<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-17085
TECHNICLONE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-3698422
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
14282 Franklin Avenue, Tustin, California 92780-7017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (714) 508-6000
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED,
SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS:
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.)
95,230,511 shares of Common Stock
as of August 31, 2000
<PAGE>
TECHNICLONE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JULY 31, 2000
TABLE OF CONTENTS
THE TERMS "WE", "US", "OUR," AND "THE COMPANY" AS USED IN THIS FORM ON 10-Q
REFERS TO TECHNICLONE CORPORATION, TECHNICLONE INTERNATIONAL CORPORATION, ITS
FORMER SUBSIDIARY, CANCER BIOLOGICS INCORPORATED, WHICH WAS MERGED INTO THE
COMPANY ON JULY 26, 1994 AND ITS WHOLLY-OWNED SUBSIDIARY PEREGRINE
PHARMACEUTICALS, INC., WHICH WAS ACQUIRED DURING APRIL 1997.
PART I FINANCIAL INFORMATION
PAGE
Item 1. Our Financial Statements .......................................... 3
Consolidated Balance Sheets at July 31, 2000 and April 30, 2000 ... 3
Consolidated Statements of Operations for the three months ended
July 31, 2000 and 1999 ............................................ 5
Consolidated Statement of Stockholders' Equity for the three months
ended July 31, 2000 ............................................... 6
Consolidated Statements of Cash Flows for the three months ended
July 31, 2000 and 1999 ............................................ 7
Notes to Consolidated Financial Statements ........................ 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................. 13
Company Overview .................................................. 13
Risk Factors of Our Company ....................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 17
Item 2. Changes in Securities and Use of Proceeds ......................... 17
Item 3. Defaults Upon Senior Securities ................................... 18
Item 4. Submission of Matters to a Vote of Security Holders ............... 18
Item 5. Other Information ................................................. 18
Item 6. Exhibits and Reports on Form 8-K .................................. 18
2
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PART I FINANCIAL INFORMATION
----------------------------
ITEM 1. FINANCIAL STATEMENTS
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<TABLE>
TECHNICLONE CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 2000 AND APRIL 30, 2000
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<CAPTION>
JULY 31, APRIL 30,
2000 2000
------------- -------------
UNAUDITED
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,708,000 $ 4,131,000
Other receivables, net of allowance of $279,000 (July) and
$342,000 (April) 66,000 90,000
Prepaid expenses and other current assets 182,000 268,000
Laboratory equipment held for sale 428,000 428,000
------------- -------------
Total current assets 13,384,000 4,917,000
PROPERTY:
Leasehold improvements 125,000 73,000
Laboratory equipment 898,000 860,000
Furniture, fixtures and computer equipment 806,000 806,000
------------- -------------
1,829,000 1,739,000
Less accumulated depreciation and amortization (946,000) (869,000)
------------- -------------
Property, net 883,000 870,000
OTHER ASSETS:
Note receivable, net of allowance of $1,800,000 (July) and
$1,863,000 (April) - -
Other, net 166,000 166,000
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Total other assets 166,000 166,000
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TOTAL ASSETS $ 14,433,000 $ 5,953,000
============= =============
</TABLE>
3
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<TABLE>
TECHNICLONE CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 2000 AND APRIL 30, 2000 (CONTINUED)
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<CAPTION>
JULY 31, APRIL 30,
2000 2000
-------------- --------------
UNAUDITED
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 427,000 $ 522,000
Deferred license revenue 4,396,000 3,500,000
Note payable to related party and accrued interest 3,564,000 3,465,000
Accrued clinical trial site fees 336,000 280,000
Accrued royalties and license fees 301,000 268,000
Accrued legal and accounting fees 214,000 186,000
Notes payable, current portion 112,000 110,000
Other current liabilities 248,000 254,000
-------------- --------------
Total current liabilities 9,598,000 8,585,000
NOTES PAYABLE 60,000 89,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock- $.001 par value; authorized 5,000,000
shares, none outstanding: - -
Common stock-$.001 par value; authorized 150,000,000 shares;
outstanding - 94,711,839 (July); 90,612,610 (April) 95,000 91,000
Additional paid-in capital 115,862,000 106,640,000
Deferred compensation (1,931,000) (2,258,000)
Accumulated deficit (109,251,000) (107,194,000)
