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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended April 30, 1996
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
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Commission file number 0-17085
TECHNICLONE INTERNATIONAL CORPORATION
(Exact name of Registrant as specified in its charter)
California 95-3698422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14282 Franklin Avenue, Tustin, California 92780-7017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 838-0500
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 $64,449,225 as of July 1, 1996, based upon average
bid and asked prices of such stock.
[Cover page 1 of 2 pages]
Page 1 of 52 Pages
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APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicated by check mark whether the Registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES . NO .
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
20,869,675 shares of Common Stock
as of July 1, 1996
DOCUMENTS INCORPORATED BY REFERENCE.
Part III of the Form 10-K is incorporated by reference from the
Registrant's Definitive Proxy Statement for its 1996 Annual Meeting which will
be filed with The Commission on or before August 15, 1996.
This Annual Report on Form 10-K includes certain forward-looking
statements, the realization of which may be impacted by certain important
factors discussed in "Additional Factors that May Affect Future Results" under
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
[Cover page 2 of 2 pages]
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PART I
ITEM 1. BUSINESS
The following discussion contains forward-looking statements. These
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially. See "Additional Factors That May Affect
Future Results" under Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Techniclone International Corporation ("Techniclone") was incorporated
on June 3, 1981, under the laws of the State of California. Effective as of
December 31, 1981, the Company acquired all of the assets, technology and
proprietary rights of Techniclone International Ltd., a research and development
partnership which commenced business in July 1981. In 1983, the Company
completed an initial public offering of its securities. The "Company" refers to
Techniclone International Corporation, its predecessor partnership and its
former subsidiary, Cancer Biologics Incorporated ("CBI"), which was merged into
the Company on July 26, 1994.
The Company is engaged in research and development of new technologies
utilized in the production of monoclonal antibodies and the production of
specific monoclonal antibodies with prospective research, diagnostic and
therapeutic applications. To date, the Company has been primarily engaged in the
research, development and production of mouse and human hybridoma cell lines and
in the manufacture and initial marketing of monoclonal antibodies derived from
these cell lines for in vitro diagnostic purposes. Products that appear to have
commercial viability include (i) two anti-lymphoma antibodies, LYM-1 and LYM-2;
(ii) a series of monoclonal antibodies for diagnostic applications; and (iii)
three advanced monoclonal antibody technologies, TNT, Vasopermeation
Enhancement, and Modified Antibody Technology.
In 1985, Techniclone entered into a research and development agreement
with Northwestern University and its researchers to develop antibodies known as
LYM-1 and LYM-2 (LYM-1 and LYM-2 are collectively referred to herein as the "LYM
Antibodies"). Techniclone holds an exclusive world-wide license to manufacture
and market products using the LYM Antibodies. In clinical studies conducted at
the University of California at Davis, over fifty patients with B-cell lymphoma
have been treated with LYM-1 linked to Iodine-131. A significant number of these
patients had significant clinical responses including patients showing complete
and durable responses. None of the patients experienced the acute toxicities
that normally accompany treatment with these radioisotopes.
The Company has begun Phase II/III testing in multi-center clinical
trials of the LYM-1 Antibody in late stage non-Hodgkins lymphoma patients. The
clinical trials are being sponsored by Alpha Therapeutic Corporation, a
wholly-owned subsidiary of Green Cross of Japan. The clinical trials are
currently being held at participating medical centers including M.D. Anderson,
The Cleveland Clinic, Cornell University (N.Y.C.), George Washington University
and the University of Cincinnati. After the first twelve patients have been
treated, the trials are expected to be expanded to a total of twenty medical
centers. Following the completion of the clinical trials, the Company expects to
file an application with the FDA to market LYM-1 in the United States.
In connection with the production and sale of the LYM Antibodies, the
Company is obligated to make certain milestone and royalty payments.
The Company entered into an agreement dated as of August 7, 1992 with
David Legere and Legere Enterprises, Ltd., a Florida limited partnership
controlled by the Purchaser ("Legere"), pursuant
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to which Legere purchased an aggregate of 2,000,000 shares of the Common Stock
of the Company for $1.20 per share, at an aggregate purchase price of
$2,400,000. In February 1994, the Company entered into a Subscription Agreement
with Legere pursuant to which Legere purchased an additional 1,000,000 shares of
the Company's common stock for an aggregate purchase price of $1,500,000. As of
July 1, 1996, the Partnership and affiliates of the Partnership beneficially
owned 3,490,916 shares of Common Stock representing approximately 16.72 percent
of the issued and outstanding shares of the Company.
On October 28, 1992, the Company entered into a License Agreement with
Alpha Therapeutic Corporation ("Alpha") pursuant to which the Company granted
Alpha a license for the development and commercialization of the LYM Antibodies
in the United States and certain other countries. Unless the Agreement is
terminated, Alpha is required to make future payments to the Company as follows:
(i) $100,000 upon the first European regulatory submission or six months from
the commencement date of U.S. Phase III clinical trials, whichever comes first,
(ii) $200,000 upon the approval of the first European regulatory submission,
(iii) $500,000 upon the submission of a PLA to FDA, and (iv) after the
completion of the Phase III LYM-1 clinical trial $100,000 per year as a research
and development grant. The agreement also provides that Alpha will conduct all
remaining development work necessary for FDA/PLA submission and pay all costs of
development and patient costs including physician fees, hospital fees, material
costs and follow-up costs. Under the Agreement, the Company is responsible for
manufacturing the LYM-1 Antibody for clinical and commercial use.
During the year ended April 30, 1996, Alpha and the Company have spent
considerable time, effort and money to prepare an application to approve the
Phase III clinical trials for LYM-1. Alpha and the Company completed the
application and submitted it to the FDA in February 1994. The FDA acted upon the
application in October 1994 and approved a Phase II/Phase III trial. With the
Phase II/Phase III trial, the Company agreed to perform additional work on the
first twelve (12) patients to complete some additional Phase II requirements.
The Company has begun Phase II/III testing in multi-center clinical trials of
the LYM-1 antibody in late stage non-Hodgkins lymphoma patients. The clinical
trials are sponsored by Alpha and are being held at participating medical
centers including M.D. Anderson, The Cleveland Clinic, Cornell University
(N.Y.C.), George Washington University and the University of Cincinnati.
On December 27, 1995, the Company issued 7,700 shares of newly created
Class B Convertible Preferred Stock, at a price of $1,000 per share, and on
December 29, 1995 issued an additional 500 shares of Class B Convertible
Preferred Stock, at a price of $1,000 per share, for an aggregate issuance
consideration of $8,200,000 to sixteen (16) offshore investors pursuant to
Regulation S promulgated under the Securities Act of 1933. The Class B
Convertible Preferred Stock is non-voting. The Class B Convertible Preferred
Stock is convertible, commencing immediately after the Closing into Common Stock
of the Company. During the first ninety days after the Closing, each share of
the Class B Convertible Preferred Stock was convertible in multiples of $50,000
into that number of shares of Common Stock calculated by dividing $1,000 by 110%
of the Fixed Conversion Price which is the lower of (i) $3.06875 (fair market
value at the date of issuance) per share of Common Stock or (ii) 85% of the fair
market value of the Common Stock on the date of conversion based on the average
bid price during the five trading days prior to the date of conversion.
Beginning 91 days after the Closing Date the number of shares of Common Stock
issued upon conversion of each share of Class B Convertible Preferred Stock
converted is determined by (i) taking ten percent (10%) of One Thousand Dollars
($1,000) pro-rated on the basis of a 365 day year, by the number of days between
the last Closing Date and the date of conversion plus (ii) One Thousand Dollars
($1,000), (iii) divided by the Conversion Price. As of April 30, 1996, the Fixed
Conversion Price was set at $3.06875, which was the average closing bid price
for the Company's Common Stock for the five (5) trading days ending on December
8, 1995. Additionally, the Class B Convertible Preferred Stock has a liquidation
preference over other classes of
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the Company's stock. This liquidation preference is $1,000 per share of Class B
Convertible Preferred Stock plus 10% per annum pro-rated through any liquidation
date. As of April 30, 1996, 1,400 shares of Class B Convertible Preferred Stock
had been converted at the election of the holder to Common Stock. In connection
with these conversions the Company issued 469,144 shares of Common Stock. As of
April 30, 1996, 6,800 shares of Class B Convertible Preferred Stock remain
outstanding which as of April 30, 1996 are convertible into 2,289,951 shares of
Common Stock at a conversion price of $3.06875 per share, with a liquidation
preference of $7,027,288.
The Company received $7,137,544 in net proceeds from the sale of Class
B Convertible Preferred Stock after payment of offering commissions and expenses
and legal fees. In connection with the placement of the Class B Preferred Stock,
the Company paid Swartz Investments, Inc. commissions of $656,000 and a
non-accountable expense allowance of $246,000. In addition, the Company issued
Swartz Investments, Inc. two five year warrants to purchase an aggregate of
267,210 shares of the Company's Common Stock at an exercise price of $3.06875.
The Common Stock issuable on exercise of the warrant and on conversion of the
Class B Convertible Preferred Stock (if not otherwise freely tradeable) is
subject to registration pursuant to a Registration Rights Agreement.
Additionally, the Company paid other commissions of $75,000 and legal fees of
approximately $85,000 in connection with the preferred stock placement.
The Company intends to use the proceeds from the offering to support
its LYM-1, Oncolym(TM) manufacturing effort for the Phase III LYM-1, Oncolym(TM)
clinical trials, to fund additional development of its patented Tumor Necrosis
Therapy (TNT) and for working capital.
After the Closing of the Class B Convertible Preferred Stock the
Company applied for and was granted relisting of its Common Stock on the NASDAQ
trading system effective on April 1, 1996 with the trading symbol TCLN.
On February 5, 1996,the Company entered into an agreement with
Cambridge Antibody Technology, Ltd. ("CAT") to develop and market a new class of
products for cancer therapy and diagnosis. The Agreement provides that the
Company and CAT will develop a monoclonal antibody based upon CAT's patented
technology for producing fully human monoclonal antibodies and the Company's
Tumor Necrosis Therapy ("TNT"). The Agreement provides that equity in the joint
venture and costs associated with the development of the product would be shared
equally between the Company and CAT. The Company retained exclusive world-wide
manufacturing rights for TNT. It is anticipated that the joint venture will
conduct clinical trials of TNT concurrently in both the United States and
Europe.
On February 29, 1996 the Company entered into a Distribution Agreement
with Biotechnology Development, Ltd. ("BTD"), a limited partnership controlled
by Edward Legere, a member of the Board of Directors of the Company and a major
shareholder of the Company, which provides for BTD to acquire LYM-1 antibody
technology marketing rights for certain European countries and other geographic
areas not covered by its existing license agreement with Alpha Therapeutic
Corporation in exchange for the payment of $3,000,000 by BTD to the Company.
Under the terms of the Distribution Agreement, the Company retains all
manufacturing rights to LYM-1 and will supply LYM-1 to BTD at preset prices.
Additionally, the Company has the option under an Option Agreement to repurchase
the marketing rights to LYM-1 for a thirty month period. The repurchase price,
if repurchase is elected by the Company at its sole discretion, includes a
combination of cash, stock options and royalty payments to be made to BTD, the
amount of which depends on when the repurchase option is elected by the Company.
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Techniclone organized CBI in 1983 to engage in the research and
development of monoclonal antibodies that recognize antigens associated with
specific forms of human cancer. CBI applied for, and was granted, some patents
on TNT. Laboratory testing on animals indicates that TNT may have potential
application for in vivo diagnosis and therapeutic treatment of a wider spectrum
of cancers than other currently reported antibodies.
On January 18, 1994 the Company and CBI entered into an Agreement and
Plan of Merger (the "Agreement and Plan of Merger") which contemplated the
merger of CBI with and into the Company (the "Merger"). On June 10, 1994, a
meeting of the shareholders of the Company was held. At this meeting the
shareholders adopted the proposal to approve the Merger pursuant to the
Agreement and Plan of Merger. The Merger between CBI and the Company was
completed on July 26, 1994. The assets of CBI acquired by the Company consisted
primarily of research and development of the TNT antibody technology, which has
not been approved by the FDA. As a result of the Merger, the Company incurred an
immediate charge to earnings of $4,849,591 which represented the excess of the
fair market value of the Company stock issued over the net assets acquired of
CBI, plus an additional non-recurring charge relating to CBI stock options
assumed by the Company.
