in Registrant's Current Report on Form 8-K as filed
with the Commission on or about May 12, 1997).
4.10 Regulation D Common Equity Line Subscription Agreement dated
June 16, 1998 between the Registrant and the Equity Line
Subscribers named therein (Incorporated by reference to
Exhibit 4.4 contained in Registrant's Current Report on Form
8-K dated as filed with the Commission on or about June 29,
1998).
4.11 Form of Amendment to Regulation D Common Stock Equity Line
Subscription Agreement (Incorporated by reference to Exhibit
4.5 contained in Registrant's Current Report on Form 8-K
filed with the Commission on or about June 29, 1998).
4.12 Registration Rights Agreement between the Registrant and the
Subscribers (Incorporated by reference to Exhibit 4.6
contained in Registrant's Current Report on Form 8-K as filed
with the Commission on or about June 29, 1998).
4.13 Form of Stock Purchase Warrant to be issued to the Equity
Line Subscribers pursuant to the Regulation D Common Stock
Equity Subscription Agreement (Incorporated by reference to
Exhibit 4.7 contained in Registrant's Current Report on Form
8-K as filed with the Commission on or about June 29, 1998).
4.14 Placement Agent Agreement dated as of June 16, 1998, by and
between the Registrant and Swartz Investments LLC, a Georgia
limited liability company d/b/a Swartz Institutional Finance
(Incorporated by reference to the exhibit contained in
Registration's Registration Statement on Form S-3 (File No.
333-63773)).
4.15 Second Amendment to Regulation D Common Stock Equity Line
Subscription Agreement dated as of September 16, 1998, by and
among the Registrant, The Tail Wind Fund, Ltd. and Resonance
Limited (Incorporated by reference to the exhibit contained
in Registration's Registration Statement on Form S-3 (File
No. 333-63773)).
4.16 Form of Non-qualified Stock Option Agreement by an between
Registrant, Director and certain consultants dated December
22, 1999 (Incorporated by reference to the exhibit contained
in Registration's Registration Statement on Form S-3 (File
No. 333-40716)).
10.23 Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan - 1986 (Incorporated by
reference to the exhibit contained in Registrant's
Registration Statement on Form S-8 (File No. 33-15102))*
34
<PAGE>
EXHIBIT SEQUENTIAL PAGE
NUMBER DESCRIPTION NO.
-------- ------------------------------------------------------------- ---------------
10.24 Cancer Biologics Incorporated Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase Plan
- 1987 (Incorporated by reference to the exhibit contained in
Registrant's Registration Statement on Form S-8 (File No.
33-8664)).*
10.26 Amendment to 1986 Stock Option Plan dated March 1, 1988
(Incorporated by reference to the exhibit of the same number
contained in Registrant's Annual Report on Form 10-K for the
year ended April 30, 1988).*
10.31 Agreement dated February 5, 1996, between Cambridge Antibody
Technology, Ltd. and Registrant (Incorporated by reference to
Exhibit 10.1 contained in Registrant's Current Report on Form
8-K dated February 5, 1996, as filed with the Commission on
or about February 8, 1996).
10.32 Distribution Agreement dated February 29, 1996, between
Biotechnology Development, Ltd. and Registrant (Incorporated
by reference to Exhibit 10.1 contained in Registrant's
Current Report on Form 8-K dated February 29, 1996, as filed
with the Commission on or about March 7, 1996).
10.33 Option Agreement dated February 29, 1996, by and between
Biotechnology Development, Ltd. And Registrant (Incorporated
by reference to Exhibit 10.2 contained in Registrant's
Current Report on Form 8-K dated February 29, 1996, as filed
with the Commission on or about March 7, 1996).
10.40 1996 Stock Incentive Plan (Incorporated by reference to the
exhibit contained in Registrants' Registration Statement in
form S-8 (File No. 333-17513)).*
10.41 Stock Exchange Agreement dated as of January 15, 1997 among
the stockholders of Peregrine Pharmaceuticals, Inc. and
Registrant (Incorporated by reference to Exhibit 2.1 to
Registrants' Quarterly Report on Form 10-Q for the quarter
ended January 31, 1997).
10.42 First Amendment to Stock Exchange Agreement among the
Stockholders of Peregrine Pharmaceuticals, Inc. and
Registrant (Incorporated by reference to Exhibit 2.1
contained in Registrant's Current Report on Form 8-K as filed
with the Commission on or about May 12, 1997).
10.43 Termination and Transfer Agreement dated as of November 14,
1997 by and between Registrant and Alpha Therapeutic
Corporation (Incorporated by reference to Exhibit 10.1
contained in Registrant's Current Report on Form 8-K as filed
with the commission on or about November 24, 1997).
35
<PAGE>
EXHIBIT SEQUENTIAL PAGE
NUMBER DESCRIPTION NO.
-------- ------------------------------------------------------------- ---------------
10.46 Option Agreement dated October 23, 1998 between Biotechnology
Development Ltd. and the Registrant (Incorporated by
reference to the exhibit contained in Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended October 31,
1998, as filed with the SEC on or about December 15, 1998).
10.47 Real Estate Purchase Agreement by and between Techniclone
Corporation and 14282 Franklin Avenue Associates, LLC dated
December 24, 1998 (Incorporated by reference to Exhibit 10.47
to Registrants' Quarterly Report on Form 10-Q for the quarter
ended January 31, 1999).
10.48 Lease and Agreement of Lease between TNCA, LLC, as Landlord,
and Techniclone Corporation, as Tenant, dated as of December
24, 1998 (Incorporated by reference to Exhibit 10.48 to
Registrants' Quarterly Report on Form 10-Q for the quarter
ended January 31, 1999).
10.49 Promissory Note dated as of December 24, 1998 between
Techniclone Corporation (Payee) and TNCA Holding, LLC (Maker)
for $1,925,000 (Incorporated by reference to Exhibit 10.49 to
Registrants' Quarterly Report on Form 10-Q for the quarter
ended January 31, 1999).
10.50 Pledge and Security Agreement dated as of December 24, 1998
for $1,925,000 Promissory Note between Grantors and
Techniclone Corporation (Secured Party) (Incorporated by
reference to Exhibit 10.50 to Registrants' Quarterly Report
on Form 10-Q for the quarter ended January 31, 1999).
10.51 Final fully-executed copy of the Regulation D Common Stock
Equity Line Subscription Agreement dated as of June 16, 1998
between the Registrant and the Subscribers named therein.
10.53 Termination Agreement dated as of March 8, 1999 by and
between Registrant and Biotechnology Development Ltd.
(Incorporated by reference to Exhibit 10.53 to Registrants'
Annual Report on Form 10-K for the year ended April 30,
1999).
10.54 Secured Promissory Note for $3,300,000 dated March 8, 1999
between Registrant and Biotechnology Development Ltd.
(Incorporated by reference to Exhibit 10.54 to Registrants'
Annual Report on Form 10-K for the year ended April 30,
1999).
10.55 Security Agreement dated March 8, 1999 between Registrant and
Biotechnology Development Ltd. (Incorporated by reference to
Exhibit 10.52 to Registrants' Annual Report on Form 10-K for
the year ended April 30, 1999).
36
<PAGE>
EXHIBIT SEQUENTIAL PAGE
NUMBER DESCRIPTION NO.
-------- ------------------------------------------------------------- ---------------
10.56 License Agreement dated as of March 8, 1999 by and between
Registrant and Schering A.G. (Incorporated by reference to
Exhibit 10.56 to Registrants' Annual Report on Form 10-K for
the year ended April 30, 1999).**
10.57 Patent License Agreement dated October 8, 1998 between
Registrant and the Board of Regents of the University of
Texas System for patents related to Targeting the Vasculature
of Solid Tumors (Vascular Targeting Agent patents)
(Incorporated by reference to Exhibit 10.57 to Registrants'
Quarterly Report on Form 10-Q for the quarter ended July 31,
1999).
10.58 Patent License Agreement dated October 8, 1998 between
Registrant and the Board of Regents of the University of
Texas System for patents related to the Coagulation of the
Tumor Vasculature (Vascular Targeting Agent patents)
(Incorporated by reference to Exhibit 10.58 to Registrants'
Quarterly Report on Form 10-Q for the quarter ended July 31,
1999).
10.59 License Agreement between Northwestern University and
Registrant dated August 4, 1999 covering the LYM-1 and LYM-2
antibodies (Oncolym(R)) (Incorporated by reference to Exhibit
10.59 to Registrants' Quarterly Report on Form 10-Q for the
quarter ended July 31, 1999).
10.60 Change in Control Agreement dated August 4, 1999 between
Registrant and John N. Bonfiglio, V.P. of Technology and
Business Development (Incorporated by reference to Exhibit
10.60 to Registrants' Quarterly Report on Form 10-Q for the
quarter ended October 31, 1999).*
10.63 Change in Control Agreement dated September 27, 1999 between
Registrant and Terrence Chew, V.P of Clinical and Regulatory
Affairs (Incorporated by reference to Exhibit 10.63 to
Registrants' Quarterly Report on Form 10-Q for the quarter
ended October 31, 1999).*
10.64 Regulation D Subscription Agreement dated January 6, 2000
between Registrant and Subscribers, Swartz Investments, LLC
and Biotechnology Development, LTD. (Incorporated by
reference to Exhibit 10.64 to Registrants' Quarterly Report
on Form 10-Q for the quarter ended January 31, 2000).
10.65 Registration Right Agreement dated January 6, 2000 between
Registrant and Subscribers of the Regulation D Subscription
Agreement dated January 6, 2000 (Incorporated by reference to
Exhibit 10.65 to Registrants' Quarterly Report on Form 10-Q
for the quarter ended January 31, 2000).