-------------- --------------
Total stockholders' equity (deficit) 4,775,000 (2,721,000)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 14,433,000 $ 5,953,000
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
4
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TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 2000 AND 1999 (UNAUDITED)
--------------------------------------------------------------------------------
THREE MONTHS ENDED JULY 31,
2000 1999
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COSTS AND EXPENSES:
Research and development $ 1,453,000 $ 1,984,000
General and administrative 480,000 823,000
Stock-based compensation 327,000 157,000
Interest 103,000 88,000
------------- -------------
Total costs and expenses 2,363,000 3,052,000
INTEREST AND OTHER INCOME 306,000 63,000
------------- -------------
NET LOSS $ (2,057,000) $ (2,989,000)
============= =============
Net loss before preferred stock dividends $ (2,057,000) $ (2,989,000)
Imputed dividends on Class C Preferred Stock - (1,000)
------------- -------------
Net loss applicable to common stock $ (2,057,000) $ (2,990,000)
============= =============
Weighted average shares outstanding 92,539,300 75,002,199
============= =============
BASIC AND DILUTED LOSS PER SHARE $ (0.02) $ (0.04)
============= =============
See accompanying notes to consolidated financial statements
5
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<TABLE>
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED JULY 31, 2000 (UNAUDITED)
---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NET
ADDITIONAL STOCKHOLDERS'
COMMON STOCK PAID-IN DEFERRED STOCK ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT (DEFICIT)
-------------- ------------ -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES - April 30, 2000 90,612,610 $ 91,000 $ 106,640,000 $ (2,258,000) $(107,194,000) $ (2,721,000)
Common stock issued upon
exercise of options and warrants 49,801 - 14,000 - - 14,000
Common stock issued for cash
under Equity Line 3,464,419 3,000 7,209,000 - - 7,212,000
Common stock issued to OXiGENE,
Inc. for cash under joint
venture 585,009 1,000 1,999,000 - - 2,000,000
Stock-based compensation - - - 327,000 - 327,000
Net loss - - - - (2,057,000) (2,057,000)
-------------- ------------ -------------- -------------- -------------- --------------
BALANCES - July 31, 2000 94,711,839 $ 95,000 $ 115,862,000 $ (1,931,000) $(109,251,000) $ 4,775,000
============== ============ ============== ============== ============== ==============
See accompanying notes to consolidated financial statements
6
</TABLE>
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<TABLE>
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JULY 31, 2000 AND 1999 (UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED JULY 31,
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,057,000) $(2,989,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 77,000 126,000
Stock-based compensation 327,000 157,000
Severance expense - 126,000
Changes in operating assets and liabilities:
Other receivables 24,000 (23,000)
Prepaid expenses and other current assets 86,000 29,000
Accounts payable and accrued legal and accounting fees (67,000) (66,000)
Deferred license revenue 896,000 -
Accrued clinical trial site fees 56,000 (63,000)
Accrued royalties and license termination fees 33,000 (9,000)
Other accrued expenses and current liabilities 93,000 (147,000)
------------ ------------
Net cash used in operating activities (532,000) (2,859,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property acquisitions (90,000) (76,000)
Decrease in other assets - 16,000
------------ ------------
Net cash used in investing activities (90,000) (60,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 9,226,000 2,196,000
Principal payments on notes payable (27,000) (29,000)
Payment of Class C preferred stock dividends - (1,000)
------------ ------------
Net cash provided by financing activities 9,199,000 2,166,000
------------ ------------
</TABLE>
7
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<TABLE>
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JULY 31, 2000 AND 1999 (UNAUDITED) (CONTINUED)
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<CAPTION>
THREE MONTHS ENDED JULY 31,
2000 1999
------------ ------------
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 8,577,000 $ (753,000)
CASH AND CASH EQUIVALENTS,
beginning of period 4,131,000 2,385,000
------------ ------------
CASH AND CASH EQUIVALENTS,
end of period $12,708,000 $ 1,632,000
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 4,000 $ 88,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
8
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TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2000 (UNAUDITED)
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1. 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 Vascular