The Company's offices and laboratories are located at 14282 Franklin
Avenue, Tustin, California 92780-7017, and its telephone number is (714)
838-0500.
MONOCLONAL ANTIBODY TECHNOLOGY
ANTIBODIES. Antibodies are protein molecules produced by certain white
blood cells, known as lymphocytes, in the blood, spleen and lymph nodes, which
are part of the immune system in humans and certain animals, in response to the
presence of foreign substances (antigens) in the body. Each antibody recognizes
and binds to one or a very few specific sites on a specific antigen. This
quality, known as specificity, is the basis for using antibodies to diagnose
diseases or deliver drugs to disease sites, and to detect subtle differences
between malignant and normal cells. Once a lymphocyte comes in contact with an
invading antigen, it begins to generate identical offspring cells (clones)
producing identical antibodies that bind to the antigen. Each of these
antibodies recognizes and binds in exactly the same way to the antigen. This
binding process sets in motion a complex series of events which normally permits
the body to eliminate the antigen.
In a healthy person or animal, hundreds of millions of antibodies are
produced as a defense mechanism when the body is invaded by antigens. Different
lymphocytes will, however, recognize an invading antigen in slightly different
ways. As a result, the clones produced by each lymphocyte will produce
antibodies which bind to different sites on the antigen. Each antibody carries a
genetically determined sequence of seven to eleven amino acids; this chemical
sequence creates a unique site for recognizing and attaching to a corresponding
antigen. Changing any amino acid in the chemical sequence could produce a
different antibody which would recognize and bond with different antigens.
THERAPEUTIC APPLICATIONS. Cancer therapy utilizing monoclonal
antibodies, whether used alone or conjugated with other substances that attack
cancerous cells, directly attack the cancerous cells, leaving healthy cells
unharmed. Consequently, cancer therapies based upon monoclonal antibodies have
the potential for more effective treatments without the harmful side effects
associated with most cancer therapies. Research in this area has indicated that
certain monoclonal antibodies are effective in the treatment of certain types of
cancers, including lymphoma. The Company's LYM Antibodies, may be an effective
treatment for lymphoma, a form of cancer of the lymph nodes and blood
lymphocytes.
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Research has also indicated that many monoclonal antibodies have
greater potential for fighting cancers and other diseases in the body when
conjugated with drugs, biologics, toxins or isotopes. Because of the great
specificity of monoclonal antibodies, they can deliver the conjugated drug,
biological, toxin or isotope directly to the selected target cells without
clinically significant toxicity to other cells in the body. The conjugated
monoclonal antibody binds to its target cell, which internalized the conjugated
drug, biological, toxin or isotope, causing cell death.
TECHNICLONE'S MONOCLONAL ANTIBODY PRODUCTION. Monoclonal antibodies are
produced by the Company using a technology first developed in England in 1975,
by isolating an antibody-producing hybridoma in a tissue culture medium where it
will produce identical hybridoma cells, called clones. Each hybridoma grown in
this manner will secrete the same type of antibody, which can then be harvested.
Because the antibodies grown in this manner are all derived from the same parent
lymphocyte, they are called monoclonal antibodies. The Company's business
strategy has been directed toward development of monoclonal antibodies from
mouse and human hybridomas, which offer the opportunity for producing large
quantities of an antibody that recognizes and bonds to a specific antigen.
Hybridomas are created through the fusion of an antibody-secreting lymphocyte
cell with a cancerous (myeloma) cell. These hybrid cells exhibit the vigorous
growth and multiplication characteristics of the myeloma cell and the
antibody-secreting characteristic of the lymphocyte cell and are easily grown in
culture media. (See also Manufacturing.)
CHIMERIC ANTIBODIES. Chimeric antibodies are produced by genetic
engineering. A chimeric antibody consists mostly of human protein, with a small
amount of murine protein carrying the specificity site. Like fully human
antibodies, chimerics are regarded as less foreign than whole murine antibodies
and are suited to multiple treatments in-vivo. Techniclone has prepared
chimerics of LYM-1, LYM-2 and TNT at its research laboratories. Preliminary
clinical studies are encouraging and formal trials of chimeric LYM-2 and TNT are
planned to begin in November 1996. The chimeric TNT study will be carried out
jointly by Cambridge Antibody Technology, Ltd. in England and by Techniclone in
the United States.
LYM-1, ONCOLYM(TM).
Techniclone's first proprietary monoclonal antibody cancer therapy
product LYM-1, Oncolym(TM) is now in a Phase III multi-center clinical trial
being conducted by development partner Alpha Therapeutic Corporation, a U.S.
subsidiary of Green Cross Corporation of Osaka, Japan. LYM-1, Oncolym(TM) is
designed as a therapy against non-Hodgkins lymphoma cancers. Techniclone's
LYM-1, Oncolym(TM) antibody is linked to a radioactive isotope, and the combined
molecule is injected into the blood stream of the cancer patient. The LYM-1,
Oncolym(TM) antibody then recognizes and bonds to the tumor to deliver the
isotope to the tumor site, with minimal adverse effect on surrounding healthy
tissue.
In Phase II trails of non-Hodgkin's lymphoma patients treated with
LYM-1, Oncolym(TM) at varying dose levels, fifty-six percent (56%) of the trial
participants had complete or partial (greater than 50% tumor shrinkage)
remissions of their tumors. It should be noted that these Phase II clinical
trial results were achieved with terminal patients whose disease was progressing
despite conventional chemotherapy and who were diagnosed as having two to six
months life expectancy.
The Phase III clinical trial of the LYM-1, Oncolym(TM) antibody is
being conducted using patients with characteristics similar to those in the
Phase II trials. The Phase III clinical trial is being conducted at several
clinical sites with the expectation that the study will ultimately be expanded
to include a total of twenty sites with an enrollment of up to 130 patients. The
initial clinical sites include New York HospitalCornell University Medical
Center, MD Anderson Cancer Center, University of Cincinnati Medical Center,
Cleveland Clinical Foundation, and The George Washington University Medical
Center.
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The foregoing contains forward-looking statements that involve risks
and uncertainties that could cause actual results to differ materially. See
"Additional Factors That May Affect Future Results" under Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ADVANCED MONOCLONAL ANTIBODY.
In addition to the LYM-1, Oncolym(TM) product, Techniclone has
developed three advanced monoclonal antibody technologies for cancer therapy and
diagnosis. Working in combination, these technologies are designed to increase
the uptake or dosing of a drug at the tumor site. These three technologies are
known as Tumor Necrosis Therapy ("TNT"), Vasopermeation Enhancement ("VE") and
Modified Antibody Technology ("MAT").
TUMOR NECROSIS THERAPY. TNT is an antibody which attaches to dead cells
found in tumors. The TNT antibody targets necrotic tissue at the interior of
solid tumors, thereby permitting tumors to be destroyed from the inside out. The
TNT delivery system could be the basis for a class of new products effective
across the entire spectrum of solid tumor types, including lung, colon, breast,
prostate and pancreatic cancers. TNT appears to be a monoclonal antibody
delivery system that is universally effective against the entire spectrum of
solid tumor types.
TNT is different from the Company's other monoclonal antibody based
technologies in its ability to penetrate to the core of solid tumors and
overcome the obstacles of conventional monoclonal antibody therapy. TNT has been
shown in initial tests to deliver therapeutic agents, like chemical drugs or
radioactive isotopes, to the interior of a solid tumor, thereby permitting the
tumor to be destroyed from the inside-out.
The foregoing contains forward-looking statements that involve risks
and uncertainties that could cause actual results to differ materially. See
"Additional Factors That May Affect Future Results" under Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
VASOPERMEATION ENHANCEMENT. Vasopermeation Enhancement is a technology
which uses vasoactive agents linked to monoclonal antibodies, which when bound
to tumors, increase the vasoactive permeability of the tumor site.
Vasopermeation Enhancement is based on the concept that when tumor tissues are
uniquely targeted by monoclonal antibodies linked with vasoactive agents
(molecules that cause tissues to dilate), these tissues will become a "sink" for
other compounds that are given intravenously. In pre-clinical studies,
Techniclone's scientists were able to increase the uptake of drugs or isotopes
within a tumor by 200% to 400% if a vasoactive agent was given several hours
prior to the therapeutic treatment. This enhancement of toxic drug dosing is
achieved by altering the physiology and, in particular, the permeability of the
blood vessels and capillaries that serve the tumor. As the tumor vessels become
more permeable, the amount of therapeutic treatment reaching the tumor cells
increases.
More specifically, the mechanism by which Vasopermeation Enhancement
technology works in a cancer patient is through pretreatment of the patient with
a vasoconjugate, such as Interleukin-2 (IL-2) linked to a monoclonal antibody, a
few hours prior to delivery of a therapeutic drug. The antibody side of this
vasoconjugate may be targeted either against antigens which are unique to the
tumor vessel walls or antigens inside the tumor itself. The vasoconjugate
affects the walls of the tumor vessel and causes an immediate increase in vessel
permeability. This increased state of permeability creates a window of
opportunity for several hours, allowing any therapeutic drug injected into the
patient during that time to enter the tumor in greatly enhanced concentrations.
The therapeutic drug can be a chemotherapy drug, radiolabeled antibody or other
cancer fighting agent.
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The foregoing contains forward-looking statements that involve risks
and uncertainties that could cause actual results to differ materially. See
"Additional Factors That May Affect Future Results" under Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
MODIFIED ANTIBODY TECHNOLOGY. Modified Antibody Technology is a
technology where a small organic molecule, such as the vitamin biotin, is
attached to an antibody and this combined molecule causes a major change to
occur in the physicochemical properties of the antibody itself. This chemical
modification decreases the electric charge of the antibody and thereby
influences the way the antibody travels through the circulatory system, and
decreases the time it takes for the antibody to completely clear the patient's
body (the "clearance time"). Decreasing the clearance time of an antibody is an
important factor in reducing its overall toxicity.
In pre-clinical studies, Techniclone's Modified Antibodies have shown
improved uptake in solid tumors and improved clearance time. Modified Antibodies
have clearance profiles similar to that of smaller antibody fragments and thus
produce markedly less toxicity.
The foregoing contains forward-looking statements that involve risks
and uncertainties that could cause actual results to differ materially. See
"Additional Factors That May Affect Future Results" under Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PRODUCTS
The Company's plans for future growth have focused on the development
of two product groups: therapeutic products and advanced monoclonal antibody
technologies. Therapeutic products are products intended for hospital pharmacies
and radiologists. The Company is currently developing LYM-1, LYM-2 and TNT
Antibodies for this market. The advanced monoclonal antibody technologies which
the Company is developing are the Vasopermeation Enhancement and the Modified
Antibody Technology.
LICENSE AGREEMENTS. On October 28, 1992, the Company entered into a
License Agreement with Alpha Therapeutic Corporation ("Alpha") pursuant to which
the Company granted Alpha a license for the development and commercialization of
the LYM Antibodies in the United States and certain other countries. Under the
License Agreement, Alpha paid the Company $100,000 and, unless the Agreement is
terminated, Alpha is required to make fixed payments to the Company as follows:
(i) $50,000 within 30 days following their meeting with the FDA to discuss the
LYM-1 development program (which amount was paid on July 23, 1993); (ii)
$100,000 upon the first European regulatory submission or six (6) months from
the commencement date of U.S. Phase III clinical trials, whichever comes first,
(iii) $200,000 upon the approval of the first European regulatory submission,
(iv) $500,000 upon the submission of a PLA to the FDA, and (v) after the
completion of the Phase III LYM-1 clinical trial $100,000 per year as a research
and development grant. The agreement also provides that Alpha conduct all
remaining development work necessary for FDA/PLA submission and pay all costs of
development and patient costs including physician fees, hospital fees, material
costs and follow-up costs. Under the Agreement the Company is responsible for
manufacturing the LYM Antibodies for clinical and commercial use.
On February 5, 1996,the Company entered into an agreement with
Cambridge Antibody Technology, Ltd. ("CAT") to develop and market a new class of
products for cancer therapy and diagnosis. The Agreement provides that the
Company and CAT will develop a monoclonal antibody based upon CAT's patented
technology for producing fully human monoclonal antibodies and the Company's
Tumor Necrosis Therapy ("TNT"). The Agreement provides that equity in the joint
venture and costs associated with the development of the product would be shared
equally between the Company
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and CAT. The Company would retain exclusive world-wide manufacturing rights. It
is anticipated that the joint venture will conduct clinical trials of TNT
concurrently in both the United States and Europe.