37
<PAGE>
EXHIBIT SEQUENTIAL PAGE
NUMBER DESCRIPTION NO.
-------- ------------------------------------------------------------- ---------------
10.66 Form of Warrant to be issued to Subscribers pursuant to the
Regulation D Subscription Agreement dated January 6, 2000
(Incorporated by reference to Exhibit 10.66 to Registrants'
Quarterly Report on Form 10-Q for the quarter ended January
31, 2000).
10.67 Warrant to purchase 750,000 shares of Common Stock of
Registrant issued to Swartz Private Equity, LLC dated
November 19, 1999 (Incorporated by reference to Exhibit 10.67
to Registrants' Quarterly Report on Form 10-Q for the quarter
ended January 31, 2000).
10.68 Amendment Agreement dated June 14, 2000 to the License
Agreement dated March 8, 1999 by and between Registrant and
Schering A.G. (Incorporated by reference to Exhibit 10.68 to
Registrants' Registration Statement on form S-3 (File No.
333-40716).
10.69 Waiver Agreement effective December 29, 1999 by and between
Registrant and Biotechnology Development Ltd. (Incorporated
by reference to Exhibit 10.69 to Registrants' Registration
Statement on form S-3 (File No. 333-40716).
10.70 Joint Venture Agreement dated May 11, 2000 by and between
Registrant and Oxigene, Inc. (Incorporated by reference to
Exhibit 10.70 to Registrants' Registration Statement on form
S-3 (File No. 333-40716).
21 Subsidiary of Registrant ***
23.1 Consent of Ernst & Young LLP, Independent Auditors ***
23.2 Consent of Deloitte & Touche LLP ***
27 Financial Data Schedule ***
-------------------------------
</TABLE>
* This Exhibit is a management contract or a compensation plan
or arrangement.
** Portions omitted pursuant to a request of confidentiality
filed separately with the Commission.
*** Filed herewith.
(b) Reports on Form 8-K: None
38
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TECHNICLONE CORPORATION
Dated: July 28, 2000 By: /s/ John N. Bonfiglio
------------------------------------
John N. Bonfiglio, President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ John N. Bonfiglio President & Chief Executive July 28, 2000
------------------------------------ Officer (Principal Executive
John N. Bonfiglio Officer)
/s/ Paul J. Lytle Vice President of Finance July 28, 2000
------------------------------------ and Accounting (Principal
Paul J. Lytle Financial and Principal
Accounting Officer)
/s/ Carlton M. Johnson Director July 28, 2000
------------------------------------
Carlton M. Johnson
/s/ Edward J. Legere Director July 28, 2000
------------------------------------
Edward J. Legere
/s/ Eric S. Swartz Director July 28, 2000
------------------------------------
Eric S. Swartz
/s/ Clive R. Taylor, M.D., Ph.D. Director July 28, 2000
------------------------------------
Clive R. Taylor, M.D., Ph.D.
39
</TABLE>
<PAGE>
TECHNICLONE CORPORATION
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Techniclone Corporation
We have audited the accompanying consolidated balance sheets of Techniclone
Corporation as of April 30, 2000 and 1999 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
two years then ended. Our audit also included the financial statement schedule
listed in the Index at Item 14(a) for the year ended April 30, 2000. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Techniclone Corporation at April 30, 2000 and 1999, and the consolidated results
of its operations and its cash flows for the two years then ended, in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule for the years ended April 30,
2000 and 1999, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
/s/ ERNST & YOUNG LLP
-------------------------
Orange County, California
June 16, 2000,
except for Notes 1, 6, and 13, as to which the date is
July 21, 2000
F-1
<PAGE>
TECHNICLONE CORPORATION
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Techniclone Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of Techniclone Corporation and its
subsidiary (the Company) for each of the two years in the period ended April 30,
1998. Our audits also included the financial statement schedule listed in the
index at Item 14. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Techniclone Corporation and
subsidiary as of April 30, 1998, and the results of their operations and their
cash flows for each of the two years in the period ended April 30, 1998 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations and working
capital deficiency raise substantial doubt about its ability to continue as a
going concern. Management's plans concerning these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
-------------------------
Costa Mesa, California
June 15, 1998
F-2
<PAGE>
TECHNICLONE CORPORATION
<TABLE>
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 2000 AND 1999
--------------------------------------------------------------------------------------------
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,131,000 $ 2,385,000
Other receivables, net of allowance for doubtful accounts of
$342,000 (2000) and $201,000 (1999) 90,000 279,000
Prepaid expenses and other current assets 268,000 337,000
Laboratory equipment held for sale 428,000 -
Covenant not-to-compete with former officer - 213,000
------------- -------------
Total current assets 4,917,000 3,214,000
PROPERTY:
Leasehold improvements 73,000 71,000
Laboratory equipment 860,000 2,098,000
Furniture, fixtures and computer equipment 806,000 838,000
------------- -------------
1,739,000 3,007,000
Less accumulated depreciation and amortization (869,000) (1,067,000)
------------- -------------
Property, net 870,000 1,940,000
OTHER ASSETS:
Note receivable, net of allowance of
$1,863,000 (2000) and $0 (1999) - 1,863,000
Other, net 166,000 353,000
------------- -------------
Total other assets 166,000 2,216,000
------------- -------------
TOTAL ASSETS $ 5,953,000 $ 7,370,000
============= =============
F-3
</TABLE>
<PAGE>
TECHNICLONE CORPORATION
<TABLE>
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 2000 AND 1999 (continued)
--------------------------------------------------------------------------------------------------------
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 522,000 $ 898,000
Deferred license revenue 3,500,000 3,000,000
Related party note payable 3,300,000 -
Accrued clinical trial site fees 280,000 691,000
Accrued royalties and license fees 268,000 310,000
Accrued legal and accounting fees 186,000 314,000
Notes payable, current portion 110,000 106,000
Due to former officers under severance agreements - 329,000
Other current liabilities 419,000 357,000
------------- -------------
Total current liabilities 8,585,000 6,005,000
NOTES PAYABLE 89,000 198,000
RELATED PARTY NOTE PAYABLE - 3,300,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock- $.001 par value; authorized 5,000,000 shares; Class C
convertible preferred stock, shares outstanding 2000-none; 1999-121 - -
Common stock-$.001 par value; authorized 150,000,000 shares;
outstanding 2000 - 90,612,610; 1999 - 73,372,205 91,000 73,000
Additional paid-in-capital 104,382,000 90,779,000
Accumulated deficit (107,194,000) (92,678,000)
------------- -------------
(2,721,000) (1,826,000)
Less notes receivable from sale of common stock - (307,000)
------------- -------------
Total stockholders' equity (deficit) (2,721,000) (2,133,000)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 5,953,000 $ 7,370,000
============= =============
See accompanying notes to consolidated financial statements.
F-4
</TABLE>
<PAGE>
TECHNICLONE CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000
-------------------------------------------------------------------------------------------------
<CAPTION>
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
COSTS AND EXPENSES:
Research and development $ 8,075,000 $ 8,795,000 $ 7,644,000
License fee - 4,500,000 -
General and administrative 2,798,000 4,448,000 3,819,000
Stock-based compensation (non-cash) 1,438,000 455,000 438,000
Loss on disposal of property and write-down of
property held for sale 327,000 1,247,000 161,000
Interest 382,000 428,000 296,000
Provision for note receivable 1,863,000 - -
------------- ------------- -------------
Total costs and expenses 14,883,000 19,873,000 12,358,000
INTEREST AND OTHER INCOME 369,000 380,000 534,000
------------- ------------- -------------
NET LOSS $(14,514,000) $(19,493,000) $(11,824,000)
============= ============= =============
Net loss before preferred stock
accretion and dividends $(14,514,000) $(19,493,000) $(11,824,000)
Preferred stock accretion and dividends:
Accretion of Class B and Class C preferred
stock discount - (531,000) (2,476,000)
Imputed dividends for Class B and
Class C preferred stock (2,000) (15,000) (965,000)
------------- ------------- -------------
Net loss applicable to common stock $(14,516,000) $(20,039,000) $(15,265,000)
============= ============= =============
Weighted average shares outstanding 81,195,049 66,146,628 30,947,758
============= ============= =============
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.18) $ (0.30) $ (0.49)
============= ============= =============
See accompanying notes to consolidated financial statements.