Targeting Agent ("VTA") technology through the acquisition of Peregrine in April
1997. All intercompany balances and transactions have been eliminated.
At July 31, 2000, we had $12,708,000 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
(excluding any future draws under the Company's Common Stock Equity Line of
Credit), we will continue to require additional funding to sustain our research
and development efforts, provide for future clinical trials, establish contract
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.
The Company's ability to access funds under the Equity Line Agreement
is subject to the satisfaction of certain conditions and the failure to satisfy
these conditions may limit or preclude the Company's ability to access such
funds, which could adversely affect the Company's business, immediate liquidity,
financial position and results of operations unless additional financing sources
are available (Note 2).
The accompanying unaudited consolidated financial statements contain
all adjustments (consisting of only normal recurring adjustments) which, in the
opinion of management, are necessary to present fairly the consolidated
financial position of the Company at July 31, 2000, and the consolidated results
of its operations and its consolidated cash flows for the three-month periods
ended July 31, 2000 and 1999. Although the Company believes that the disclosures
in the financial statements are adequate to make the information presented not
misleading, certain information and footnote disclosures normally included in
the consolidated financial statements have been condensed or omitted pursuant to
rules and regulations of the Securities and Exchange Commission. The
consolidated financial statements included herein should be read in conjunction
with the consolidated financial statements of the Company, included in the
Company's Annual Report on Form 10-K for the year ended April 30, 2000, which
was filed with the Securities and Exchange Commission on July 31, 2000. Results
of operations for the interim periods covered by this Report may not necessarily
be indicative of results of operations for the full fiscal year.
RECLASSIFICATION. Certain reclassifications were made to the prior
period balances to conform them to the current period presentation.
9
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TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2000 (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
NET LOSS PER SHARE. Net loss per share is calculated by adding the net
loss for the three month period to the Preferred Stock dividends and Preferred
Stock issuance discount accretion on the Class C Preferred Stock during the
three-month period divided by the weighted average number of shares of common
stock outstanding during the three month period. Shares issuable upon the
exercise of common stock warrants and options have been excluded from the per
share calculation for the three-month periods ended July 31, 2000 and 1999
because their effect is antidilutive. Accretion of the Class C Preferred Stock
dividends and issue discount amounted to $1,000 for the quarter ended July 31,
1999. There were no shares of Preferred Stock outstanding during the three
months ended July 31, 2000.
RECENT ACCOUNTING PRONOUNCEMENTS. 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 quarter 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.
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, of adopting SFAS No. 133.
2. STOCKHOLDERS' EQUITY
During June 1998, the Company secured access to $20,000,000 under a
Common Stock Equity Line of Credit ("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 July 31, 2000, the Company had approximately 7,055,000
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. 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 under the
Equity Line are priced at a discount equal to the greater of $0.20 or 17.5% off
the lowest closing per share bid price during the ten trading days immediately
preceding the date on which such shares are sold to the institutional investors.
10
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TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2000 (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
During the quarter ended July 31, 2000, the Company received gross
proceeds of $7,800,000 in exchange for 3,147,924 shares of common stock under
the Equity Line. In addition, during the quarter ended July 31, 2000, the
Company issued 316,495 shares of common stock and warrants to purchase up to
31,648 shares of common stock and paid cash fees of $546,000 to Dunwoody
Brokerage Services, Inc. as placement agent fees. Mr. Eric Swartz, a member of
the Board of Directors, maintains a contractual right to 50% of the placement
agent fees paid under the Equity Line. The Equity Line was consummated in June
1998 when Mr. Swartz had no Board affiliation with the Company.