COMPETITION
The Company's competitive position is based on its proprietary
technology and know-how, U.S. patents covering the LYM Antibodies and its
technology for monitoring chemotherapy and diagnosis and therapy of human
cancers. The Company has a number of worldwide patents pending. The Company
plans to compete on the basis of the advantages of its technologies, the quality
of its products, and its commitment to research into innovative technologies.
For some of its products a lower marketing price will also be a significant
advantage.
Various other companies, many of which have larger financial resources
than the Company, are currently engaged in research and development of
monoclonal antibodies and in cancer prevention and treatment. However, none of
these companies has achieved market dominance. Nevertheless, 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, the Company's 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 the Company to develop monoclonal
antibody technology or other products to prevent or treat cancer and to market
their products. Accordingly, the Company plans, whenever feasible, to enter into
joint venture relationships with these larger firms for the development and
marketing of specific products and technologies so that the Company's
competitive position might be enhanced.
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and other
countries is a significant factor in the Company's ongoing research and
development activities and in the production and marketing of its products. 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 the LYM Antibodies and
TNT, 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. The
Company has filed a Notice of Claimed Investigational Exemption for Use of a New
Drug with the FDA for the production of LYM-1 as a material intended for human
use, but has not filed such a Notice with respect to any other in vivo products.
The regulatory approval process is administered by the FDA's Office of 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 consists of additional testing for efficacy and
safety with an expanded patient group. After completion of clinical studies, a
Product License Application 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
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testing prior to approval. The Company has not, to date, filed a Product License
Application for any therapeutic products.
If approval is obtained for the sale of such new drug, FDA regulations
will also apply to the manufacturing process and market 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 the
Company's products. Other federal agencies and congressional committees have
indicated an interest in implementing further regulation of biotechnology
applications. The extent of future regulation cannot be predicted, but could
affect the manufacture and sale of the Company's products.
In addition, the Company is subject to regulation under state and
federal laws and regulations regarding occupational safety, laboratory
practices, the use and handling of radioisotopes, environmental protection and
hazardous substance control, and other regulations. The Company's products may
also be subject to import laws in other countries and food and drug laws in
various states in which the products are or may be sold.
The Company believes that it is in compliance with all applicable laws
and regulations including those relating to the handling and disposal of
hazardous and toxic wastes.
PATENTS AND TRADE SECRETS
The Company has relied on the internal achievements of the Company, as
well as the direct sponsorship of university researchers, for its basic
technologies. The Company believes it will continue to learn, on a timely basis,
of advances in the biological sciences which might complement or enhance its
existing expertise. It intends to pursue opportunities to license such advances
as well as pursue similar developments internally.
The Company has applied for several patents either directly or as a
cosponsor/licensee. The Company treats particular variations in the production
of monoclonal antibodies and related technologies as trade secrets. Patent
protection may, however, be significant in the case of newly-developed human
hybridoma technologies. The Company intends to pursue patent protection for
inventions related to human hybridoma procedures and other unique antibodies
that it cannot protect as trade secrets. Techniclone, as licensee, cosponsored
the patent applications for the LYM Antibodies through its licensing agreements
with Northwestern University. United States Letters patents for LYM-1 and LYM-2
were issued in February 1988.
The Company's TNT technologies are covered by a United States patent
issued in August 1989 for diagnostic and therapeutic monitoring, and by a United
States patent issued in May 1991 for all therapeutic applications. The foreign
counterparts of these patents have been issued by the European Patent Office and
are still pending in several Asian countries. A third patent application for TNT
imaging and therapeutic applications is pending in the United States.
For its Vasopermeation Enhancement technology, Techniclone holds an
exclusive world-wide license from the University of Southern California (USC)
that covers all uses of the Vasopermeation Enhancement technology and all
related patents that may issue. USC has filed patent applications
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covering the Vasopermeation Enhancement technology in the United States, Europe,
Japan, Canada and Australia. The United States patent application was filed in
October 1988 and is currently pending. This patent covers all aspects of
attaching vasoactive compounds to immunoreactive fragments for the purpose of
enhancing the uptake of therapeutic drugs or diagnostic agents. The European
patent application for Vasopermeation Enhancement was allowed in June 1995.
Techniclone's Modified Antibody Technology is covered by a U.S. patent
issued in March 1993. The European patent application for Modified Antibody
Technology was allowed in June 1996. Asian patent applications for Modified
Antibody Technology are pending as is a second United States patent application
covering further uses of the technology.
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, if
issued, 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.
The Company knows of no third party patents which are infringed by its
present activities or which would, without infringement or license, prevent the
pursuit of its business objectives. However, there can be no assurances that
such patents have not been or will not be issued and, if so, whether the Company
will be able to obtain licensing arrangements on reasonable terms.
The Company also intends to continue to rely upon trade secrets and
improvements, unpatented proprietary know-how, and continuing technological
innovation to develop and maintain its competitive position in research and
diagnostic products. To this end, the Company places restrictions in its
agreements with third parties which restrict their right to use and disclose any
of the Company's proprietary technology which they are licensed to use. In
addition, the Company has internal non-disclosure safeguards, including
confidentiality agreements with all of its employees. There can be no assurance
that others may not independently develop similar technology or that the
Company's secrecy will not be breached.
MANUFACTURING
RAW MATERIALS. The Company uses various common raw materials in the
manufacture of its products and in the development of its technologies. These
raw materials are generally available from several alternate distributors of
laboratory chemicals and supplies. The Company has not experienced any
difficulty in obtaining these raw materials and does not consider raw material
availability to be a significant factor in its business. The Company uses highly
purified materials with strict requirements for sterility and pyrogenicity.
PRODUCTION.
The Company's LYM-1 (Oncolym(TM)) antibody is produced for use in the
Phase III clinical trials at Techniclone's GMP pilot facility in Tustin,
California. The Company has commenced design efforts to expand this facility to
handle commercial production requirements. The Company will install additional
bioreactors adequate to meet commercial demand. Centralized product testing and
process controls in this facility permit the Company to maintain a high degree
of uniformity and quality control of its antibodies while utilizing economies of
scale in its manufacturing processes.
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Once the LYM-1 antibody has passed stringent quality control and
outside testing, it is shipped to Oklahoma City, Oklahoma for radiolabeling,
(the process of attaching the radioactive agent, Iodine- 131, to the antibody).
From the Oklahoma facility, the labelled LYM-1 is shipped overnight to medical
centers for use in treating patients the next day.
The Company has also constructed a pilot production laboratory for the
manufacturing of TNT antibody at its Tustin, California, facility. This
laboratory is currently being validated for FDA licensing and will be able to
produce sufficient quantities of the TNT antibody to supply to the European and
United States clinical trial sites in connection with the proposed Phase I
clinical trials expected to commence in late 1996 or early 1997.
The foregoing contains forward looking statements that involve risks
and uncertainties that could cause actual results to differ materially. See
"Additional Factors That May Affect Future Results" under Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
MARKETING
On October 28, 1992, the Company entered into a License Agreement with
Alpha Therapeutic Corporation ("Alpha") pursuant to which the Company granted
Alpha a license for the development and commercialization of the LYM Antibodies
in the United States and certain other countries. Under the License Agreement
Alpha paid the Company $100,000 and unless the Agreement is terminated Alpha is
required to make fixed payments to the Company as follows: (i) $50,000 within 30
days following their meeting with the FDA to discuss the LYM-1 development
program (which amount was paid on July 23, 1993); (ii) $100,000 upon the first
European regulatory submission or six months from the commencement date of U.S.
Phase III clinical trials, whichever comes first, (iii) $200,000 upon the
approval of the first European regulatory submission, (iv) $500,000 upon the
submission of a PLA to FDA, and (v) after the completion of the Phase III LYM-1
clinical trial $100,000 per year as a research and development grant. The
agreement also provides that Alpha conduct all remaining development work
necessary for FDA/PLA submission and pay all costs of development and patient
costs including physician fees, hospital fees, material costs and follow-up
costs. Under the Agreement the Company is responsible for manufacturing the
LYM-1 antibody for clinical and commercial use.
The Company has begun Phase II/III testing in multi-center clinical
trials of the LYM-1 antibody in late stage non-Hodgkins lymphoma patients. The
clinical trials are being sponsored by Alpha Therapeutic Corporation, a
wholly-owned subsidiary of Green Cross of Japan. The clinical trials are
currently being held at participating medical centers including M.D. Anderson,
The Cleveland Clinic, Cornell University (N.Y.C.), George Washington University
and the University of Cincinnati. After the first twelve patients have been
treated, the trials are expected to be expanded to a total of twenty medical
centers. Following the completion of the clinical trials the Company expects to
file an application with the FDA to market LYM-1 in the United States.
EMPLOYEES
As of July 1, 1996, Techniclone employed 22 full-time employees, which
included 3 Ph.D. level persons, 16 technical and support employees, and 3
administrative employees.
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ITEM 2. PROPERTIES
The Company's research and manufacturing operations are located in
office and laboratory space at 14282 Franklin Avenue, Tustin, California
92780-7017. On March 25, 1996, the Company entered into a Purchase Agreement for
Real Property and Escrow Instructions by and between the Company and TR Koll
Tustin Tech Corp., an Illinois corporation ("Koll"), pursuant to which the
Company agreed to purchase from Koll its facility for the purchase price of
$1,555,620. The Company obtained financing and escrow closed on the transaction
on April 30, 1996. The terms of the financing provide that the Company financed
$1,020,000 of the purchase price and makes monthly payments of $10,737. In
addition, the Company pays common area maintenance of $2,154 per month.
Techniclone manufactures its LYM and TNT Antibodies at this facility.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings in which the Company is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to April 1, 1996, Techniclone's Common Stock was traded
intermittently in the over-the-counter market. Since April 1, 1996,
Techniclone's Common Stock has been traded on the NASDAQ Exchange. The following
table shows the high and low bid and asked prices for Techniclone's Common Stock
for each quarter in the last two fiscal years. Prices shown represent quotations
by dealers, without retail markup, markdown or commissions and may not reflect
actual transactions.
Bid Asked
Quarter ended: High Low High Low
- -------------- -----------------------------------------
April 30, 1994 3.875 1.50 5.00 2.125
July 31, 1994 3.00 2.00 4.375 2.50
October 31, 1994 3.125 1.50 4.00 2.125
January 31, 1995 2.50 0.03 4.00 1.375
April 30, 1995 2.00 0.50 4.00 1.25
July 31, 1995 1.25 .688 1.375 .813
October 31, 1995 3.063 .688 3.125 .875
January 31, 1996 5.375 2.625 5.50 2.813
April 30, 1996 7.813 5.125 7.938 5.313
As of July 1, 1996, the number of holders of record of the Company's
Common Stock was 5,986.
The Company has a limited operating history and only nominal revenues
to date. No dividends 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.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been extracted from the
financial statements of the Company for each of the five years in the period
ended April 30, 1996. The financial statements for each of the five years in the
period ended April 30, 1996 have been audited by the Company's independent
public accountants. These financial summaries should be read in conjunction with
the information contained for each of the three years in the period ended April
30, 1996, included in the financial statements and notes thereto, Management's
Discussion and Analysis of Results of Operations and Financial Condition, and
other information provided elsewhere herein.
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SELECTED FINANCIAL DATA
STATEMENTS OF OPERATIONS
YEAR ENDED APRIL 30,
---------------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------- -------------- ------------ ------------ -------------
REVENUES
Net Product Sales....... $ 78,734 $ 34,990 $ 4,400 $ -- $ 2,580
Licensing Agreements.... 203,000 120,000 56,375 7,265 3,002,244
Interest income......... 2,506 13,773 8,591 126 138,499
Other................... 64,708 -- -- -- --
------------- -------------- ------------ ------------ -------------
Total Revenues.......... 348,948 168,763 69,366 7,391 3,143,323
------------- -------------- ------------ ------------ -------------
COSTS AND EXPENSES:
Cost of sales........... 44,947 9,670 1,680 -- 2,580
Research and
Development............. 230,333 579,447 1,315,898 1,225,072 1,679,558
General and
administrative:........