F-5
</TABLE>
<PAGE>
TECHNICLONE CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000
----------------------------------------------------------------------------------------------------
<CAPTION>
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES, MAY 1, 1997 14,200 $ - 27,248,652 $ 27,000 $ 72,557,000
Accretion of Class B and Class
C preferred stock dividends
and discount 448 3,429,000
Preferred stock issued upon
exercise of Class C Placement
Agent Warrant, net of
offering costs of $115,000 670 555,000
Additional consideration on
Class C preferred stock 325 325,000
Common stock issued upon
conversion of Class B and
Class C preferred stock (10,836) 19,931,282 20,000 (20,000)
Common stock issued for cash
and upon exercise of options
and warrants 1,291,794 1,000 1,210,000
Common stock issued for
services and interest 75,623 1,000 94,000
Deferred stock compensation, net 374,000
Stock-based compensation
Reduction of notes receivable
Net loss
-------- ----------- ------------ ----------- -------------
BALANCES, APRIL 30, 1998 4,807 - 48,547,351 49,000 78,524,000
Accretion of Class C preferred
stock dividends and discount 531,000
Preferred stock issued upon
exercise of Class C Placement
Agent Warrant 530 530,000
Common stock issued for cash
under Equity Line Agreement,
net of offering costs of
$678,000 6,656,705 6,000 5,066,000
Common stock issued upon
conversion of Class C
warrants and Equity Line
warrants 5,909,015 6,000 3,635,000
Common stock issued upon
conversion of Class C
preferred stock (5,216) 9,428,131 9,000 (9,000)
Common stock issued for cash
upon exercise of options and
warrants 528,034 1,000 316,000
Common stock issued for
services, license rights,
interest, and under severance
agreements 2,302,969 2,000 1,832,000
Deferred stock compensation, net 2,199,000
Stock-based compensation
Reduction of notes receivable
Net loss
-------- ----------- ------------ ----------- -------------
BALANCES, APRIL 30, 1999 121 - 73,372,205 73,000 92,624,000
Common stock issued upon
conversion of Class C
preferred stock (121) 312,807 1,000 (1,000)
Accretion of Class C dividends
Common stock issued for cash
under Equity Line Agreement,
net of offering costs of
$781,000 9,712,044 10,000 7,947,000
Common stock issued for cash
under Subscription Agreement
with Related Parties 2,000,000 2,000 498,000
Common stock issued upon
conversion of Class C
warrants and Equity Line
warrants 1,048,802 1,000 41,000
Common stock issued for cash
upon exercise of options and
warrants 3,092,648 3,000 2,497,000
Common stock issued for
services, license rights,
interest, and under severance
agreements 1,074,104 1,000 1,183,000
Deferred stock compensation 1,851,000
Stock-based compensation
Reduction of notes receivable
Net loss
-------- ----------- ------------ ----------- -------------
BALANCES, APRIL 30, 2000 - $ - 90,612,610 $ 91,000 $106,640,000
======== =========== ============ =========== =============
</TABLE>
(CONTINUED)
<PAGE>
<TABLE>
<CAPTION>
NOTES NET
DEFERRED RECEIVABLE STOCKHOLDERS'
STOCK ACCUMULATED FROM SALE OF EQUITY
COMPENSATION DEFICIT COMMON STOCK (DEFICIT)
-------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
BALANCES, MAY 1, 1997 $ (165,000) $ (57,374,000) $ (477,000) $ 14,568,000
Accretion of Class B and Class
C preferred stock dividends
and discount (3,441,000) (12,000)
Preferred stock issued upon
exercise of Class C Placement
Agent Warrant, net of
offering costs of $115,000 555,000
Additional consideration on
Class C preferred stock 325,000
Common stock issued upon
conversion of Class B and
Class C preferred stock
Common stock issued for cash
and upon exercise of options
and warrants 1,211,000
Common stock issued for
services and interest 95,000
Deferred stock compensation, net (374,000)
Stock-based compensation 438,000 438,000
Reduction of notes receivable 92,000 92,000
Net loss (11,824,000) (11,824,000)
-------------- -------------- --------------- -------------
BALANCES, APRIL 30, 1998 (101,000) (72,639,000) (385,000) 5,448,000
Accretion of Class C preferred
stock dividends and discount (546,000) (15,000)
Preferred stock issued upon
exercise of Class C Placement
Agent Warrant 530,000
Common stock issued for cash
under Equity Line Agreement,
net of offering costs of
$678,000 5,072,000
Common stock issued upon
conversion of Class C
warrants and Equity Line
warrants 3,641,000
Common stock issued upon
conversion of Class C
preferred stock -
Common stock issued for cash
upon exercise of options and
warrants 317,000
Common stock issued for
services, license rights,
interest, and under severance
agreements 1,834,000
Deferred stock compensation, net (2,199,000) -
Stock-based compensation 455,000 455,000
Reduction of notes receivable 78,000 78,000
Net loss (19,493,000) (19,493,000)
-------------- -------------- --------------- -------------
BALANCES, APRIL 30, 1999 (1,845,000) (92,678,000) (307,000) (2,133,000)
Common stock issued upon
conversion of Class C
preferred stock -
Accretion of Class C dividends (2,000) (2,000)
Common stock issued for cash
under Equity Line Agreement,
net of offering costs of
$781,000 7,957,000
Common stock issued for cash
under Subscription Agreement
with Related Parties 500,000
Common stock issued upon
conversion of Class C
warrants and Equity Line
warrants 42,000
Common stock issued for cash
upon exercise of options and
warrants 2,500,000
Common stock issued for
services, license rights,
interest, and under severance
agreements 1,184,000
Deferred stock compensation (1,851,000) -
Stock-based compensation 1,438,000 1,438,000
Reduction of notes receivable 307,000 307,000
Net loss (14,514,000) (14,514,000)
-------------- -------------- --------------- -------------
BALANCES, APRIL 30, 2000 $ (2,258,000) $(107,194,000) $ - $ (2,721,000)
============== ============== =============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
TECHNICLONE CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000
------------------------------------------------------------------------------------------------------
<CAPTION>
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(14,514,000) $(19,493,000) $(11,824,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Provision for note receivable 1,863,000 - -
Buyback of licensing rights - 4,500,000 -
Depreciation and amortization 516,000 1,046,000 706,000
Loss on disposal of long-term assets and write-down 327,000 1,247,000 201,000
of property held for sale
Stock-based compensation expense and common stock
issued for interest, services, and under severance
agreements 2,622,000 1,089,000 533,000
Severance expense 213,000 414,000 -
Reserve for contract loss, net of inventory write-off - - (156,000)
Additional consideration on Class C preferred stock - - 325,000
Changes in operating assets and liabilities, net
of effects from acquisition of subsidiaries:
Other receivables, net 142,000 (161,000) 289,000
Prepaid expenses and other current assets 69,000 13,000 (251,000)
Other assets 187,000
Accounts payable and other accrued liabilities (813,000) (200,000) 324,000
Accrued clinical trial site fees (411,000) 691,000 -
Deferred license revenue 500,000 3,000,000 -
------------- ------------- -------------
Net cash used in operating activities (9,299,000) (7,854,000) (9,853,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property - 3,924,000 -
Purchases of property (201,000) (542,000) (2,874,000)
Payments on (issuance of) notes receivable 47,000 15,000 (24,000)
Increase in other assets - (335,000) (46,000)
------------- ------------- -------------
Net cash provided by (used in) investing activities (154,000) 3,062,000 (2,944,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock - 530,000 555,000
Net proceeds from issuance of common stock 10,999,000 9,030,000 1,211,000
Payment of Class C preferred stock dividends (2,000) (15,000) (12,000)
Payments on notes receivable from sale of common stock 307,000 78,000 52,000
Principal payments on notes payable (105,000) (4,382,000) (100,000)
Proceeds from issuance of notes payable - 200,000 598,000
------------- ------------- -------------
Net cash provided by financing activities 11,199,000 5,441,000 2,304,000
------------- ------------- -------------
</TABLE>
F-7
<PAGE>
TECHNICLONE CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000 (continued)
-------------------------------------------------------------------------------------------------------
<CAPTION>
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
$ 1,746,000 $ 649,000 $(10,493,000)
CASH AND CASH EQUIVALENTS,
Beginning of year 2,385,000 1,736,000 12,229,000
------------- ------------- -------------
CASH AND CASH EQUIVALENTS,
End of year $ 4,131,000 $ 2,385,000 $ 1,736,000
============= ============= =============
SUPPLEMENTAL INFORMATION:
Interest paid $ 217,000 $ 203,000 $ 258,000
============= ============= =============
Schedule of non-cash investing and financing activities:
Purchase of laboratory equipment for notes payable $ 57,000
=============
Note receivable from sale of property $ 1,925,000
=============
For supplemental information relating to conversion of preferred stock into common stock, common stock
issued in exchange for services, forgiveness of note receivable from officer, provision for note
receivable, loss on disposal of property and other non-cash transactions, see Notes 3, 4, 5, 6, 7, 8 and 9.
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000 (continued)
--------------------------------------------------------------------------------
1. ORGANIZATION AND BUSINESS DESCRIPTION
ORGANIZATION - Techniclone Corporation ("Techniclone or the Company")
was incorporated in the state of Delaware on September 25, 1996. On March 24,
1997, Techniclone International Corporation, a California corporation,
(predecessor company incorporated in June 1981) was merged with and into
Techniclone Corporation. Techniclone has one wholly owned subsidiary, Peregrine
Pharmaceuticals, Inc., a Delaware corporation, which was acquired on April 24,
1997.
BUSINESS DESCRIPTION - Techniclone is a biopharmaceutical company
engaged in the research, development and commercialization of targeted cancer
therapeutics. The Company develops product candidates based primarily on
proprietary collateral (indirect) tumor targeting technologies for the treatment
of solid tumors and a direct tumor targeting agent for the treatment of
refractory malignant lymphoma.
At July 21, 2000, we had $12,762,000 in cash and cash equivalents. We
have expended substantial funds on the development of our product candidates and
for clinical trials. As a result, we have had negative cash flows from
operations since inception and expect the negative cash flows from operations to
continue until we are able to generate sufficient additional revenue from the
sale and/or licensing of our products. Although we have sufficient cash on hand
to meet our obligations on a timely basis for at least the next 12 months, we
will continue to require additional funding to sustain our research and
development efforts, provide for future clinical trials, expand our
manufacturing and product commercialization capabilities, and continue our
operations until we are able to generate sufficient revenue from the sale and/or
licensing of our products. We plan to obtain required financing through one or
more methods including, obtaining additional equity or debt financing and
negotiating additional licensing or collaboration agreements with another
company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary,
Peregrine Pharmaceuticals, Inc. (Peregrine). The Company acquired the VTA
technology through the acquisition of Peregrine in April 1997. All intercompany
balances and transactions have been eliminated.
CASH EQUIVALENTS - The Company considers all highly liquid, short-term
investments with an initial maturity of three months or less to be cash
equivalents.
PROPERTY - Property is recorded at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the related asset, generally ranging from three to ten years. Amortization of
leasehold improvements is calculated using the straight-line method over the
shorter of the estimated useful life of the asset or the remaining lease term.