During May 2000, the Company received $2,000,000 in exchange for
585,009 shares of common stock in accordance with the joint venture agreement
with OXiGENE, Inc. (Note 4).
3. CONTINGENCY
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.
4. LICENSING
During May 2000, the Company entered into a joint venture agreement
with OXiGENE, Inc. ("OXiGENE"). Under the terms of the joint venture agreement,
the Company has agreed to supply its VTA intellectual property to the joint
venture while OXiGENE has agreed to (i) provide its next generation
tubulin-binding compounds (ii) spend up to $20,000,000 to fund the development
expenses of the joint venture based on its development success (iii) pay the
Company a nonrefundable $1,000,000 license fee, which was received in May 2000
and will be amortized as license revenue over a two year period (iv) purchase
$2,000,000 of the Company's common stock (Note 2) and (v) pay the Company a
$1,000,000 nonrefundable license fee and subscribe to an additional $1,000,000
in common stock of the Company upon filing an Investigational New Drug
Application ("IND") for the first clinical candidate developed. Any future
funding of the joint venture after OXiGENE has paid its $20,000,000 in
development expenses will be shared equally by the Company and OXiGENE.
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 until the Company has received $10,000,000 in sublicensing fees.
Thereafter, the joint venture partners will share licensing fees equally. 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.
11
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TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2000 (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
During June 2000, the Company and Schering A.G. entered into an
amendment (the "Amendment") to the Oncolym(R) License Agreement dated March 8,
1999 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. In exchange for this commitment, the Company 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 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 dated March 8, 1999. During August 2000, the Company issued 518,672
shares of its common stock valued at $1,300,000 for the Company's initial
obligation under the Amendment.
During August 2000, the Company entered into a licensing agreement with
Scotia Pharmaceutical Limited to license a segment of its VTA technology,
specifically related to applications of Photodynamic Therapy agents (PDT) 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.
5. SUBSEQUENT EVENTS
On August 31, 2000, the Company paid $1,000,000 in principal on its
note payable to BTD, which is included in note payable to related party and
accrued interest in the accompanying financial statements.
12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Except for historical information contained herein, this Quarterly
Report on Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. In light of the important factors that can materially affect results,
including those set forth elsewhere in this Form 10-Q, 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-Q, 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.
The following discussion is included to describe the Company's
financial position and results of operations for the quarter ended July 31, 2000
compared to the same period in the prior year. The consolidated financial
statements and notes thereto contain detailed information that should be
referred to in conjunction with this discussion. In addition, the consolidated
financial statements included herein should be read in conjunction with the
consolidated financial statements of the Company, included in the Company's
Annual Report on Form 10-K for the year ended April 30, 2000, which was filed
with the Securities and Exchange Commission on July 31, 2000. Results of
operations for the interim periods covered by this Report may not necessarily be
indicative of results of operations for the full fiscal year.
COMPANY OVERVIEW. 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-Hodgkin's 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
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, the University of Miami and Northwestern University. 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.
13
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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). 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-Hodgkin's B-cell Lymphoma.
RESULTS OF OPERATIONS. Before we compare the total operations of the
Company (cash and non-cash income and expenses), we would like to discuss the
Company's operational burn rate (net cash expenses from operations) for the
three months ended July 31, 2000 compared to the same period in the prior year.
As shown in the following schedule, the Company's operational burn rate has
decreased $823,000 (or 32%) from $2,580,000 for the quarter ended July 31, 1999
to $1,757,000 for the current three-month period ended July 31, 2000. As further
shown in that schedule, the average monthly operational burn rate has decreased
approximately $274,000 (or 32%) per month for each month in the three months
ended July 31, 2000 compared to the same average monthly periods in the prior
year. The net decrease in cash expenses primarily relates to a decrease in
manufacturing related expenses as the Company will now contract out such
services, a decrease in radiolabeling scale-up expenses and a decrease in
general and administrative expenses primarily due to fewer employees in
administration. In addition, the net decrease in expenses was supplemented by an
increase in interest and other income as a result of a higher cash balance on
hand during the current quarter. Moving forward, the Company is trying to
sublease its excess space 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.