Unrelated entities.. 320,171 453,200 914,142 547,133 947,816
Affiliates.......... 92,671 136,641 212,594 137,326 170,659
Interest (primarily to
related parties).... 32,145 31,724 30,467 27,833 17,412
Charges related to
merger of subsidiary. -- -- -- 4,849,591 --
Contract losses......... -- -- -- 132,071 --
Other................... (156,140) -- -- -- --
------------- -------------- ------------ ------------ -------------
Total costs
and expenses........... 564,127 1,210,682 2,474,781 6,919,026 2,818,025
------------- -------------- ------------ ------------ -------------
NET INCOME
(LOSS).................. $ (215,179) $ (1,041,919) $ (2,405,415) $ (6,911,635) $ 325,298
============== ============== ============ ============ =============
NET INCOME (LOSS)
PER SHARE............... $ (.02) $ (.09) $ (.18) $ (.44) $ .02
============= ============== ============ ============ =============
Weighted average
number of
common shares
and common
equivalent shares
outstanding......... 11,548,484 12,211,176 13,653,829 15,794,811 21,382,524
============= ============= ============= ============= =============
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BALANCE SHEET DATA
APRIL 30,
----------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ -------------
Working Capital (deficit) $ 334,142 $ (156,289) $ (499,059) $ (934,121) $ 7,460,514
Total Assets............ 807,137 951,660 848,036 856,657 10,775,757
Long-term Debt.......... 310,100 302,131 258,500 258,500 987,032
Accumulated deficit..... (7,727,009) (8,768,928) (11,174,343) (18,085,978) (17,760,680)
Stockholders' equity
(deficit)............. 246,181 314,381 (60,905) (600,441) 8,964,677
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
YEAR ENDED APRIL 30, 1996 COMPARED TO YEAR ENDED APRIL 30, 1995
The Company's net income of approximately $325,000 for the year ended
April 30, 1996 represents an increase of approximately $7,237,000 compared to
the net loss of approximately $6,912,000 for the prior year ended April 30,
1995. This increase in the net income in the 1996 year is primarily attributable
to a $4,101,000 decrease in total costs and expenses and an increase of
$3,136,000 in total revenues. The decrease in total costs and expenses is
primarily attributable to a decease in an aggregate charge to earnings of
$4,849,591 which occurred during the year ended April 30, 1995 (which
represented the excess of the fair market value of the Company stock issued over
the net assets acquired of CBI, plus an additional non-recurring charge relating
to CBI stock options assumed by the Company) in connection with the merger of
Cancer Biologics Incorporated ("CBI") with and into the Company effective July
26, 1994, and which did not recur during the year ended April 30, 1996.
Total revenues for the year ended April 30, 1996 increased
approximately $3,136,000 compared to the total revenues of $7,000 for prior year
ended April 30, 1995. This increase resulted from increases in sales of
antibodies and other products of approximately $3,000, licensing revenue of
$2,995,000 and interest income of approximately $138,000, in comparison to the
prior year ended April 30, 1995. Licensing fee revenues increased during the
year ended April 30, 1996 primarily from the result of an increase in licensing
fees from Biotechnology Development Ltd. relating to the Company's LYM-1
antibody. On February 29, 1996 the Company entered into a Distribution Agreement
with Biotechnology Development, Ltd. ("BTD"), a limited partnership controlled
by a member of the Board of Directors of the Company and a major shareholder of
the Company, which provides for BTD to acquire LYM-1 antibody technology
marketing rights for certain European countries and other geographic areas not
covered by its existing license agreement with Alpha Therapeutic Corporation in
exchange for the payment of $3,000,000 by BTD to the Company. Under the terms of
the Distribution Agreement, the Company retains all manufacturing rights to
LYM-1 and will supply LYM-1 to BTD at preset prices. Additionally, the Company
has the option under an Option Agreement to repurchase the marketing rights to
LYM-1 for a thirty month period. The repurchase price, if repurchase is elected
by the Company at its sole discretion, includes a combination of cash, stock
options and royalty payments to be made to BTD, the amount of which depends on
when the repurchase option is elected by the Company.
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On December 27, 1995, the Company issued 7,700 shares of newly created
Class B Convertible Preferred Stock, at a price of $1,000 per share, and on
December 29, 1995 issued an additional 500 shares of Class B Convertible
Preferred Stock, at a price of $1,000 per share, for an aggregate issuance
consideration of $8,200,000 to sixteen (16) offshore investors pursuant to
Regulation S promulgated under the Securities Act of 1933. The Class B
Convertible Preferred Stock is non-voting. The Class B Convertible Preferred
Stock is convertible, commencing immediately after the Closing into Common Stock
of the Company. During the first ninety days after the Closing, each share of
the Class B Convertible Preferred Stock was convertible in multiples of $50,000
into that number of shares of Common Stock calculated by dividing $1,000 by 110%
of the Fixed Conversion Price which is the lower of (i) $3.06875 (fair market
value at the date of issuance) per share of Common Stock or (ii) 85% of the fair
market value of the Common Stock on the date of conversion based on the average
bid price during the five trading days prior to the date of conversion.
Beginning 91 days after the Closing Date the number of shares of Common Stock
issued upon conversion of each share of Class B Convertible Preferred Stock
converted is determined by (i) taking ten percent (10%) of One Thousand Dollars
($1,000) pro-rated on the basis of a 365 day year, by the number of days between
the last Closing Date and the date of conversion plus (ii) One Thousand Dollars
($1,000), (iii) divided by the Conversion Price. As of April 30, 1996, the Fixed
Conversion Price was set at $3.06875, which was the average closing bid price
for the Company's Common Stock for the five (5) trading days ending on December
8, 1995. Additionally, the Class B Convertible Preferred Stock has a liquidation
preference over other classes of the Company's stock. This liquidation
preference is $1,000 per share of Class B Convertible Preferred Stock plus 10%
per annum pro-rated through any liquidation date. As of April 30, 1996 1,400
shares of Class B Convertible Preferred Stock had been converted at the election
of the holder to Common Stock. In connection with these conversions the Company
issued 469,144 shares of Common Stock. As of April 30, 1996, 6,800 shares of
Class B Convertible Preferred Stock remain outstanding which as of April 30,
1996 were convertible into 2,289,951 shares of Common Stock at a conversion
price of $3.06875 per share, with a liquidation preference of $7,027,288.
The Company received $7,137,544 in net proceeds from the sale of the
Class B Convertible Preferred Stock after payment of offering commissions and
expenses and legal fees. In connection with the placement of the Class B
Preferred Stock, the Company paid to Swartz Investments, Inc. commissions of
$656,000 and a non-accountable expense allowance of $246,000. In addition, the
Company issued to Swartz Investments, Inc. two five year warrants to purchase an
aggregate of 267,210 shares of the Company's Common Stock at an exercise price
of $3.06875. The Common Stock issuable on exercise of the warrant and on
conversion of the Class B Convertible Preferred Stock (if not otherwise freely
tradeable) is subject to registration pursuant to a Registration Rights
Agreement. Additionally, the Company paid other commissions of $75,000 and legal
fees of approximately $85,000 in connection with the preferred stock placement.
The Company intends to use the proceeds from the offering to support
its LYM-1, Oncolym(TM) manufacturing effort for the Phase III LYM-1, Oncolym(TM)
clinical trials, to fund additional development of its patented Tumor Necrosis
Therapy (TNT) and for working capital. Interest income increased during the year
ended April 30, 1996 as the level of cash funds available for investment has
increased in comparison to the prior year ended April 30, 1995.
The Company has had no significant research and development contract
revenue during the year ended April 30, 1996 however the Company expects
research and development revenues to increase due to the clinical trials of the
LYM-1 antibody.
The Company's total costs and expenses decreased approximately
$4,101,000 (or 59%) for the year ended April 30, 1996 in comparison to the year
ended April 30, 1995. Cost of sales increased
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approximately $3,000 in comparison to the prior year and sales of antibodies and
other products increased approximately $3,000. Research and development expenses
increased approximately $454,000 (or 37%) for the year ended April 30, 1996 in
comparison to the year ended April 30, 1995. This increase in research and
development expenses during the year ended April 30, 1996 resulted from the
Company's activities during the year ended April 30, 1996 in preparing for the
Phase III clinical trials of the LYM-1 antibody. During the year ended April 30,
1996, the Company increased its TNT development costs by approximately $63,000,
in comparison to the prior year ended April 30, 1995. Also, during the year
ended April 30, 1996, research and development costs relating to the LYM-1
antibody increased by approximately $391,000 due to an approximate $286,000
increase in salaries and related costs for clinical trial preparation and an
approximate $105,000 increase in expenses incurred in supporting the efforts of
Mills Biopharmaceuticals, Inc. ("MBI") to complete and obtain Nuclear Regulatory
Commission licensing for its Oklahoma LYM-1 antibody labelling facility.
Management anticipates the Company will have additional capital requirements and
expenses related to development and clinical trials of its antibodies.
General and administrative expenses incurred by the Company increased
approximately $434,000 (or 63%) during the year ended April 30, 1996 in
comparison to the prior year ended April 30, 1995. The increase in general and
administrative expenses during the year ended April 30, 1996 resulted primarily
from increased administrative, payroll and consultant costs associated with
clinical trial preparation and expanded public relations activities. Interest
expense decreased approximately $10,000 during the year ended April 30, 1996 in
comparison to the year ended April 30, 1995 due to lower levels of interest
bearing debt outstanding during the year. Management believes that general and
administrative costs will increase during the year ending April 30, 1997 as
Phase III clinical trials of the LYM-1 antibody are expanded and due to
increased investor relations activities.
YEAR ENDED APRIL 30, 1995 COMPARED TO YEAR ENDED APRIL 30, 1994
The Company's net loss of approximately $6,912,000 for the year ended
April 30, 1995 represented an increase of approximately $4,507,000 (or 187%)
compared to the net loss of approximately $2,405,000 for the prior year ended
April 30, 1994. This increase in the net loss in the 1995 year was primarily
attributable to a $4,444,000 increase in total costs and expenses and a $62,000
decrease in total revenues.
Total revenues for the year ended April 30, 1995 decreased
approximately $62,000 compared to the prior year ended April 30, 1994. This
decrease resulted from decreases in sales of antibodies and other products of
approximately $4,000, licensing revenue of $50,000 and interest income of
approximately $8,000, in comparison to the prior year ended April 30, 1994.
Management attributed the decreases in product and antibody sales to lower sales
of the Company's Histoclone products during the year ended April 30, 1995. The
licensing fee revenues decreased during the year ended April 30, 1995 primarily
from a decrease in LYM-1 licensing fees from Alpha Therapeutic Corporation.
Interest income decreased during the year ended April 30, 1995, as the level of
idle cash funds available for investment had decreased in comparison to the
prior year ended April 30, 1994.
The Company had no significant research and development contract
revenue during the year ended April 30, 1995.
The Company's total costs and expenses increased approximately
$4,444,000 (or 180%) for the year ended April 30, 1995 in comparison to the year
ended April 30, 1994. Cost of sales decreased approximately $2,000 during the
year ended April 30, 1995, in comparison to the prior year ended April 30, 1994,
while sales of antibodies and other products decreased approximately $4,000
during the year ended April 30, 1995. Research and development expenses
decreased approximately $91,000 (or 7%)
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for the year ended April 30, 1995 in comparison to the year ended April 30,
1994. This decrease in research and development expenses resulted primarily from
an approximate $140,000 decrease in expenses due to capitalization of inventory
costs, and a $160,000 decrease in development costs of the TNT antibody
technologies, offset by approximately $209,000 in increased research and
development expenses relating to the Company's preparation for commencement of
clinical trials of LYM-1 during the year ended April 30, 1995. During the year
ended April 30, 1995, the Company produced significant quantities of LYM-1
antibody for sale and use when clinical trials begin. A portion of these
production and testing costs of these LYM-1 inventories were capitalized during
the year, whereas similar costs incurred prior to inventory production were
expensed as research and development costs during the prior year ended April 30,
1994. During the year ended April 30, 1995, the Company decreased its TNT
development costs by $160,000, in comparison to the prior year ended April 30,
1994, as funds were redirected to LYM-1 clinical trial preparation. During the
year ended April 30, 1995, research and development costs relating to the LYM-1
antibody increased by approximately $209,000 due to a $102,000 increase in
salaries and related costs for clinical trial preparation and a $107,000
increase in expenses during the year ended April 30, 1995 incurred in supporting
the efforts of MBI to complete and obtain NRC licensing for its Oklahoma LYM-1
antibody labelling facility.