IMPAIRMENT -The Company assesses recoverability of its long-term assets
by comparing the remaining carrying value to the value of the underlying
collateral or the fair market value of the related long-term asset based on
undiscounted cash flows.
PREFERRED STOCK DIVIDENDS - Dividends on Class B and Class C Stock are
accreted over the life of the preferred stock and are based on the stated
F-9
<PAGE>
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000 (continued)
--------------------------------------------------------------------------------
dividend rate (10% for the Class B and 5% for the Class C) plus the dividend
amount attributable to the discount at the issuance date. To the extent that
unconverted shares of Class B and Class C Stock remain outstanding, the value of
the dividend is remeasured and recorded on each date that the conversion rate
changes.
REVENUE RECOGNITION - Revenues related to licensing agreements (Note 7)
are recognized when cash has been received and all obligations of the Company
have been met, which is generally upon the transfer of the technology license or
other rights to the licensee.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". The bulletin draws on existing accounting rules and provides
specific guidance on how those accounting rules should be applied. Among other
things, SAB No. 101 requires that license and other up-front fees from research
collaborators be recognized over the term of the agreement unless the fee is in
exchange for products delivered or services performed that represent the
culmination of a separate earnings process. SAB No. 101 is effective no later
than the fourth fiscal quarters of the fiscal years beginning after December 15,
1999. The Company is currently reviewing the impact of SAB No. 101 and the
effect it may have on the Company's financial position and results of
operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and
cash equivalents, other receivables, accounts payable and accrued liabilities
approximate their fair values because of the short maturity of these financial
instruments. Notes receivable approximate fair value as the interest rates
charged approximate currently available market rates. Based on the borrowing
rates currently available to the Company for debt with similar terms and
maturities, the fair value of notes payable approximates the carrying value of
these liabilities.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from these estimates.
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS - Net loss per share
attributable to common stockholders is calculated by taking the net loss for the
year and deducting the dividends and Preferred Stock issuance discount accretion
on the Class B Preferred Stock and the Class C Preferred Stock during the year
and dividing the sum of these amounts by the weighted average number of shares
of common stock outstanding during the year. Because the impact of options,
warrants, and other convertible instruments are antidilutive, there is no
difference between basic and diluted loss per share amounts for the three years
in the period ended April 30, 2000. The Company has excluded the following
shares issuable upon the exercise of common stock warrants and options and
conversions of outstanding Preferred Stock and Preferred Stock dividends from
the three years ended April 30, 2000 per share calculation because their effect
is antidilutive:
F-10
<PAGE>
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000 (continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Common stock equivalent shares assuming issuance
of shares represented by outstanding stock
options and warrants utilizing the treasury
stock method
6,603,433 2,927,725 3,840,220
Common stock equivalent shares assuming issuance
of shares upon conversion of preferred stock and
Class C placement agent warrants utilizing the
if-converted method
117,130 613,035 24,117,127
</TABLE>
The common stock equivalent shares assuming issuance of shares upon
conversion of preferred stock and Class C placement agent warrants were
calculated assuming conversion of preferred stock at the beginning of the year
or at the issuance date, if later. Additionally, the stock was assumed converted
rather than redeemed, as it is the Company's intention not to redeem the
preferred stock for cash. The preferred stock is not considered a common stock
equivalent.
INCOME TAXES - The Company utilizes the liability method of accounting
for income taxes as set forth in Statement of Financial Accounting Standards
(SFAS) No. 109, ACCOUNTING FOR INCOME TAXES. Under the liability method,
deferred taxes are determined based on the differences between the consolidated
financial statements and tax basis of assets and liabilities using enacted tax
rates. A valuation allowance is provided when it is more likely than not that
some portion or the entire deferred tax asset will not be realized.
RECLASSIFICATION - Certain amounts in the 1999 and 1998 consolidated
financial statements have been reclassified to conform to the current year
presentation.
RECENT ACCOUNTING PRONOUNCEMENTS - Effective May 1, 1998, the Company
adopted SFAS No. 130, "REPORTING COMPREHENSIVE INCOME", which establishes
standards for reporting and displaying comprehensive income and its components
in the consolidated financial statements. For the fiscal years ended April 30,
2000, 1999 and 1998, the Company did not have any components of comprehensive
income as defined in SFAS No. 130.
The Company adopted SFAS No. 131, "DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION" on May 1, 1998. SFAS No. 131 established
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 stockholders. The adoption
of SFAS No. 131 had no impact on the Company's consolidated financial statements
as the Company operates in one industry segment engaged in the research,
development and commercialization of targeted cancer therapeutics.
During June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" which
will be effective for the Company beginning May 1, 2001. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and for
hedging activities. It requires an entity to recognize all derivatives as either
assets or liabilities in the statements of financial position and measure those
instruments at fair value. The Company has not determined the impact on the
consolidated financial statements, if any, upon adopting SFAS No. 133.
F-11
<PAGE>
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000 (continued)
--------------------------------------------------------------------------------
3. NOTES RECEIVABLE
During December 1998, the Company completed the sale and subsequent
leaseback of its two facilities (Note 4) and recorded an initial note receivable
from buyer of $1,925,000. The note bears interest at 7.0% per annum through
December 1, 2001 and 7.5% thereafter and is collaterized under the Security and
Pledge Agreement. The note receivable is amortized over 20 years and is due upon
the earlier of 12 years or upon the sale of related facilities. In accordance
with the related lease agreement, if the Company defaults under the lease
agreement, the note receivable shall be deemed to be immediately satisfied in
full and the buyer shall have no further obligation to the Company for the note
receivable balance. Although the Company had made all payments under the lease
agreement and had not defaulted under any terms of the lease agreement, the
Company established a 100% reserve for the note receivable in the amount of
$1,863,000 during the fiscal year ended April 30, 2000. The Company will
continue to adjust the estimated allowance and record interest income on the
note receivable as payments are received. The Company has received all payments
through July 2000.
The covenant not-to-compete with former officer of $213,000 at April
30, 1999 represents the unamortized portion of the original $350,000 note
receivable from a former officer. During July 1998, the Company entered into a
severance agreement with the former officer (Note 6) whereby the Company agreed
that if the former officer did not compete with the Company during the period
beginning March 1, 1998 through February 29, 2000, the Company will, on March 1,
2000, forgive an amount equal to his principal note of $350,000 and interest
thereon. The Company amortized the note receivable over the period
not-to-compete as a non-cash expense included in general and administrative
expenses in the accompanying financial statements. On March 1, 2000, the Company
forgave the note receivable and accrued interest charges thereon.
4. PROPERTY
On December 24, 1998, the Company completed the sale and subsequent
leaseback of its two facilities with an unrelated entity. The aggregate sales
price of the two facilities was $6,100,000, comprised of $4,175,000 in cash and
a note receivable of $1,925,000 (Note 3). In accordance with SFAS No. 98, the
Company accounted for the sale and subsequent leaseback transaction as a sale
and removed the net book value of land, buildings and building improvements of
$7,014,000 from the consolidated financial statements and recorded a loss on
sale of $1,171,000, which included selling expenses of $257,000.
Property held for sale represents lab equipment located in the
Company's manufacturing facility, which was shut down during the quarter ended
April 30, 2000. During the quarter ended April 30, 2000, the Company expensed
$267,000 in accordance with SFAS 121, "ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" included in the
accompanying consolidated financial statements. Laboratory equipment held for
sale is stated at the lower of the net book value or fair value of the related
asset. The Company anticipates it will dispose of such assets within the next
twelve months.
F-12
<PAGE>
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000 (continued)
--------------------------------------------------------------------------------
5. NOTES PAYABLE
During December 1998, the Company borrowed $200,000 from an unrelated
entity. The note is unsecured, bears interest at 7.0% per annum and is payable
over three years. Principal and interest payments of $6,000 are due monthly.
On March 8, 1999, the Company entered into a Termination Agreement with
Biotechnology Development Ltd. ("BTD") and re-acquired the Oncolym(R)
distribution rights (Note 7). In conjunction with the Termination Agreement, the
Company issued a note payable for $3,300,000 due and payable on March 1, 2001.
The note payable originally bore simple interest at a rate of 10% per annum,
payable monthly. The note was originally collateralized by all available
tangible assets of the Company. On December 1, 1999, the Company defaulted on
its monthly interest payment of $27,500 to BTD on the $3,300,000 note payable
and did not file a registration statement with the Securities and Exchange
Commissions to register 1,523,809 shares of common stock and warrants to
purchase up to 4,825,000 shares of common stock by December 8, 1999 due to the
limited amount of cash on hand at that time. The note payable and shares of
common stock were issued to BTD upon the Company re-acquiring certain Oncolym(R)
distribution rights. On December 29, 1999, the Company obtained a waiver from
BTD for the deferral of interest payments for up to nine months and an extension
of time to register 1,523,809 shares of common stock and warrants to purchase up
to 4,825,000 shares of common stock until the Company's next registration
statement filing. In exchange for this waiver, the Company agreed to (i)
increase the rate of interest from 10% per annum to 12% per annum on the note
payable of $3,300,000 effective December 1, 1999, (ii) replace the current
collateral with the rights to the TNT technology (iii) extend the expiration
date of 5,325,000 warrants to December 1, 2005 and (iv) only in the case of a
merger, acquisition, or reverse stock split, re-price up to 5,325,000 warrants
to an exercise price of $0.34 per share. BTD is a limited partnership controlled
by Mr. Edward J. Legere, a member of the Board of Directors since December 29,
1999.