14
<PAGE>
The operational burn rate analysis for the three months ended July 31,
2000 and 1999 is as follows:
THREE MONTHS ENDED JULY 31,
------------------------------
2000 1999
------------- -------------
Net loss $ (2,057,000) $ (2,989,000)
Less non-cash revenue and expenses:
Deferred license revenue (104,000) -
Depreciation and amortization 77,000 126,000
Stock-based compensation expense
and non-cash severance expenses 327,000 283,000
------------- -------------
Net operational burn rate for the three
months ended July 31, $ (1,757,000) $ (2,580,000)
============= =============
Net average monthly operational burn rate
based on the three months ended July 31, $ (586,000) $ (860,000)
============= =============
The Company's net loss of $2,057,000 for the quarter ended July 31,
2000 represents a decrease in net loss of $932,000 (or 31%) in comparison to the
net loss of $2,989,000 for the prior year quarter ended July 31, 1999. This
decrease in the net loss for the quarter ended July 31, 2000 is due to a
decrease in total costs and expenses of $689,000 combined with an increase in
interest and other income of $243,000.
The Company's total costs and expenses decreased $689,000 during the
three months ended July 31, 2000 compared to the three months ended July 31,
1999 due to a decrease in research and development expenses of $531,000 and a
decrease in general and administrative expenses of $343,000, which were offset
by an increase in stock-based compensation expense of $170,000 and an increase
in interest expense of $15,000.
The decrease in research and development expenses of $531,000 during
the three months ended July 31, 2000 compared to the same period in the prior
year is primarily due to decreased research fees paid to MDS Nordion associated
with the development of a commercial radiolabeling facility combined with a
decrease in manufacturing expenses as the Company is no longer attempting to
become a commercial manufacturer of antibodies, which has led to the reduction
in materials, outside services and salaries to support the manufacturing
operation. The Company will now contract out its commercial manufacturing needs
with companies with excess capacities.
The decrease in general and administrative expenses of $343,000 during
the quarter ended July 31, 2000 compared to the quarter ended July 31, 1999
resulted primarily from a decrease in severance expenses and decreased salaries
due to fewer employees in administration combined with a decrease in legal fees,
consulting fees, investor relation fees and other general expenses.
The increase in stock-based compensation of $170,000 for the three
months ended July 31, 2000 is primarily due to the fair value of options granted
to non-employee consultants of the Company during April 2000 who are assisting
the Company with the development of its platform technologies. The options were
valued using the Black-Scholes valuation model and are being amortized over the
estimated period of service or related vesting period.
The increase in interest expense of $15,000 for the three months ended
July 31, 2000 compared to the same period in the prior year is primarily due to
an increase in the rate of interest from 10% per annum to 12% per annum on a
$3,300,000 note payable to Biotechnology Development Ltd. in accordance with the
Waiver Agreement dated December 29, 1999.
15
<PAGE>
The increase in interest and other income of $243,000 during the three
months ended July 31, 2000 compared to the same period in the prior year is
primarily due to an increase in interest income from the Company's increased
level of cash and cash equivalents on hand during the current quarter combined
with the current quarter recognition of $104,000 in license revenues from the
OXiGENE, Inc. joint venture. The Company does not expect to generate product
sales for at least the next year.
LIQUIDITY AND CAPITAL RESOURCES. As of July 31, 2000, the Company had
$12,708,000 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 the
quarter ended July 31, 2000, the Company received net proceeds of $9,226,000
from the sale of Common Stock and from the exercise of stock options. 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
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 31, 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.
COMMITMENTS. At July 31, 2000, we had no material capital commitments,
although we have significant obligations, most of which are contingent, for
payments to licensors for its technologies and in connection with the
acquisition of the Oncolym(R) rights previously owned by Alpha Therapeutic
Corporation ("Alpha").