General and administrative expenses incurred by the Company decreased
approximately $442,000 (or 39%) during the year ended April 30, 1995 in
comparison to the prior year ended April 30, 1994. The decrease in general and
administrative expenses during the year ended April 30, 1995 resulted primarily
from $300,000 expensed in the prior year ended April 30, 1994 associated with
the vesting of contingent stock options and $142,000 in shareholder meeting
expenses incurred in the year ended April 30, 1994, which did not recur in the
year ended April 30, 1995. Interest expense decreased $3,000 during the year
ended April 30, 1995 in comparison to the year ended April 30, 1994 due to lower
levels of interest bearing debt outstanding during the year.
The Company incurred a $4,849,591 charge to earnings during the year
ended April 30, 1995 relating to the merger of CBI into the Company on July 26,
1994. The assets of CBI acquired by the Company consisted primarily of research
and development of the TNT antibody technology, which has not been approved by
the FDA. The $4,849,591 charge to earnings consists of the excess of the fair
market value of the Company common stock issued of $2,504,053 over the net
assets of CBI acquired of $231,582 plus an additional $2,577,120, non-recurring
charge relating to the Company's assumption of outstanding stock options of CBI
in the merger.
The Company recorded a $132,071 reserve during the year ended April 30,
1995 for contract losses relating to current and future LYM-1 inventories which
are committed to be sold at below the Company's expected cost to Alpha
Therapeutics for use in the Phase III clinical trials of LYM-1.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1996, the Company had $8,173,347 in cash, investments and
receivables and a working capital surplus of $7,460,514 compared to $38,020 in
cash and receivables and a working capital deficit of $934,121 at April 30,
1995. The Company raised net proceeds of approximately $1,507,000 from the sale
of Common Stock and net proceeds of $7,138,000 from the sale of the Class B
Preferred Stock during the year ended April 30, 1996.
CAPITAL COMMITMENTS
At April 30, 1996, the Company had no material commitments to acquire
additional assets, but expects to acquire additional assets, building
improvements and equipment during the year ending April
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30, 1997 to expand its office and production facilities.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
FUTURE OPERATING RESULTS. Future operating results may be impacted by a
number of factors that could cause actual results to differ materially from
those stated herein, which reflect management's current expectations. These
factors include worldwide economic and political conditions, industry specific
factors, the Company's ability to maintain access to external financing sources
and its financial liquidity, the Company's ability to timely develop and produce
commercially viable products at competitive prices, the availability and cost of
components of those products, and the Company's ability to manage expense
levels.
NEED FOR ADDITIONAL CAPITAL. At April 30, 1996, the Company had
approximately $8,078,000 cash and short term investments which approximates 27
months of expenses. The Company has continued to experience negative cash flows
since its inception and expects the negative cash flow to continue for the
foreseeable future. The Company expects that the monthly negative cash flow will
increase as a result of increased activities with the Phase III clinical trials
for LYM-1 and the significantly increased research and development with the
Company's other products, including Tumor Necrosis Therapy ("TNT"). As a result
of the increased expenditure of funds, the Company believes that it will be
necessary for the Company to raise additional capital to sustain the research
and development and provide for future clinical trials. The Company must raise
additional equity funds in order to continue its operations until it is able to
generate sufficient additional revenue from the sale and licensing of its
products. There can be no assurance that the Company will be successful in
raising such funds on terms acceptable to it or at all, or that sufficient
additional capital will be raised to research and develop the Company's
additional products. The Company is discussing the possibility of raising
additional funds with several investment banking firms, but as of April 30,
1996, the Company had not entered into any firm commitments for additional
funds. If the initial results from the Phase II/III clinical trials of LYM-1 are
poor, the results may have a material adverse effect upon the Company's ability
to raise additional capital, which would affect the Company's ability to
continue a full-scale research and development effort for its antibody
technologies. The Company's future success is highly dependent upon its
continued access to sources of financing which it believes are necessary for the
continued growth of the Company. In the event the Company is unable to maintain
access to its existing financing sources, or obtain other sources of financing
there would be a material adverse effect on the Company's business, financial
position and results of operations.
COMPETITION. The biotechnology industry is intensely competitive and
changing rapidly. Substantially all of the Company's existing competitors have
larger technical staffs, more established and larger research budgets and
significantly greater financial resources than the Company. There can be no
assurance that these competitors will not be able to expend resources to develop
their products prior to the Company's product being granted approval for
marketing by the U.S. Food and Drug Administration. There can be no assurance
that the Company will be able to compete successfully or that competition will
not have a material adverse effect on the Company's results of operation.
TECHNOLOGY. The Company's future success will depend significantly upon
its ability to develop and test workable products which the Company will seek
FDA approval to market to certain defined groups. A significant risk remains as
to the technological, performance and commercial success of the Company's
technology and products. The products currently under development by the Company
will require significant additional laboratory and clinical testing and
investment over the foreseeable future. The significant research, development,
and testing activities, together with resultant increases in associated
expenses, are expected to result in operating losses for the foreseeable future.
Although the
21
22
Company is optimistic that it will be able to successfully complete development
of one or more of its products, there can be no assurance that the Company's
research and development activities will be successfully completed; that any
proposed products will prove to be effective in clinical trials; that the
Company will be able to obtain all necessary governmental clearances and
approvals to market its products; that such proposed products will prove to be
commercially viable or successfully marketed; or that the Company will ever
achieve significant revenues or profitable operations. In addition, the Company
may encounter unanticipated problems, including development, manufacturing,
distribution and marketing difficulties. The failure to adequately address such
difficulties could have a material adverse effect on the Company's prospects.
REGULATION. The Company's products are subject to extensive government
regulation in the United States by federal, state and local agencies including
the Food and Drug Administration. The process of obtaining and maintaining FDA
and other required regulatory approvals for the Company's products is lengthy,
expensive and uncertain. There can be no assurance that the Company can obtain
FDA or other regulatory approval for the marketing of its products or that
changes in existing regulations or the adoption of new regulations will not
occur which will adversely affect the Company.
EARTHQUAKE RISKS. The Company's corporate headquarters facility, at
which the majority of its research and development activities are conducted, is
located near major earthquake faults which have experienced earthquakes in the
past. The Company does not carry earthquake insurance on its facility due to its
unavailability and prohibitive cost. In the event of a major earthquake or other
disaster affecting the Company's facilities, the operations and operating
results of the Company could be adversely affected.
STOCK PRICE FLUCTUATIONS. The Company's participation in the highly
competitive biotechnology industry often results in significant volatility in
the Company's common stock price. This volatility in the stock price is a
significant risk investors should consider.
FORWARD LOOKING STATEMENTS. This Annual Report on Form 10-K contains
certain forward-looking statements that are based on current expectations. In
light of the important factors that can materially affect results, including
those set forth above and elsewhere in this Form 10-K, the inclusion of
forward-looking information herein should not be regarded as a representation by
the Company or any other person that the objectives or plans of the Company will
be achieved. The Company may encounter competitive, technological, financial and
business challenges making it more difficult than expected to continue to
develop, market and manufacture its products; competitive conditions within the
industry may change adversely; upon development of the Company's products,
demand for the Company's products may weaken; the market may not accept the
Company's products; the Company may be unable to retain existing key management
personnel; the Company's forecasts may not accurately anticipate market demand;
and there may be other material adverse changes in the Company's operations or
business. Certain important factors affecting the forward looking statements
made herein include, but are not limited to (i) accurately forecasting capital
expenditures, and (ii) obtaining new sources of external financing prior to the
expiration of existing support arrangements or capital. Assumptions relating to
budgeting, marketing, product development and other management decisions are
subjective in many respects and thus susceptible to interpretations and periodic
revisions based on actual experience and business developments, the impact of
which may cause the Company to alter its capital expenditure or other budgets,
which may in turn affect the Company's financial position and results of
operations.
22
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements included in this Report
at pages F-1 through F-21.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
23
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except for information concerning the Company's executive officers
which is included in Part I of this Annual Report on Form 10-K, the information
required by Item 10 is incorporated herein by reference from the Company's
definitive proxy statement for the Company's 1996 annual shareholders' meeting
which will be filed with the Commission on or before August 15, 1996.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
from the Company's definitive proxy statement for the Company's 1996 annual
shareholders' meeting which will be filed with the Commission on or before
August 15, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
from the Company's definitive proxy statement for the Company's 1996 annual
meeting which will be filed with the Commission on or before August 15, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
from the Company's definitive proxy statement for the Company's 1996 annual
shareholders' meeting which will be filed with the Commission on or before
August 15, 1996.
24
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) (1) Financial Statements
The financial statements and schedules listed below are filed as part
of this Report:
Page
Independent Auditors' Report F-1
Balance Sheets as of F-2 & F-3
April 30, 1996 and 1995
Statements of Operations F-4
for each of the three years in the period
ended April 30, 1996.
Statements of Stockholders' Equity F-5 & F-6
(Deficit) for each of the three years in the period
ended April 30, 1996.
Statements of Cash Flows F-7 & F-8
for each of the three years
in the period ended April 30, 1996
Notes to Financial Statements F-9 - F-20
(2) Financial Statement Schedules
II Valuation and Qualifying Accounts F-21
(3) Exhibits
Exhibit Sequential
Number Description Page No.
- ------- ----------- ----------
3.1 Articles of Incorporation of the Registrant, as Amended to Date
(Incorporated by reference to the exhibit 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)
3.2 Bylaws of the Registrant, as currently in effect **
4.1 Form of Certificate for Common Stock **
4.2 Form of Techniclone Research Partners I Warrants *
25
26
4.3 Form of Series A Convertible Debentures *
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 __, 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
10.5 Research and Development Contract, dated December 31, 1981 and
amended March 1, 1982, between Registrant and Celltech Partners I **
10.6 Option Agreement, dated December 31, 1981 and amended March 1, 1982,
between Registrant and Celltech Partners I **
10.12 Secrecy Agreement, dated April 24, 1981, and proposed License
Agreement by and between Registrant and the Regents of the
University of California **
10.16 Agreement to purchase Registrant's Stock dated June 16, 1986,
between Registrant and American Cyanamid Company ***
10.17 Agreement to purchase 400,000 shares of Registrant's Common Stock
dated April 29, 1988 between Registrant and American Cyanamid Company ****
10.22 1982 Stock Option Plan *****
10.23 Incentive Stock Option, Nonqualified Stock Option and Restricted
Stock Purchase Plan - 1986 ******
10.24 Cancer Biologics Incorporated Incentive Stock Option, Nonqualified
Stock Option and Restricted Stock Purchase Plan - 1987 *
10.25 Amendment to 1982 Stock Option Plan dated March 1, 1988 *
10.26 Amendment to 1986 Stock Option Plan dated March 1, 1988 *
10.27 License Agreement dated May 12, 1986 between Registrant and Cancer
26
27
Biologics Incorporated *
10.28 Lease Agreement dated February 1, 1988 between Registrant and
McKellar Development of La Jolla *
10.29 Stock Purchase Agreement dated November 1987, between Registrant
and Cancer Biologics Incorporated *
10.30 Lease Agreement dated September 10, 1991 between Registrant and
McKellar Development of La Jolla
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)
10.34 Purchase Agreement for Real Property and Escrow Instructions
dated as of March 22, 1996, by and between TR Koll Tustin Tech
Corp. and Registrant (Incorporated by reference to Exhibit
10.1 contained in Registrant's Current Report on Form 8-K
dated March 25, 1996, as filed with the Commission on or about
April 5, 1996)
11.1 Computation of Net Income (Loss) Per Share 51
22 Subsidiaries of the Registrant None
23 Consent of Deloitte & Touche LLP 52
(b) Reports on Form 8-K:
(i) Current Report on Form 8-K as filed with the Commission on
January 24, 1996, reporting the issuance and sale of the
Series B Convertible Preferred Stock
(ii) Current Report on Form 8-K as filed with the Commission on
February 8, 1996, reporting the agreement with Cambridge
Antibody Technology, Ltd.
27
28
(iii) Current Report on Form 8-K as filed with the Commission on
March 7, 1996, reporting the Distribution Agreement with
Biotechnology Development, Ltd.
(iv) Current Report on Form 8-K as filed with the Commission on
April 5, 1996, reporting the agreement to purchase the
Company's facility
* 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.
** Incorporated by reference to the exhibit of the same number
contained in Registrant's Registration Statement on Form S-18
(File No. 2-78552).
*** 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, 1986.
**** Incorporated by reference to the exhibit contained in
Registrant's Current Report on Form 8-K dated April 29, 1988.
***** Incorporated by reference to the exhibit contained in
Registrant's Registration Statement on Form S-8 filed August
4, 1983 (File No. 2-85628).
****** Incorporated by reference to the exhibit contained in
Registrant's Registration Statement on Form S-8 dated June 16,
1987 (File No. 33-15102).