During fiscal year 1998, in conjunction with upgrading the Company's
manufacturing facilities, the Company issued a short-term note payable to a
construction contractor for $2,385,000. The note payable was issued in exchange
for $1,885,000 of accounts payable due to the contractor and cash proceeds of
$500,000 for working capital purposes. Under the terms of the short-term note
agreement, the Company issued 82,235 and 65,000 shares of common stock for
interest charges in fiscal year 1999 and 1998, respectively. In conjunction with
the financing, the Company issued two warrants, expiring through July 2001, to
purchase an aggregate of 335,000 shares of the Company's common stock at an
average price of $.79 per share. The value of the warrants were based on a
Black-Scholes formula after considering the terms in the related warrant
agreements. During fiscal year 1999 and 1998, the Company recorded $115,000 and
$45,000 as interest expense for the fair value of the related warrants. In
August 1998, the note payable of $2,385,000 was paid in full.
In addition, the Company has entered into three separate note
agreements with aggregate amounts due of $189,000 to finance laboratory
equipment that bear interest at rates between 10% and 10.9% and require
aggregate monthly payments of $4,000 through June 2002.
F-13
<PAGE>
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000 (continued)
--------------------------------------------------------------------------------
Minimum future principal payments on notes payable as of April 30, 2000
are as follows:
Year ending April 30:
2001 $ 3,410,000
2002 86,000
2003 2,000
-----------------
$ 3,498,000
=================
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE. In December 1998, the Company sold and subsequently
leased back its two facilities in Tustin, California. The lease has an original
lease term of twelve years with two 5-year renewal options and includes
scheduled rental increases of 3.35% every two years. Rent expense under the
lease agreement totaled $735,000 and $269,000 for fiscal years 2000 and 1999,
respectively. At April 30, 2000, future minimum lease payments under the
noncancelable operating lease are as follows:
Year ending April 30:
2001 $ 684,000
2002 698,000
2003 707,000
2004 721,000
2005 731,000
Thereafter 4,378,000
-----------------
$ 7,919,000
=================
RENTAL INCOME. During April 2000, the Company entered into a sublease
with an unrelated entity for a portion of the Company's leased facility. Future
aggregate minimum rental payments to be received under the three year sublease
term is $327,000.
SEVERANCE AGREEMENTS. In July 1998, the Company entered into a
severance agreement with its former Chief Executive Officer (CEO). The severance
agreement provides for the former CEO to be paid $300,000 a year for the period
beginning March 1, 1998 through March 1, 2000. Outstanding stock options to
purchase an aggregate of 989,000 shares of common stock will vest and be payable
on December 31, 1998, December 31, 1999 and March 1, 2000 in equal installments.
In addition, the Company will make income tax payments, at the bonus rate, to
the appropriate taxing authorities. In addition, the Company agreed that if the
former CEO did not compete during the period beginning March 1, 1998 and ending
February 29, 2000, the Company will, on March 1, 2000, forgive the former CEO an
amount equal to his note of $350,000, plus all accrued interest thereon (Note
3). Under the severance agreement, the Company expensed approximately $573,000
and $948,000, of which, $337,000 and $595,000 was considered a non-cash expense
for the fiscal years ended April 30, 2000 and 1999, respectively, which has been
included in general and administrative expenses in the accompanying consolidated
financial statements. As of March 1, 2000, the Company had no further
obligations under this severance agreement.
F-14
<PAGE>
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000 (continued)
--------------------------------------------------------------------------------
On October 4, 1998, the Company's former Vice President of Operations
and Administration resigned to pursue other personal and business interests. In
connection with his resignation, the Company entered into a severance agreement
whereby the former Vice President of Operations and Administration will provide
consulting services to the Company as an independent consultant for a fixed and
non-cancelable period of sixteen months continuing until January 31, 2000, in
consideration of a monthly consulting fee of $12,500 and the issuance of an
aggregate of 320,000 shares of Common Stock during such period for the exercise
of outstanding stock options, without the requirement of any payment of the
exercise price ($.60 per share). During fiscal years ended April 30, 2000 and
1999, 80,000 and 240,000 shares of common stock, respectively, had been issued
under the severance agreement. In addition, under the severance agreement, the
Company made tax payments totaling $65,280 to federal and state taxing
authorities to offset the income to the former Vice President of Operations and
Administration resulting from the non-payment of the exercise price for such
options. Under the severance agreement, the Company expensed approximately
$162,000 and $301,000, of which, $40,000 and $165,000 was considered a non-cash
expense for the fiscal years ended April 30, 2000 and 1999, respectively, which
has been included in general and administrative expenses in the accompanying
consolidated financial statements. The Company had no further commitments under
this severance agreement as of April 30, 2000.
LEGAL PROCEEDINGS. During March 2000, the Company was served with a
notice of lawsuit filed in Orange County Superior Court for the State of
California by a former officer of the Company who resigned from the Company on
November 3, 1999. The lawsuit alleges a single cause of action for breach of
contract. A Director of the Company was also served with a notice of lawsuit,
but such claims do not appear to be directed toward the Company. A hearing was
held on July 21, 2000 in which the Superior Court judge approved a plaintiff
request for a writ of attachment and required the plaintiff to post a $15,000
bond in connection with that writ. The case is in the early stages of
investigation and the Company is unable to evaluate the likelihood of an
unfavorable outcome. The Company intends to vigorously contest the underlying
complaint.
7. LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS
ONCOLYM(R)
On March 8, 1999, the Company entered into a License Agreement with
Schering A.G. whereby Schering A.G. was granted the exclusive, worldwide right
to market and distribute Oncolym(R) products, in exchange for an initial payment
of $3,000,000 and future milestone payments plus a royalty on net sales. The
initial up-front payment of $3,000,000 received during fiscal year 1999 is
included in deferred license revenue in the accompanying consolidated financial
statements at April 30, 2000 and 1999 and will be recognized as license revenue
when all obligations of the Company have been met. During June 2000, the Company
and Schering A.G. entered into an amendment to the License Agreement (the
Amendment) whereby Schering A.G. has agreed to pay for 100% of the Oncolym(R)
clinical development expenses, excluding drug related costs, for the Phase I
clinical trial for the treatment of up to 18 patients. In exchange for this
commitment, Techniclone has agreed to transfer $1,300,000 of its common stock to
Schering A.G. as defined in the Amendment. Upon the successful completion of the
Phase I clinical trial, Schering A.G. will pay for 100% of the Phase II/III
clinical trial (excluding drug related costs) in exchange for the Company
F-15
<PAGE>
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000 (continued)
--------------------------------------------------------------------------------
issuing an additional $1,700,000 of its common stock as defined in the
Amendment. Eighty percent of the clinical trial costs in excess of the
$1,300,000 for the Phase I trial and $1,700,000 for the Phase II/III trial will
be paid by Schering A.G. and Techniclone will pay the remaining 20%. If Schering
A.G. moves forward after the Phase II/III clinical trial, then Schering A.G. has
agreed to refund Techniclone 80% of the proceeds it received from the sale of
Techniclone's common stock by applying such amount to the Company's clinical and
manufacturing obligations under the License Agreement.
Also in March 1999, the Company entered into a Termination Agreement
with BTD, pursuant to which the Company terminated all previous agreements with
BTD and thereby reacquired the marketing rights to Oncolym(R) products in Europe
and certain other designated foreign countries. In exchange for these rights,
the Company expensed $4,500,000 as a license fee in fiscal year 1999, which was
comprised of a secured promissory note payable in the amount of $3,300,000 and
shares of common stock equal to $1,200,000, or 1,523,809 common shares. The
number of shares of common stock issued was calculated by taking $1,200,000
divided by ninety percent (90%) of the market price of the Company's common
stock as defined in the Termination Agreement. In addition, the Company issued
warrants to purchase up to 3,700,000 shares of common stock at an exercise price
of $3.00 per share exercisable through March 2002 and issued warrants to
purchase up to 1,000,000 shares of common stock at an exercise price of $5.00
per share. The warrants were measured utilizing the Black-Scholes option
valuation model (Note 5).
On October 23, 1998, the Company entered into an Option Agreement with
BTD for an extension of time to reacquire the Oncolym(R) rights. Under the
Option Agreement, the Company paid $37,500 per month through March 8, 1999 and
also issued a warrant to purchase up to 125,000 shares of common stock at $3.00
per share. The fair value of the warrant was measured utilizing the
Black-Scholes option valuation model.
In November 1997, the Company entered into a Termination and Transfer
Agreement with Alpha Therapeutic Corporation (Alpha), whereby the Company
reacquired the rights for the development, commercialization and marketing of
Oncolym(R) in the United States and certain other countries, previously granted
to Alpha in October 1992. Under the terms of the Termination and Transfer
Agreement, the Company paid Alpha $260,000 upon signing of the agreement and
paid an additional $250,000 upon enrollment of the first clinical trial patient
by the Company. In addition, the Company has contingent obligations due upon
filing of a Biologics License Application ("BLA") and upon FDA approval of a BLA
by the Food and Drug Administration plus a royalty on net sales for product sold
in North, South and Central America and Asia for five (5) years after
commercialization of the product. Under the Termination and Transfer Agreement,
$510,000 was expensed in fiscal year 1998 and no amounts were due or payable at
April 30, 2000.
On October 28, 1992, the Company entered into an agreement with an
unrelated corporation (licensee) to terminate a previous license agreement
relating to Oncolym(R). The termination agreement provides for maximum payments
of $1,100,000 to be paid by the Company based on achievement of certain
milestones, including royalties on net sales. As of April 30, 2000, the Company
had paid $100,000 and accrued for an additional $100,000 relating to the
termination agreement. There have been no sales of the related products through
April 30, 2000.
F-16
<PAGE>
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000 (continued)
--------------------------------------------------------------------------------
In 1985, the Company entered into a research and development agreement,
as amended in August 1999, with Northwestern University and its researchers to
develop Oncolym(R). The Company holds an exclusive world-wide license to
manufacture and market products using the Oncolym(R) antibodies. In exchange for
the world-wide license to manufacture and market the products, the Company will
pay Northwestern University a royalty on net sales.