16
<PAGE>
RISK FACTORS OF OUR COMPANY
The biotechnology industry includes many risks and challenges. Our
challenges may include, but are not limited to: uncertainties associated with
completing pre-clinical and clinical trials for our technologies; the
significant costs to develop our products as all of our products are currently
in development, pre-clinical studies or clinical trials and no revenue has been
generated from commercial product sales; obtaining additional financing to
support our operations and the development of our products; obtaining regulatory
approval for our technologies; complying with governmental regulations
applicable to our business; obtaining the raw materials necessary in the
development of such compounds; consummating collaborative arrangements with
corporate partners for product development; achieving milestones under
collaborative arrangements with corporate partners; developing the capacity to
manufacture, market and sell our products, either directly or indirectly with
collaborative partners; developing market demand for and acceptance of such
products; competing effectively with other pharmaceutical and biotechnological
products; attracting and retaining key personnel; protecting proprietary rights;
accurately forecasting operating and capital expenditures, other capital
commitments, or clinical trial costs and general economic conditions. A more
detail discussion regarding the Company's industry and business risk factors can
be found in the Company's Annual Report on Form 10-K for the year ended April
30, 2000, as filed with the Securities and Exchange Commission on July 31, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------- ----------------------------------------------------------
Changes in United States interest rates would affect the interest
earned on the Company's cash and cash equivalents. Based on the Company's
overall interest rate exposure at July 31, 2000, a near-term change in interest
rates, based on historical movements, would not materially affect the fair value
of interest rate sensitive instruments. The Company's debt instruments have
fixed interest rates and terms and therefore, a significant change in interest
rates would not have a material adverse effect on the Company's financial
position or results of operations.
PART II OTHER INFORMATION
ITEM 1. 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
------- ------------------------------------------
The following is a summary of transactions by the Company during the
quarterly period of May 1, 2000 through July 31, 2000 involving issuance and
sales of the Company's securities that were not registered under the Securities
Act of 1933, as amended (the "Securities Act").
During May 2000, the Company issued 585,009 shares of common stock to
OXiGENE, Inc. in exchange for $2,000,000 in accordance with the joint venture
agreement.
17
<PAGE>
During June 2000, the Company issued 9,801 shares of Common Stock to
one institutional investor upon the cashless exercise of 42,413 warrants under
the Equity Line.
On various dates during the quarter ended July 31, 2000, the Company
issued an aggregate of 3,464,419 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 $7,800,000, pursuant to an Equity Line draw and also
issued warrants to the two institutional investors and placement agent to
purchase up to 400,356 shares of Common Stock, which warrants are immediately
exercisable on a cashless basis only and expire on December 31, 2004.
The issuances of the securities of the Company in the above
transactions were 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 3. DEFAULTS UPON SENIOR SECURITIES. None.
------- --------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
------- ----------------------------------------------------
ITEM 5. OTHER INFORMATION. None.
------- ------------------
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K.
------- --------------------------------
(a) Exhibits:
Exhibit Number Description
-------------- -----------
10.71 Third Amendment to Regulation D Common Stock Equity Line
Subscription Agreement dated June 2, 2000 by and among
the Registrant, The Tail Wind Fund, Ltd. and Resonance
Limited.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
Current Report on Form 8-K as filed with the Commission on May
17, 2000 reporting the joint venture agreement with OXiGENE,
Inc. for the Company's Vascular Targeting Agent technology.
Current Report on Form 8-K as filed with the Commission on
June 2, 2000 reporting the third amendment to the Regulation D
Common Stock Equity Line Subscription Agreement, whereby the
Company would be able to draw up to $2,800,000 per month.
18
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHNICLONE CORPORATION
By: /s/ John N. Bonfiglio
--------------------------------------
President & Chief Executive Officer
/s/ Paul J. Lytle
--------------------------------------
Vice President of Finance and
Accounting (signed both as an officer
duly authorized to sign on behalf of
the Registrant and principal financial
officer and chief accounting officer)
19