28
29
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 INTERNATIONAL CORPORATION
Dated: July 25, 1996 By: /ss/ Lon H. Stone
----------------------------------
Lon H. Stone, President
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.
Signature Capacity Date
- --------- -------- ----
/ss/ Lon H. Stone Chairman of the Board, July 25, 1996
- ------------------------ President, Chief Executive
Lon H. Stone Officer and Director
/ss/William V. Moding Vice President-Finance, July 25, 1996
- ------------------------ Chief Financial Officer,
William V. Moding Secretary and Director
/ss/Rudolph C. Shepard Assistant Secretary July 25, 1996
- ------------------------ and Director
Rudolph C. Shepard
/ss/ Clive R. Taylor, M.D. Director July 25, 1996
- ---------------------------
Clive R. Taylor, M.D.,
Ph.D.
/ss/ Edward Joseph Legere II Director July 25, 1996
- ------------------------------
Edward Joseph Legere II
Director July __, 1996
- ------------------------------
Carmelo J. Santoro
29
30
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Techniclone International Corporation:
We have audited the accompanying balance sheets of Techniclone International
Corporation (the Company) as of April 30, 1996 and 1995, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended April 30, 1996. 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 the listed
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements present fairly, in all material
respects, the financial position of Techniclone International Corporation as of
April 30, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended April 30, 1996 in conformity
with generally accepted accounting principles. Also, in our opinion, such
financial statement schedule, when considered in relation to the basis financial
statements taken as a whole presents fairly, in all material respects, the
information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
June 21, 1996
31
TECHNICLONE INTERNATIONAL CORPORATION
BALANCE SHEETS
AS OF APRIL 30,1996 AND 1995
- -------------------------------------------------------------------------------
1996 1995
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 3) $ 4,179,313 $ 35,642
Short-term investments (Note 3) 3,898,888
Accounts receivable, net (Note 5) 95,146 2,378
Inventories, net (Note 3) 93,921 226,457
Prepaid expenses and other current assets 17,294
----------- ----------
Total current assets 8,284,562 264,477
PROPERTY (Notes 3 and 4):
Land 525,255
Building and improvements 1,298,416
Laboratory equipment 1,139,663 985,026
Furniture and fixtures 78,155 30,844
----------- ----------
3,041,489 1,015,870
Less accumulated depreciation and amortization (722,436) (583,328)
------------ -----------
Property, net 2,319,053 432,542
OTHER ASSETS (Note 3):
Patents, net 166,585 154,081
Other 5,557 5,557
----------- ----------
Total other assets 172,142 159,638
----------- ----------
$10,775,757 $ 856,657
=========== ==========
See independent auditors' report and
notes to financial statements.
F-2
32
TECHNICLONE INTERNATIONAL CORPORATION
BALANCE SHEETS
AS OF APRIL 30, 1996 AND 1995 (CONTINUED)
- -------------------------------------------------------------------------------
1996 1995
LIABILITIES AND STOCKHOLDERS'DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 230,144 $ 137,878
Accrued legal and accounting fees (Note 10) 99,495 334,741
Accrued payroll and related costs 88,791 260,301
Accrued license termination fee (Note 6) 100,000 100,000
Accrued royalties (Note 6) 61,667 75,168
Accrued interest (Note 4) 90,910
Reserve for contract losses (Note 11) 173,563 132,071
Current portion of long-term debt (Note 4) 32,968
Other current liabilities (Note 5) 37,420 67,529
------------ ------------
Total current liabilities 824,048 1,198,598
LONG-TERM DEBT (Note 4) 987,032
LONG-TERM DEBT TO RELATED PARTY (Note 4) 258,500
COMMITMENTS (Notes 5 and 6)
STOCKHOLDERS'EQUITY (DEFICIT) (Notes 2,4,6,7 and 8):
Preferred stock - $1 par value; authorized 100,000 shares:
Class A convertible preferred stock, shares outstanding -
1996, no shares; 1995, 4,225 shares
(liquidation preference of $253,500 - 1995) 4,225
Class B convertible preferred stock, shares outstanding -
1996, 6,800 shares; 1995, no shares
(liquidation preference of $7,027,288 - 1996) 6,800
Common stock - no par value; authorized 30,000,000 shares;
outstanding - 1996, 20,048,014 shares; 1995, 16,768,909 shares 21,133,968 17,730,648
Additional paid-in capital 6,061,171 227,246
Accumulated deficit (17,760,680) (18,085,978)
------------ ------------
9,441,259 (123,859)
Less notes receivable from sale of common stock (476,582) (476,582)
------------ ------------
Net stockholders' equity (deficit) 8,964,677 (600,441)
------------ ------------
$ 10,775,757 $ 856,657
============ ============
See independent auditors' report and
notes to financial statements.
F-3
33
TECHNICLONE INTERNATIONAL CORPORATION
STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1996
- -------------------------------------------------------------------------------
1996 1995 1994
REVENUES (Notes 3 and 6):
Net product sales $ 2,580 $ - $ 4,400
Licensing agreements 3,002,244 7,265 56,375
Interest income 138,499 126 8,591
---------- ---------- ----------
Total revenues 3,143,323 7,391 69,366
COSTS AND EXPENSES (Notes 2, 3, 4, 5, 6,
8, 10 and 11):
Cost of sales 2,580 1,680
Research and development 1,679,558 1,225,072 1,315,898
General and administrative:
Unrelated entities 947,816 547,133 914,142
Affiliates 170,659 137,326 212,594
Interest (primarily to related parties) 17,412 27,833 30,467
Charges related to merger 4,849,591
Contract losses 132,071
---------- ----------- -----------
Total costs and expenses 2,818,025 6,919,026 2,474,781
---------- ----------- -----------
NET INCOME (LOSS) $ 325,298 $(6,911,635) $(2,405,415)
========== =========== ===========
NET INCOME (LOSS) PER SHARE -
PRIMARY (Note 3) $0.02 ($0.44) ($0.18)
===== ===== =====
NET INCOME (LOSS) PER SHARE -
FULLY DILUTED (Note 3) $0.02 ($0.44) ($0.18)
===== ===== =====
See independent auditors' report and
notes to financial statements.
F-4
34
TECHNICLONE INTERNATIONAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30,1996
- -------------------------------------------------------------------------------
NOTES NET
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE STOCKHOLDERS'
---------------- ---------------------- PAID-IN ACCUMULATED FROM SALE OF EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMMON STOCK (DEFICIT)
BALANCES, May 1, 1993 10,000 $10,000 12,759,393 $ 8,785,520 $532,789 $ (8,768,928) $(245,000) $ 314,381
Common stock issued for cash,
net of issuance costs of $38,696 1,403,232 1,734,129
Issuance of compensatory options
(Note 8) 296,000
Net loss (2,405,415) (2,405,415)
------- ------- ---------- ----------- -------- ------------ --------- -----------
BALANCES, April 30,1994 10,000 10,000 14,162,625 10,815,649 532,789 (11,174,343) (245,000) (60,905)
Common stock issued for cash,
net of issuance costs of $15,132 1,221,978 1,499,118 1,499,118
Common stock issued upon
conversion of preferred stock (5,775) (5,775) 288,750 311,318 (305,543)
Common stock issued in exchange
for services 10,000 12,500 12,500
Common stock issued upon exercise
of options 6,223 10,890 10,890
Common stock and compensatory
options issued upon merger of
subsidiary(Note 2) 1,079,333 5,081,173 (231,582) 4,849,591
Net loss (6,911,635) (6,911,635)
------- ------- ---------- ----------- -------- ------------ --------- -----------
BALANCES,April 30,1995 4,225 4,225 16,768,909 17,730,648 227,246 (18,085,978) (476,582) (600,441)
See independent auditors' report and
notes to financial statements.
F-5
35
TECHNICLONE INTERNATIONAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1996 (CONTINUED)
- -------------------------------------------------------------------------------
NOTES NET
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE STOCKHOLDER'S
----------------- ------------------- PAID-IN ACCUMULATED FROM SALE OF EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMMON STOCK (DEFICIT)
Common stock issued for
cash $ 1,770,396 $ 1,289,352 $ - $ - $ - $1,289,352
Class B preferred stock
issued for cash, net
of issuance costs of
$1,062,456 8,200 8,200 7,129,344 7,137,544
Common stock issued upon
conversion of Class A
preferred stock (4,225) (4,225) 338,000 227,760 (223,535)
Common stock issued upon
conversion of Class B
preferred stock (1,400) (1,400) 469,144 1,218,605 (1,217,205)
Common stock issued upon
conversion of note payable
and accrued interest to
related party (Note 4) 235,000 258,500 104,697 363,197
Common stock issued upon
conversion of accrued
expenses and other current
liabilities 183,333 134,000 134,000
Common stock issued upon
exercise of stock options 226,132 218,003 218,003
Common stock issued upon
exercise of stock options
in exchange for services 57,100 57,100 57,100
Proceeds from sale of stock
purchase warrants, net 40,624 40,624
Net income 325,298 325,298
----- ------ ---------- ----------- ---------- ------------ --------- ----------
BALANCES, April 30, 1996 6,800 $6,800 20,048,014 $21,133,968 $6,061,171 $(17,760,680) $(476,582) $8,964,677
----- ------ ---------- ----------- ---------- ------------ --------- ----------
See independent auditors' report and
notes to financial statements.
F-6
36
TECHNICLONE INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30,1996
- -------------------------------------------------------------------------------
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 325,298 $(6,911,635) $(2,405,415)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 169,162 151,368 184,194
Charges related to merger 4,849,591
Common stock issued for services 57,100 12,500
Issuance of compensatory options 296,000
Conversion of interest expense into shares of
common stock 13,787
Increase in reserves 230,793
Changes in operating assets and liabilities:
Accounts receivable (92,768) (2,378) 2,400
Inventories 132,536 (236,499) (57,854)
Prepaid expenses and other current assets (17,294)
Deposits 33,600 (33,600)
Accounts payable and accrued legal and
accounting fees (142,980) 171,980 84,543
Accrued license termination fee 100,000
Other accrued expenses and current liabilities (39,628) 244,106 87,119
----------- ----------- -----------
Net cash provided by (used in) operating activities 405,213 (1,456,574) (1,742,613)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (3,898,888)
Property acquisitions (2,025,619) (39,262) (55,357)
Increase in other assets (42,558) (7,632) (52,690)
----------- ----------- -----------
Net cash used in investing activities (5,967,065) (46,894) (108,047)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock 7,137,544
Proceeds from issuance of common stock 1,547,979 1,510,008 1,734,129
Proceeds from issuance of long-term debt 1,020,000
----------- ----------- -----------
Net cash provided by financing activities 9,705,523 1,510,008 1,734,129
----------- ----------- -----------
See independent auditors' report and
notes to financial statements.
F-7
37
TECHNICLONE INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30,1996 (CONTINUED)
- --------------------------------------------------------------------------------
1996 1995 1994
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $4,143,671 $ 6,540 $ (116,531)
CASH AND CASH EQUIVALENTS,
beginning of year 35,642 29,102 145,633
---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
end of year $4,179,313 $ 35,642 $ 29,102
========== ========== ==========
SUPPLEMENTAL INFORMATION:
Merger of subsidiary (Note 2):
Common stock issued $2,504,053
Compensatory options issued 2,577,120
Notes receivable assumed (231,582)
----------
Charges related to merger $4,849,591
==========
Interest paid $ 3,625 $ 6,998 $ 9,787
Income taxes paid $ 800 $ 1,600 $ 1,600
For supplemental information relating to conversion of preferred stock into
common stock, common stock issued in exchange for services, common stock issued
upon merger and other noncash transactions, see the statements of stockholders'
equity (deficit) and Notes 2, 7, 8 and 11.
NONCASH INVESTING AND FINANCING
ACTIVITIES:
Common stock issued upon conversion of accrued
expenses and other current liabilities $ 134,000 $ - $ -
Common stock issued upon conversion of note
payable and forgiveness of accrued interest to
related party $ 363,197 $ - $ -
See independent auditors' report and
notes to financial statements.
F-8
38
TECHNICLONE INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1996
- -----------------------------------------------------------------------------
1. GENERAL AND NATURE OF OPERATIONS
Nature of Operations - Techniclone International Corporation (the
Company) was incorporated on June 3, 1981 under the laws of the State
of California. The Company is engaged in research and development of
new technologies used in the production of monoclonal antibodies and
the production of specific antibodies with prospective research,
diagnostic and therapeutic applications. The Company's activities are
primarily focused on innovative drug delivery systems that permit the
destruction or treatment of cancerous tumors.