TUMOR NECROSIS THERAPY (COTARA(TM))
On November 29, 1999, the Company entered into a 90-day option
agreement with a multinational pharmaceutical company to potentially license a
specific use of the TNT technology. The Company is in continued negotiations
with the multinational pharmaceutical company. There can be no assurances that
the Company will be successful in entering into such licensing transaction on
terms that are mutually acceptable.
In February 1996, the Company entered into a joint venture agreement
with Cambridge Antibody Technology, Inc. (CAT), an unrelated entity, which
provides for the co-sponsorship of development and clinical testing of chimeric
and human TNT antibodies. As part of the joint venture agreement, CAT maintained
the responsibility to construct human TNT antibodies for future joint clinical
development and testing. A human TNT antibody was completed by CAT in early
1998. The agreement also provided that equity in the joint venture and costs
associated with the development of TNT based products would be shared equally
and the Company would retain exclusive world-wide manufacturing rights. In May
1998, the Company and CAT elected to discontinue the co-sponsorship of the
development of the TNT antibodies and the Company assumed full responsibility to
fund development and clinical trials of the TNT antibody. The Company and CAT
are currently in negotiations regarding modifications to the joint venture
arrangement.
The Company has arrangements with certain third parties to acquire
licenses needed to produce and commercialize chimeric and human antibodies,
including the Company's TNT antibody. Management believes terms of the licenses
will not significantly impact the cost structure or marketability of chimeric or
human TNT based products.
VASCULAR TARGETING AGENTS
On May 17, 2000, the Company entered into a joint venture with Oxigene,
Inc. for its VTA technology. Under the terms of the joint venture, the Company
has agreed to supply its VTA intellectual property to the joint venture. In
exchange for this, Oxigene, Inc. has agreed to provide its next generation
tubulin-binding compounds and based on the development success of the joint
venture, Oxigene, Inc. will be required to spend up to $20,000,000 to fund the
development expenses of the joint venture. Any further funding of the joint
venture thereafter will be shared equally by the Company and Oxigene, Inc. In
addition, Oxigene, Inc. has paid the Company an up-front licensing fee of
$1,000,000 and purchased $2,000,000 of the Company's stock based on the closing
market price for the five days prior and after the closing date. Additionally,
under the terms of the joint venture agreement, any sublicensing fees generated
within the joint venture will be allocated 75% to the Company and 25% to
Oxigene, Inc. until the Company has received $10,000,000 in sublicensing fees.
Thereafter, the joint venture partners will share licensing fees equally. In
addition, Oxigene, Inc. will also be required to pay the Company $1,000,000 and
to subscribe to an additional $1,000,000 in common stock of the Company upon the
F-17
<PAGE>
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000 (continued)
--------------------------------------------------------------------------------
filing of an Investigational New Drug Application (IND) for the first clinical
candidate developed. Any royalty income or profits will also be shared equally
by the joint venture partners. The Company and Oxigene have agreed to name the
new entity Arcus Therapeutics, LLC.
During April 2000, the Company entered into a binding letter of intent
to license a segment of its Vascular Targeting Agent (VTA) technology,
specifically related to applications of Photodynamic Therapy agents (PDT) with
Scotia Pharmaceuticals Limited for the worldwide exclusive rights to this area.
Under the letter of intent, the Company received an up-front payment of $500,000
in April 2000, which has been included in deferred license revenue in the
accompanying consolidated financial statements. The Company will also receive
milestone payments and a royalty upon commercialization of a product. There can
be no assurance that the Company will enter into a definitive agreement.
On January 27, 2000, the Company executed its option agreement with the
University of Texas Southwestern Medical Center, Dallas (University) to obtain
an exclusive world-wide license for a novel anti-angiogenesis antibody named 2C3
and its derivatives. The antibody is an anti-VEGF (Vascular Endothelial Growth
Factor) antibody with the ability to block the binding of a growth factor to
receptors found on tumor vasculature, the effect is to inhibit tumor vessel
growth. The license agreement is currently being drafted by the University.
During January 2000, the Company signed a letter of intent to license a
segment of its Vascular Targeting Agent (VTA) technology, specifically related
to Vascular Endothelial Growth Factor (VEGF), with SuperGen, Inc. Under the
terms of the letter of intent, the Company would receive an up-front payment and
future milestone payments aggregating approximately $8,000,000 plus a royalty on
net sales. The transaction is subject to further medical, technical, business,
financial and legal due diligence and will be subject to customary closing
conditions. There can be no assurance that the Company will enter into a
definitive agreement.
In April 1997, in conjunction with the acquisition of Peregrine, the
Company gained access to certain exclusive licenses for Vascular Targeting
Agents (VTAs) technologies. In conjunction with obtaining certain exclusive
licenses for Vascular Targeting Agents (VTAs) technologies from Peregrine, the
Company will be required to pay annual patent maintenance fees of $50,000 plus
milestone payments and future royalties on net sales. No product revenues have
been generated from the Company's VTA technology.
VASOPERMEATION ENHANCEMENT AGENTS AND OTHER LICENSES
During February 2000, the Company entered into an exclusive worldwide
licensing transaction with the University of Southern California for its
Permeability Enhancing Protein (PEP) in exchange for an up-front payment plus
future milestone payments and a royalty on net sales. The PEP technology is a
piece of the Company's Vasopermeation Enhancing Agent (VEA) technology, which is
designed to increase the uptake of chemotherapeutic agents into tumors. PEP is
designed to be used in conjunction the VEA technology platform.
Prior to fiscal year 1996, the Company had entered into several license
and research and development agreements with a university for the exclusive,
worldwide licensing rights to use certain patents and technologies in exchange
for fixed and contingent payments and royalties on net sales of the related
products. Some of the agreements are terminable at the discretion of the Company
while others continue through 2001. Minimum future royalties under these
agreements are $84,500 annually. Royalties related to these agreements amounted
to $84,500 for fiscal years 2000 and 1999 and $86,500 for fiscal year 1998.
F-18
<PAGE>
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000 (continued)
--------------------------------------------------------------------------------
8. STOCKHOLDERS' EQUITY
CLASS B PREFERRED STOCK
During December 1995, the Company issued 8,200 shares of nonvoting
Class B preferred stock (Class B Stock), at a price of $1,000 per share, for net
proceeds of $7,138,000. The number of shares of common stock issued upon
conversion of each share of Class B Stock is determined by (i) taking ten
percent (10%) of One Thousand Dollars ($1,000) pro-rated on the basis of a 365
day year, by the number of days the Class B Stock is outstanding plus (ii) One
Thousand Dollars ($1,000), (iii) divided by the lower of $3.06875, the fixed
conversion price, or 85% of the average closing bid price for the Company's
common stock for the five trading days immediately preceding the conversion date
(the "Conversion Price"). During fiscal year 1998, the remaining 2,200 shares of
Class B preferred stock outstanding were converted into 4,388,982 common shares.
The Company recorded $224,000 in Class B Stock dividends during the fiscal year
ended April 30, 1998.
CLASS C PREFERRED STOCK
On April 25, 1997, the Company entered into a 5% Preferred Stock
Investment Agreement and sold 12,000 shares of 5% Adjustable Convertible Class C
Preferred Stock (the Class C Stock) for net proceeds of $11,069,000. The holders
of the Class C Stock do not have voting rights, except as provided under
Delaware law, and the Class C Stock is convertible into common stock.
Commencing on September 26, 1997, the Class C Stock was 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 lower of $.5958 (Conversion Cap)
per share or 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 an increasing percentage discount. The discount
ranged from 13% beginning on November 26, 1997 and reached a maximum discount
percentage of 27% on July 26, 1998.
In conjunction with the 5% Preferred Stock Investment Agreement, the
Placement Agent was granted a warrant to purchase up to 1,200 shares of Class C
Stock at $1,000 per share. The Company estimated the difference between the
grant price and the fair value of the placement agent warrants on the date of
grant to be approximately $862,000 and has been treated as a cost of the
offering in the accompanying consolidated financial statements. During fiscal
year 1999 and 1998, the Placement Agent purchased 530 and 670 shares of Class C
Stock for gross proceeds of $530,000 and $670,000, respectively.
In accordance with the Agreement, upon conversion of the Class C Stock
into common stock, the preferred stockholders were granted warrants to purchase
one-fourth of the number of shares of common stock issued upon conversion. The
warrants are exercisable at $0.6554, or 110% of the Conversion Cap and expire in
April 2002. No value has been ascribed to these warrants, as the warrants are
considered non-detachable. During fiscal years 2000, 1999 and 1998, warrants to
purchase 78,201, 2,357,019 and 3,885,515 shares of common stock were issued upon
F-19
<PAGE>
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000 (continued)
--------------------------------------------------------------------------------
conversion of 121, 5,216 and 8,636 shares of Class C Stock, respectively. During
fiscal years ended April 30, 2000 and 1999, 63,537 and 6,207,290 warrants,
respectively, were exercised on a combined cash and cashless basis in exchange
for 63,537 and 5,894,733 shares of common stock and net proceeds to the Company
of $42,000 and $3,641,000, respectively. At April 30, 2000, 49,908 Class C
warrants were outstanding.
Beginning September 30,1997, the dividends on the Class C Stock are
payable quarterly in shares of Class C Stock or, at the option of the Company,
in cash, at the rate of $50.00 per share per annum. During fiscal year 2000,
1999 and 1998, the Company recorded $2,000, $15,000 and $742,000 in Class C
Stock dividends, respectively. The dividends recorded of $742,000 during fiscal
year 1998 included 448 shares of Class C Stock issued as dividend shares.