Going Concern - The accompanying financial statements have been
prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business. As shown in the financial statements, the Company suffered
losses in fiscal 1995 and 1994 and has an accumulated deficit at April
30, 1996. Management has restructured certain of its license
agreements to provide it with greater control over the development and
clinical trials of its antibodies. If the Company is able to achieve
certain goals in relation to these antibodies, it will receive certain
additional financing pursuant to the terms of an existing license
agreement (Note 6). Historically, the Company has relied on third
party and investor funds to fund its operations and clinical trials,
and management expects to receive additional funds in the future.
There can be no assurances that this funding will be received. If the
Company does not receive additional funding, it will be forced to
scale back operations and it could have a material adverse effect on
the Company. The Company's continuation as a going concern is
dependent on its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to obtain additional financing as may
be required and, ultimately, to attain successful operations. During
fiscal 1996, the Company received significant funding through the
issuance of preferred stock (Note 7) and a foreign distribution
agreement (Note 6) which has resulted in significant available cash as
of April 30, 1996. Management believes that the cash and cash
equivalents and short-term investments aggregating approximately
$8,078,000 as of April 30, 1996 are sufficient to support the
Company's estimated operations and other cash needs through at least
April 30, 1997.
2. MERGER
In June 1994, the Company's stockholders approved a merger of the
Company's 62%-owned subsidiary, Cancer Biologics Incorporated (CBI),
into the Company. Pursuant to the agreement and plan of merger dated
January 18, 1994, each share of CBI common stock, no par value, was
converted into the right to receive one share of the Company's common
stock, and each CBI option was converted into the right to acquire
shares of the Company's common stock with the same terms and
conditions as specified in the CBI option agreement. At the merger
date, July 26, 1994, 1,079,333 shares of CBI's common stock and
options to purchase 1,416,000 shares of CBI's common stock were
outstanding to stockholders other than the Company, of which 676,000
shares and options to purchase 739,000 shares were held by officers
and directors of the Company. As a result of the merger, the
F-9
39
TECHNICLONE INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30,1996 (CONTINUED)
- -------------------------------------------------------------------------------
Company incurred nonrecurring charges to operations of $4,849,591, of
which $2,272,471 relates to the value of the stock issued in excess of
notes receivable assumed, and $2,577,120 relates to the excess of the
fair market value over the exercise price of the CBI options at the
effective date of the merger (measurement date). The Company
recognized this charge to operations due to the research and
development nature of CBI and as CBI had no tangible assets at the
date of the merger.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents - The Company considers all highly-liquid, short-term
investments with an initial maturity of three months or less to be
cash equivalents.
Short-term Investments - Short-term investments represent six-month
term treasury bills which expire at various dates through July 1996,
are classified as held-to-maturity, and are stated at cost, which
approximates fair value.
Inventories - Inventories are stated at the lower of first-in,
first-out cost or market and consist of the following at April 30:
1996 1995
Raw materials $ 20,960 $ 11,300
Laboratory supplies 19,598 16,510
Finished goods 79,885 297,369
Reserves (26,522) (98,722)
-------- --------
$ 93,921 $226,457
======== ========
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, the estimated
useful lives are 8 to 25 years for buildings and improvements and five
years for laboratory equipment and furniture and fixtures.
Other Assets - Other assets primarily consist of patent costs which
are amortized over the lesser of the estimated useful life of the
patent or the estimated useful life of the related product. Patent
costs totaled $166,585 and $154,081, net of related accumulated
amortization of $140,318 and $110,264, at April 30, 1996 and 1995,
respectively. During fiscal 1994, the Company changed the
amortization period of the patents from 17 years to ten years, which
resulted in additional amortization expense of $34,620 during the year
ended April 30, 1994.
F-10
40
TECHNICLONE INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30,1996 (CONTINUED)
- -------------------------------------------------------------------------------
Revenue Recognition - Product revenues are recognized upon shipment to
customers. Revenues related to licensing agreements (Note 6) 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 and license to the licensee.
Net Income (Loss) per Share - Net income (loss) per share is
calculated by dividing net income (loss) by the average number of
shares of common stock and dilutive common stock equivalents
outstanding each year, totaling 21,382,524 in fiscal 1996, 15,794,811
in fiscal 1995 and 13,653,829 in fiscal 1994. Fully diluted net
income (loss) per share reflects the maximum dilution and is based on
21,661,605 shares in fiscal 1996. Shares issuable upon the exercise
of common stock warrants and options and conversion of outstanding
preferred stock have been included in the per share computations for
fiscal 1996 and are excluded from fiscal 1995 and 1994 per share
calculation because their effect is antidilutive.
Income Taxes - The Company accounts for income taxes in accordance
with the standards specified in Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles necessarily
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reported periods. Actual results could differ from these
estimates.
Reclassifications - Certain amounts as previously reported have been
reclassified to conform to the fiscal 1996 presentation.
4. LONG-TERM DEBT
During January 1996, long-term debt to a related party and accrued
interest of $258,500 and $104,697, respectively, were converted into
235,000 shares of common stock at the election of the related party
pursuant to the terms of the convertible note dated December 31, 1991.
Interest expense related to this convertible debt amounted to $13,787
for the year ended April 30, 1996 and $20,680 for each of the
two years ended April 30, 1995.
On April 30, 1996, the Company entered into a $1,020,000 note
agreement with a bank and purchased its principal operating facility
in Tustin, California. The note payable is collateralized by the
property, bears interest at LIBOR, plus 4.25% (9.5% at April 30, 1996)
with a minimum rate of 9.5% and a maximum rate of 14.5%, and matures
in April 2011. Principal and interest payments are due monthly.
F-11
41
TECHNICLONE INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30,1996 (CONTINUED)
- ------------------------------------------------------------------------------
Minimum principal payments scheduled on the Company's long-term debt as
of April 30, 1996 are as follows:
Year ending April 30:
1997 $ 32,968
1998 36,253
1999 39,866
2000 43,606
2001 48,183
Thereafter 819,124
----------
$1,020,000
==========
The Company's long-term debt approximates fair value as the debt was
recently negotiated and represents the borrowing rates currently
available to the Company.
5. COMMITMENTS
On April 30, 1996, the Company terminated the operating lease on its
principal facility in conjunction with the purchase of the property
(Note 4). No future payments or obligations are due under the lease
agreement. Rent expense amounted to approximately $167,000, $180,000
and $174,000 for each of the three years in the period ended April 30,
1996, respectively.
During fiscal 1994 and 1996, the Company entered into separate
agreements to advance funds for an aggregate of $117,000 and $175,000,
respectively, to cover certain expenses of an unrelated entity
providing radio-labeling services to the Company. The Company
determined that advanced amounts under the 1994 agreement of
approximately $117,000 would no longer be recoverable and expensed all
amounts during fiscal 1995. During fiscal 1996, the Company advanced
the maximum under the 1996 agreement and recorded a $175,000 note
receivable, which is to be repaid based on potential future revenues
of the Company's product or as terms are modified in accordance with
the agreement. Due to uncertain future collection, the Company
recorded a full valuation reserve on the related note as of April 30,
1996. Additionally, under a separate agreement, an unrelated entity
advanced the Company $20,000 for each of the two years ended April 30,
1995, which will be repaid through inventory purchases from the
Company. At April 30, 1996 and 1995, the advanced balance of $37,420
and $40,000, respectively, have been included in other current
liabilities in the accompanying balance sheets.
F-12
42
TECHNICLONE INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30,1996 (CONTINUED)
- --------------------------------------------------------------------------------
During fiscal 1995, the Company entered into agreements with certain
officers, directors and employees of the Company, which expire at
various dates through September 1999. The total future commitment
under these agreements amounts to $632,000. One of the agreements
entitles the employee to receive 2% of net sales of certain products.
There were no sales of these products during fiscal 1995 or 1996.
On February 5, 1996, the Company entered into a joint venture
agreement with an unrelated entity to develop and market a new class
of products for cancer therapy and diagnosis based upon the unrelated
party's patented technology for producing fully human monoclonal
antibodies and the Company's Tumor Necrosis Technologies. The
agreement provides that equity in the joint venture and costs
associated with the development of the product would be shared
equally. The activities of the joint venture were not considered
significant for the year ended April 30, 1996. The Company would
retain exclusive world-wide manufacturing rights under the agreement.
6. LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS
During October 1992, the Company entered into an agreement to
terminate the licensing rights and certain other rights (the
Termination Agreement) associated with a June 1986 agreement with a
stockholder. The Termination Agreement provides for (1) $100,000 on
the date that is the earlier of the commencement of the first Phase
Three clinical trials (as defined) or a specified number of days after
the commencement of the first Phase Two clinical trials (as defined)
for the licensed product, and (2) $200,000 upon the issuance of a
license or other approval for the initial marketing in the United
States of such product. Such obligations are collateralized by
certain licensed patents. Additionally, the Company must pay net
royalties equal to 4% of the sales revenue related to such licensed
product, not to exceed $700,000 and 25% of any royalties received
related to such licensed product. The maximum payments due under the
Termination Agreement are $1,100,000 of which $100,000 has been
paid through April 30, 1996. The Company accrued $100,000 during
fiscal 1994 when the Company completed essentially all of the
requirements for commencement of Phase Three clinical trials. This
amount remains outstanding as of April 30, 1996. Upon achieving each
of the above criteria, additional liabilities and expenses will be
incurred.
Research and development expenses under the June 1986 and a separate
April 1988 agreement, for which all obligations have been fulfilled,
with a stockholder were $215,000 for the year ended April 30, 1994.
There were no expenses related to these agreements for the two-year
period ended April 30, 1996.
During October 1992, the Company entered into an agreement with an
unrelated entity which provides the entity with exclusive licensing
rights to certain patents and products owned by the Company in
exchange for: (1) $50,000 at a specified meeting with the United
States Food and Drug Administration (FDA), (2) $100,000 upon the
first submission to the European regulatory agency to
F-13
43
TECHNICLONE INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30,1996 (CONTINUED)
- -------------------------------------------------------------------------------
sell the product in certain countries or six months from the effective date
of the commencement of Phase Three clinical trials, whichever is sooner,
(3) $200,000 upon approval of the first European submission, (4) $500,000
on the submission to the FDA of a product license application, and (5)
$100,000 per year as a research and development grant after completion of
the Phase Three clinical trials (as defined), of which 50% of such payment
is specified for certain research programs. Additionally, the Company is
to receive 10% royalties from any product sales related to this agreement
which will be applied to offset any amounts due under stipulation (4)
above. Under the agreement, the Company received $50,000 during the year
ended April 30, 1994, which has been recognized in licensing revenues in
the accompanying financial statements. During fiscal 1995 and 1996, no
licensing revenue was earned related to this agreement.
The Company has agreements which provide the licensees with the right to
use certain technologies and to manufacture and market products derived
from these technologies in specified geographic areas (as defined), on a
non-exclusive and semi-exclusive basis. The Company recognized revenue of
$6,375, $7,265 and $2,244 related to these agreements during each of the
three years in the period ended April 30, 1996, respectively.
In September 1989, the Company entered into an option and license agreement
with a university under which the Company was granted the exclusive right
to conduct initial marketing, patent and other studies. During fiscal
1993, the Company was granted the exclusive worldwide license to use the
related technology in exchange for the payment of a license fee and royalty
terms set forth in the agreement. During the three years ended April 30,
1996, the Company incurred royalty expenses of $64,000, $43,000 and
$80,000, respectively, under the agreement, of which $67,000 and $47,000
was unpaid and accrued at April 30, 1995 and 1996, respectively. Future
minimum royalties under this agreement are the lesser of $80,000 per year
or 6% of net sales.
The Company has certain license agreements which require minimum royalties
of the lesser of $6,500 per year or 6% of net sales. All amounts have been
paid or accrued related to these agreements.
The Company has certain license agreements which require minimum royalties
of 6% of net sales. No products related to these agreements have been sold
during the three years in the period ended April 30, 1996; therefore, no
amounts have been paid or accrued related to these agreements.