During fiscal year 1998, the Registration Statement required to be
filed by the Company pursuant to the agreement was not declared effective by the
180th day following the Closing Date, and therefore, the Company issued an
additional 325 shares of Class C Stock, calculated in accordance with the terms
of the agreement.
During fiscal year 2000, 1999 and 1998, 121, 5,216 and 8,636 shares of
Class C Stock were converted into 312,807, 9,428,131 and 15,542,300 common
shares, respectively. There were no shares of Class C Stock outstanding as of
April 30, 2000.
The Class C Stock agreement included a provision for conversion of the
preferred stock into common stock at a discount during the term of the
agreements. As a result of these conversion features, the Company was accreting
an amount from accumulated deficit to additional paid-in capital equal to the
Preferred Stock discount. The Preferred Stock discount was computed by taking
the difference between the fair value of the Company's common stock on the date
the Class C Preferred Stock agreement was finalized and the conversion price,
assuming the maximum discount allowable under the terms of the agreement,
multiplied by the number of common shares into which the preferred stock would
have been convertible into (assuming the maximum discount allowable). The
Preferred Stock discount was being amortized over the period from the date of
issuance of the Preferred Stock to the Conversion or discount period (or sixteen
months) using the effective interest method. If preferred stock conversions
occur before the maximum discount is available, the discount amount is adjusted
to reflect the actual discount. During fiscal year 1999 and 1998, the Company
recorded $531,000 and $2,475,000 for the Class C Stock discount, respectively.
COMMON STOCK EQUITY LINE AGREEMENT
During June 1998, the Company secured access to $20,000,000 under a
Common Stock Equity Line ("Equity Line") with two institutional investors, as
amended on June 2, 2000 (the Amendment). Under the amended terms of the Equity
Line, the Company may, in its sole discretion, and subject to certain
restrictions, periodically sell ("Put") shares of the Company's common stock
until all common shares previously registered under the Equity Line have been
exhausted. As of April 30, 2000, the Company had approximately 10,522,000 shares
available under the Equity Line. Under the amendment, up to $2,800,000 of Puts
can be made every month if the Company's closing bid price is $2.00 or higher
during the 10-day pricing period. If the Company's closing bid price is between
$1.00 and $2.00, then the Company can Put up to $1,500,000 per month and if the
Company's closing bid price falls below $1.00 on any trading day during the ten
trading days prior to the Put, the Company's ability to access funds under the
Equity Line in the Put is limited to 15% of what would otherwise be available.
F-20
<PAGE>
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000 (continued)
--------------------------------------------------------------------------------
If the closing bid price of the Company's common stock falls below $0.50 or if
the Company is delisted from The Nasdaq SmallCap Market, the Company would have
no access to funds under the Equity Line.
In accordance with Emerging Issues Task Force Issue No. 96-13,
"Accounting for Derivative Financial Instruments", contracts that require a
company to deliver shares as part of a physical settlement should be measured at
the estimated fair value on the date of the initial Put. As such, the Company
had an independent appraisal performed to determine the estimated fair market
value of the various financial instruments included in the Equity Line and
recorded the related financial instruments as reclassifications between equity
categories. Reclassifications were made for the estimated fair market value of
the warrants issued and estimated Commitment Warrants to be issued under the
Equity Line of $1,140,000 and the estimated fair market value of the reset
provision of the Equity Line of $400,000 as additional consideration and have
been included in the accompanying financial statements. The above recorded
amounts were offset by $700,000 related to the restrictive nature of the common
stock issued under the initial tranche in June 1998 and the estimated fair
market value of the Equity Line Put option of $840,000.
Puts under the Equity Line are priced at a discount equal to the
greater of 17.5% of the lowest closing bid price during the ten trading days
immediately preceding the date on which such shares are sold to the
institutional investors or $0.20.
During fiscal years 2000 and 1999, the Company received gross proceeds
of $8,838,000 and $5,750,000 in exchange for 9,532,559 and 5,775,224 shares of
common stock under the Equity Line, respectively, including commission shares.
On April 15, 1999 and July 15, 1999, the Company issued an additional 881,481
and 179,485 shares of common stock covering the initial three and six month
adjustment dates as defined in the agreement, respectively. There are no future
reset provisions under the Equity Line.
At the time of each Put, the investors will be issued warrants,
exercisable only on a cashless basis and expiring on December 31, 2004, to
purchase up to 10%, (increased to 15% under the Amendment) of the amount of
common stock issued to the investor at the same price as the purchase of the
shares sold in the Put. During fiscal year 2000 and 1999, the Company issued
953,246 and 566,953 warrants under the Equity Line, respectively, including
commission warrants. During fiscal years 2000 and 1999, the Company issued
985,265 and 14,282 shares of common stock upon the cashless exercise of
1,216,962 and 52,173 Equity Line warrants, respectively. As of April 30, 2000,
the Company had outstanding warrants to purchase up to 265,785 shares of common
stock under the Equity Line.
Placement agent fees under each draw of the Equity Line are issued to
Dunwoody Brokerage Services, Inc., which are equal to 10% of the common shares
(commission shares) and warrants (commission warrants) issued to the
institutional investors plus an overall cash commission equal to 8% of the gross
draw amount. Mr. Eric Swartz, a member of the Board of Directors, maintains a
contractual right to 50% of the shares and warrants issued under the Equity Line
in the name of Dunwoody Brokerage Services, Inc.
F-21
<PAGE>
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000 (continued)
--------------------------------------------------------------------------------
OTHER EQUITY TRANSACTIONS
On November 19, 1999, in consideration of a commitment by Swartz
Private Equity, LLC to fund a $35,000,000 equity line financing over a three
year term, the Company issued Swartz Private Equity, LLC a five-year warrant to
purchase up to 750,000 shares of the Company's Common Stock at an initial
exercise price of $0.46875 per share subject to reset provisions as defined in
the agreement. This agreement was entered into and approved by the previous
Board of Directors. Mr. Eric Swartz, a member of the Board of Directors,
maintains a 50% ownership in Swartz Private Equity, LLC. The Company utilized
the Black-Scholes valuation model to calculate the fair value of the warrant,
which was recorded as stock-based compensation in the accompanying consolidated
financial statements.
During March 1998, the Company received a line of credit commitment
from BTD provided for borrowings of up to $2,000,000 that expired on May 31,
1998. In exchange for providing this commitment, even though the Company did not
borrow under this arrangement, BTD received a warrant, expiring in March 2003,
to purchase 500,000 shares of the Company's common stock at $1.00 per share.
In April 1999, the Company issued 1,523,809 shares of common stock
under a Termination Agreement with BTD, pursuant to which the Company terminated
all previous agreements with BTD and thereby reacquired the marketing rights to
the Oncolym(R) products in Europe and certain other designated foreign countries
(Note 5).
During fiscal year 2000 and 1999, the Company issued an aggregate of
739,333 and 569,667 shares of common stock under two separate severance
agreements (Note 6).
During fiscal year 2000, 1999 and 1998, the Company issued 334,771,
72,258 and 10,623 shares of its common stock to various unrelated entities in
exchange for services rendered. In fiscal year 1999, the Company issued 25,000
shares of common stock to a director of the Company in exchange for consulting
services and issued 30,000 shares of common stock to a former officer of the
Company as a bonus for achieving certain milestones. The issuance of shares of
common stock in exchange for services or as a bonus were recorded based on the
more readily determinable value of the services received or the fair value of
the common stock issued.
In April 1998, through a private placement, the Company sold 1,120,065
shares of restricted common stock for proceeds of $625,000. In conjunction with
the private placement, the Company granted warrants to purchase 280,015 shares
of its common stock at $1.00 per share. The warrants expire in April 2001.
During fiscal year 2000, the Company received $164,000 from the exercise of
164,469 private placement warrants. As of April 30, 2000, 115,546 private
placement warrants were outstanding.
In conjunction with the purchase of Peregrine, during May 1997, the
Company issued 143,979 shares of common stock in exchange for $550,000 to a
previous stockholder of Peregrine.
During fiscal year 2000, the Company received principal payments
aggregating $307,000 plus accrued interest on notes receivable from the sale of
common stock. The notes were paid in full and were due from a former officer and
a former director of the Company.
In accordance with the Company's Equity Line agreement, option plans,
warrant agreements and other commitments to issue common stock, the Company has
F-22
<PAGE>
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000 (continued)
--------------------------------------------------------------------------------
reserved approximately 26,862,000 shares of its common stock at April 30, 2000
for future issuance. Of this amount, approximately 10,522,000 common shares have
been reserved for future issuance under the Equity Line related to the future
available Put's.
9. STOCK OPTIONS AND WARRANTS
The Company has two stock incentive plans with outstanding options as
of April 30, 2000. The plans were adopted or assumed in conjunction with a
merger in April 1995 (CBI Plan) and September 1996 (1996 Plan). The plans
provide for the granting of options to purchase shares of the Company's common
stock at prices not less than the fair market value of the stock at the date of
grant and generally expire ten years after the date of grant. In addition,
during fiscal year 2000, the Company granted 1,500,000 non-qualified options to
one Board member and two consultants, which have not been registered under the
above Plans. The Company anticipates registering such options under a separate
registration statement.
The 1996 Plan originally provided for the issuance of options to
purchase up to 4,000,000 shares of the Company's common stock. The number of
shares for which options may be granted under the 1996 Plan automatically
increases for all subsequent common stock issuances by the Company in an amount
equal to 20% of such subsequent issuances up to a maximum of 10,000,000 options
as long as the total shares allocated to the 1996 Plan do not exceed 20% of the
Company's authorized stock. As a result of issuances of common stock by the
Company subsequent to the adoption of the 1996 Plan, the number of shares for
which options may be granted has increased to 10,000,000. Options granted
generally vest over a period of four years with a maximum term of ten years.
Option activity for each of the three years ended April 30, 2000 is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------ -------------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
Beginning of year 6,387,667 $1.00 4,477,326 $0.70 4,058,250 $3.02
Granted 8,326,603 $1.41 3,910,541 $1.36 796,909 $1.21
Exercised (3,569,001) $0.93 (1,127,701) $0.54 (17,750) $1.00
Canceled (3,531,240) $1.15 (872,499) $1.62 (360,083) $3.45
------------ ----------- -----------
BALANCE,
End of year 7,614,029 $1.42 6,387,667 $1.00 4,477,326 $0.70
============ =========== ===========
</TABLE>
Additional information regarding options outstanding as of April 30,
2000 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- --------------------------------------
WEIGHTED AVERAGE
RANGE OF PER SHARE REMAINING WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
SHARE EXERCISE NUMBER OF SHARES CONTRACTUAL LIFE PER SHARE SHARES PER SHARE EXERCISE
PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE PRICE
---------------------- ------------------- -------------------- -------------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C>
$ 0.34 - $ 0.60 4,394,463 8.38 $ 0.39 1,235,358 $ 0.45
$ 0.97 - $ 1.59 2,554,566 8.81 $ 1.16 536,500 $ 1.28
$ 3.69 - $30.00 665,000 9.85 $ 9.21 85,000 $ 3.69
------------------- -----------------
$ 0.34 - $30.00 7,614,029 8.65 $ 1.42 1,856,858 $ 0.84
=================== =================
</TABLE>
F-23
<PAGE>
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000 (continued)
--------------------------------------------------------------------------------
At April 30, 2000, options to purchase 7,614,029 shares of the
Company's common stock were outstanding, of which, 1,856,858 options were
exercisable. Options to purchase 792,169 shares were available for grant under
the Company's 1996 Plan. There are no remaining shares available for grant under
the CBI Plan.
During December 1999, the Company had a minimal amount of cash on hand
and certain employees of the Company were deferring a percentage of their
salary. In addition, the Company had significant payables to vendors and patent
attorneys and the Company was near a time of being delisted from The NASDAQ
Stock Market. Also, the Company was aware of numerous employees who had job
opportunities with companies who had stronger financial resources. In order for
the Company to continue, the Board of Directors felt it was imperative for the
Company to maintain certain key employees who were familiar with the Company's
technologies, clinical trials and business activities. Therefore, on December
22, 1999, the Board of Directors granted 4,170,000 options to various employees,
consultants and two Board members at exercise prices ranging from $0.34 to
$30.00 per share. The options were granted to purchase shares of the Company's
common stock at prices not less than the fair market value of the stock on the
date of grant and generally expire ten years after the date of grant.
On May 3, 2000, the Company granted approximately 2,383,332 stock
options to employees of the Company under the Company's 1996 Stock Option Plan
at an exercise price of $1.06.
In March 1998, the Company experienced a decline in the market value of
its common stock and repriced certain options to key employees, directors and
consultants to $.60 per share. The repricing was considered necessary to enable
the Company to retain key employees, directors and consultants.
Stock-based compensation expense recorded during each of the three
years in the periods ended April 30, 2000 primarily relates to stock option
grants made to consultants and has been measured utilizing the Black-Scholes
option valuation model. Stock-based compensation expense related to stock option
or warrant grants made to non-employees, consultants and under a proposed
financing agreement of the Company during fiscal year 2000, 1999 and 1998
amounted to $1,438,000, $430,000 and $263,000, respectively, and is being
amortized over the estimated period of service or related vesting period.
The Company utilizes the guidelines in Accounting Principles Board
Opinion No. 25 for measurement of stock-based transactions for employees. Had
the Company utilized a fair value model for measurement of stock-based
transactions for employees and amortized the expense over the vesting period,
pro forma information would be as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Pro forma net loss $ (16,340,000) $ (22,570,000) $ (17,466,000)
Pro forma net loss per share $ (0.20) $ (0.34) $ (0.56)
</TABLE>
F-24
<PAGE>
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000 (continued)
--------------------------------------------------------------------------------
The fair value of the options granted in fiscal years 2000, 1999 and
1998 were estimated at the date of grant using the Black-Scholes option pricing
model, assuming an average expected life of approximately four years, a
risk-free interest rate of 6.39% and a volatility factor ranging from 86% to
182%. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. Option valuation models require the input of highly
subjective assumptions, including the expected stock volatility. Because the
Company's options have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions can
materially affect the fair values estimated, in the opinion of management, the
existing models do not necessarily provide a reliable measure of the fair value
of its options. The weighted average estimated fair value in excess of the grant
price for employee stock options granted during fiscal years 2000, 1999 and 1998
was $0.70, $0.90 and $2.27, respectively.
As of April 30, 2000, warrants to purchase an aggregate of 8,725,277
shares of the Company's common stock were outstanding. The warrants are
exercisable at prices ranging between $0.24 and $5.00 per share with an average
exercise price of $2.19 per share and expire through January 2005. The value of
the warrants was based on a Black Scholes formula after considering terms in the
related warrant agreements.
10. INCOME TAXES
The provision for income taxes consists of the following for the three
years ended April 30, 2000:
<TABLE>
<CAPTION>
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Provision for federal income taxes at
statutory rate $ (4,935,000) $ (6,628,000) $ (4,020,000)
Acquisition of in-process research and
development - - 44,000
Permanent differences 5,000 21,000 22,000
State income taxes, net of federal benefit (435,000) (585,000) (683,000)
Other 211,000 318,000 -
Change in valuation allowance 5,154,000 6,874,000 4,637,000
-------------- -------------- --------------
Provision $ - $ - $ -
============== ============== ==============
</TABLE>
F-25
<PAGE>
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000 (continued)
--------------------------------------------------------------------------------
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes. Significant components of the
Company's deferred tax assets at April 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
-------------- --------------
<S> <C> <C>
Net operating loss carryforwards $ 21,138,000 $ 15,990,000
Stock-based compensation 1,290,000 619,000
General business and research and development credits 118,000 118,000
Deferred revenue 1,295,000 1,110,000
Accrued license note payable 1,221,000 1,221,000
Accrued liabilities 457,000 615,000
-------------- --------------
25,519,000 19,673,000
Less valuation allowance (25,519,000) (19,673,000)
-------------- --------------
Net deferred taxes $ - $ -
============== ==============
</TABLE>
At April 30, 2000, the Company and its subsidiary have federal net
operating loss carryforwards of $58,153,000 and tax credit carryforwards of
$118,000. During fiscal year 2000 and 1999, net operating loss carryforwards of
$344,000 and $895,000 expired with the remaining net operating losses expiring
through 2020. The net operating losses of $2,986,000 applicable to its
subsidiary can only be offset against future income of its subsidiary. The tax
credit carryforwards generally expire in 2008 and are available to offset future
taxes of the Company or its subsidiary.
Due to ownership changes in the Company's common stock, there will be
limitations on the Company's ability to utilize its net operating loss
carryforwards in the future. The impact of the restricted amount has not been
calculated as of April 30, 2000.
11. RELATED PARTY TRANSACTIONS
On December 29, 1999, Swartz Investments, LLC and BTD agreed to provide
interim funding to the Company for up to $500,000 to continue the operations of
the Company and to avoid the Company from filing for protection from its
creditors. During this period of time, the closing stock price was $0.41 per
share, the Company had a minimal amount of cash on hand, significant payables to
vendors and patent attorneys, and the Company was near a time of being delisted
from The NASDAQ Stock Market. During January, the Company entered into the final
agreement, a Regulation D Subscription Agreement, whereby the Company received
$500,000 in exchange for an aggregate of 2,000,000 shares of common stock and
issued warrants to purchase up to 2,000,000 shares of common stock at $0.25 per
share. Mr. Eric Swartz, a member of the Board of Directors, maintains a 50%
ownership in Swartz Investments, LLC. BTD is controlled by Mr. Edward J. Legere,
who is also a member of the Board of Directors.
F-26
<PAGE>
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000 (continued)
--------------------------------------------------------------------------------
12. BENEFIT PLAN
During fiscal year 1997, the Company adopted a 401(k) benefit plan
(Plan) for all employees who are over age 21, work at least 24 hours per week
and have three or more months of continuous service. The Plan provides for
employee contributions of up to a maximum of 15% of their compensation or
$10,500. The Company made no matching contributions to the Plan for the fiscal
year 2000, 1999 and 1998.
13. SUBSEQUENT EVENTS
Subsequent to April 30, 2000, the Company received gross proceeds of
$7,800,000 under the Equity Line in exchange for 3,464,419 shares of the
Company's common stock, including commission shares. As of July 21, 2000, the
Company had a cash and cash equivalents balance of $12,762,000.
F-27
<PAGE>
<TABLE>
TECHNICLONE CORPORATION SCHEDULE II
VALUATION OF QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2000
---------------------------------------------------------------------------------------------------------------
<CAPTION>
BALANCE AT CHARGED BALANCE
BEGINNING TO COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------------------------------------------------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Lower of cost or market inventory reserve for
the year ended April 30, 1998 $ 46,000 $ - $ (46,000) $ -
Lower of cost or market inventory reserve for
the year ended April 30, 1999 $ - $ - $ - $ -
Lower of cost or market inventory reserve for
the year ended April 30, 2000 $ - $ - $ - $ -
Valuation reserve for other receivables for
the year ended April 30, 1998 $ 175,000 $ - $ - $ 175,000
Valuation reserve for other receivables for
the year ended April 30, 1999 $ 175,000 $ 26,000 $ - $ 201,000
Valuation reserve for other receivables for
the year ended April 30, 2000 $ 201,000 $ 141,000 $ - $ 342,000
</TABLE>
F-28