In February 1996, the Company entered into a foreign distribution agreement
with a director and an entity with which the director is affiliated. The
agreement appoints the affiliated entity as the Company's exclusive
distributor to sell one of the Company's products, if approved, to certain
foreign countries if an unrelated entity forfeits or relinquishes its
outstanding distribution rights, as defined in a separate agreement. Under
the agreement, the Company received $3,000,000 for the year ended April 30,
1996, which has been recognized as licensing revenue in the accompanying
financial statements. The agreement has an initial term of fifteen years,
through February 2011, with automatic annual renewals thereafter unless
terminated pursuant to the terms of the agreement.
F-14
44
TECHNICLONE INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30,1996 (CONTINUED)
- -------------------------------------------------------------------------------
Additionally, the Company and affiliated entity entered into an
agreement which provides the Company, at its sole discretion, an
option to repurchase the distribution rights from the affiliated
entity through August 1998. Management has not exercised its option
as of April 30, 1996 nor does it currently intend to exercise the
option. The repurchase price includes a combination of cash, stock
options and royalty payments, the amount of which depends on the date
of repurchase, if elected by the Company.
7. STOCKHOLDERS' EQUITY (DEFICIT)
During December 1995, the Company issued 8,200 shares of non-voting
Class B convertible preferred stock at $1,000 per share, for cash
proceeds of $7,137,544, net of issuance costs of $1,062,456. The
Class B preferred stockholders are entitled to a liquidation
preference of $1,000 per share of Class B preferred stock and an
amount equal to 10% of the original Class B preferred stock issue
price per annum since the issuance date. The preferred stockholders
are not entitled to any cash dividends.
Each preferred share may be converted, at the option of the Class B
preferred stockholder, into that number of common shares calculated
by: (a) taking ten percent (10%) of one thousand dollars ($ 1,000)
pro-rated for the number of days between the closing date and the
conversion date plus (b) one thousand dollars ($1,000), (c) divided by
the conversion price ($3.06875 at April 30, 1996), as defined in the
agreement. During fiscal 1996, 1,400 shares of Class B preferred
stock were converted into 469,144 common shares. All outstanding
Class B preferred stock will automatically be converted into shares of
the Company's common stock on December 15, 1998.
The Company has the right to redeem, in whole or in part, the Class B
preferred stock upon receipt of a notice of conversion from the
preferred stockholder. Additionally, the Company has the right to
redeem, at its discretion, any or all of the Class B preferred stock
as long as the initial redemption is equal to or exceeds $1,500,000.
The redemption price at the Company's election ranges from 130% to
105% of the stated value, depending on the date of redemption notice.
The Class A preferred stockholders were entitled to a liquidation
preference of $60 per share of Class preferred stock and any declared
but unpaid dividends. Class A preferred stockholders could convert, at
their option, each Class A preferred stock share into 80 fully-paid and
nonassessable shares of common stock. As a result of certain common
stock transactions, the conversion ratio had increased from 50 shares
of common stock for each Class A preferred stock at April 30, 1994 to
80 shares thereafter. During fiscal 1995, 5,775 shares of Class A
preferred stock were converted into 288,750 shares of common stock,
pursuant to the election of the Class A preferred stockholders. In
connection with the commencement of the Phase Three clinical trials,
the remaining 4,225 shares of Class A preferred stock were
automatically converted into 338,000 shares of common stock during
fiscal 1996.
As a result of the Company's merger (Note 2), the Company issued
1,079,333 shares of its common stock to stockholders of CBI.
F-15
45
TECHNICLONE INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30,1996 (CONTINUED)
- --------------------------------------------------------------------------------
During August 1992 and February 1994, the Company entered into stock
subscription agreements with a director of the Company and an entity with
which the director is affiliated. The parties agreed to purchase 2,000,000
and 1,000,000 shares of the Company's stock at $1.20 and $1.50 per share,
respectively, through May 1995. During the years ended April 30, 1994,
1995 and 1996, 1,342,485, 676,167 and 55,833 shares, respectively,
aggregating $1,691,381, $1,014,250 and $83,750, respectively, were
purchased under these agreements, net of issuance costs incurred in fiscal
1994 of $38,696 which was paid through the issuance of 32,247 shares of the
Company's common stock. There were no costs incurred related to the fiscal
1995 and 1996 issuances.
Notes receivable from sale of common stock are generally
noninterest-bearing and are due April 30, 1997.
8. STOCK OPTION PLANS AND STOCK WARRANTS
In December 1982, January 1986 and June 1994, the Company adopted stock
option plans providing for the granting of options to officers and key
employees to purchase up to 1,700,000 shares of the Company's common stock
at prices not less than the fair market value of the stock at the date of
grant. The options generally expire ten years after the date of grant.
Option activity for each of the three years in the period ended April 30,
1996 is described as follows:
1996 1995 1994
---------------------------- ----------------------------- -----------------------------
PRICE PRICE PRICE
SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE
BALANCE,
beginning
of year 545,000 ($.27 - $1.75) 563,667 ($.27 - $1.75) 410,000 ($.27 - $1.50)
Granted 588,982 ($1.00 - $2.50) 153,667 ($1.75)
Exercised (194,432) ($1.00 - $2.50) (6,223) ($1.75)
Canceled (29,000) ($1.75) (12,444) ($1.75)
-------- ------- -------
BALANCE,
end of year 910,550 ($.27 - $1.75) 545,000 ($.27 - $1.75) 563,667 ($.27 - $1.75)
======== ======= =======
At April 30, 1996, options to purchase 512,850 shares of the Company's
common stock were exercisable and options to purchase 68,795 shares were
available for grant under these plans. Included in outstanding options at
April 30, 1996 are contingent options to purchase 160,000 shares of common
stock which became exercisable in October 1993 when the Company attained
equity financing of at least $3,000,000. As the fair market value exceeded
the exercise price at the time the contingency was resolved, the Company
recognized $296,000 in compensation expense during the year ended April 30,
F-16
46
TECHNICLONE INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30,1996 (CONTINUED)
- ------------------------------------------------------------------------------
1994 related to these options. Also included in outstanding options at
April 30, 1996 are options to purchase 100,000 shares of common stock which
become exercisable only if the Company experiences a change in ownership of
greater than 50%. These options generally expire ten years after the date
of grant.
Subject to stockholder approval, the Company has adopted an additional
stock option plan providing for the granting of options to purchase up to
2,500,000 shares of the Company's common stock. As of April 30, 1996,
options to purchase 1,795,000 were allocated for grant contingent upon
stockholder approval.
Pursuant to the Company's merger agreement (Note 2) on July 26, 1994,
options to purchase 1,416,000 shares were outstanding at April 30, 1995
under CBI's stock option plan which converted into the right to acquire
shares of the Company's common stock with the same terms and conditions as
specified in the CBI option agreement. During fiscal 1996, 88,800 options
were exercised at $.50 per share and 1,327,200 options were outstanding and
exercisable at April 30, 1996. These options expire at the earlier of
termination of employment or January 2003. These agreements expire in
January 2003 and are collateralized by the Company's common stock.
During fiscal 1994, the Company granted options to an unrelated party for
the purchase of 100,000 shares of the Company's common stock at $3.00 per
share. These options were granted in conjunction with an agreement which
provides for the unrelated party to seek and attain a certain level of
equity financing for the Company. The shares are exercisable upon
attainment of this financing and expire five years from such date.
During the year ended April 30, 1996, the Company granted warrants to
purchase restricted shares of common stock to nonemployees pursuant to
services provided. As of April 30, 1996, warrants to purchase an aggregate
397,310 shares had been granted with 393,310 shares exercisable at a price
per share ranging from $3.00 to $5.30, exercisable generally through
December 2000. The Company estimated that the difference between the grant
price and the fair value of the warrants on the dates of grant was $348,675
based on the Black Scholes Model, which must be recognized over the
exercise period. Of this amount, $10,625 was recorded as compensation
expense for the year ended April 30, 1996. Future annual compensation
expense ranging from approximately $34,000 to approximately $90,000 will be
recognized through fiscal 2001. Certain of these warrants have piggyback
registration rights through the expiration date.
Recently Issued Accounting Standard - In October 1995, the Financial
Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based
Compensation, which requires adoption of the disclosure provisions and
recognition and measurement provisions for nonemployee transactions for
fiscal years beginning after December 15, 1995. The new standard defines a
fair value method of accounting for stock options and other equity
instruments. Under the fair value method, compensation cost is measured at
the grant date based on the fair value of the award and is recognized over
the service period, which is usually the vesting period.
F-17
47
TECHNICLONE INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30,1996 (CONTINUED)
- --------------------------------------------------------------------------------
Pursuant to the new standard, companies are encouraged, but not
required, to adopt the fair value method of accounting for employee
stock-based transactions. Companies are also permitted to continue to
account for such transactions under the Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, but would be
required to disclose in a note to the financial statements pro forma
net income, and if presented, net income per share as if the Company
had applied the new method of accounting. The accounting requirements
of the new method are effective for all employee awards granted after
the beginning of the fiscal year of adoption. Adoption of the new
standard will have no effect on the Company's cash flows.
The Company has determined that it will not change to the fair value
method and will continue to use Accounting Principles Board Opinion No.
25 for measurement of employee stock-based transactions.
9. INCOME TAXES
The Company accounts for income taxes under SFAS No. 109. SFAS No. 109
requires the recognition of deferred tax liabilities and assets for the
future consequences of events that have been recognized in the
Company's financial statements or tax returns. In the event the future
consequences of differences between financial reporting bases and tax
bases of the Company's assets and liabilities result in a deferred tax
asset, SFAS No. 109 requires an evaluation of the probability of being
able to realize the future benefits indicated by such asset. A
valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax asset will not be realized.
As of April 30, 1996 and 1995, the Company had net deferred tax assets
of approximately $5,211,000 and $5,350,000, respectively, all of which
has been offset by a valuation allowance.
The valuation allowance decreased $139,000 in fiscal 1996 and increased
$815,000 and $4,503,000 in fiscal 1995 and 1994, respectively.
F-18
48
TECHNICLONE INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30,1996 (CONTINUED)
- -------------------------------------------------------------------------------
Net deferred tax assets are comprised of the following:
1996 1995
Net operating loss carryforwards $ 4,874,000 $ 4,943,000
Noncash compensation 118,000 118,000
General business and research and development credits 61,000 61,000
Inventory reserve 11,000 40,000
Accrued license fee 40,000 40,000
Accrued interest 36,000
Accrued royalties 25,000 30,000
Accrued vacation 13,000 6,000
Accrued payroll and related costs 24,000
Contract losses 69,000 53,000
Depreciation and amortization (1,000)
----------- -----------
5,211,000 5,350,000
Less valuation allowance (5,211,000) (5,350,000)
----------- -----------
Net deferred taxes $ - $ -
=========== ===========
Primarily all of the above temporary differences existing at April 30, 1996
will reverse in 1997, except for the net operating loss carryforwards and
the tax credits (see below). The Company's federal net operating loss
carryforwards and the tax credit carryforwards expire as follows:
YEAR OF NET OPERATING INVESTMENT OTHER
EXPIRATION LOSSES TAX CREDITS TAX CREDITS
1997 $ 1,300 $ 500 $ -
1998 263,100 1,940 12,700
1999 897,300 1,720 41,500
2000 343,900 1,920
2001 346,800 670
2002 585,600
2003 463,300
2004 1,652,300
2005 1,665,300
2006 986,500
F-19
49
TECHNICLONE INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30,1996 (CONTINUED)
- --------------------------------------------------------------------------------
YEAR OF NET OPERATING INVESTMENT OTHER
EXPIRATION LOSSES TAX CREDITS TAX CREDITS
2007 $ 214,100 $ - $ -
2008 1,038,200
2009 2,036,900
2010 1,690,400
----------- ------ -------
$12,185,000 $6,750 $54,200
=========== ====== =======
The items reconciling income taxes applied at the federal statutory
rate to the income tax provision recorded for each of the three years
in the period ended April 30, 1996 are primarily net operating loss
carryforwards, changes in valuation allowance of deferred tax assets
and state tax (benefit), net of federal effect.
10. RELATED PARTY TRANSACTIONS
Certain stockholders, through their separate businesses, have provided
the Company with various legal, accounting and consulting services. A
summary of such professional fees for each of the three years in the
period ended April 30 are as follows:
1996 1995 1994
Professional fees paid $377,378 $ 57,500 $150,000
Professional fees expensed $170,659 $137,300 $212,594
Professional fees payable at April 30 $ 65,495 $272,214 $180,381
11. FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of the year ended April 30, 1995, pursuant
to a sales contract with a third party in which the estimated costs
related to this contract exceeded sales prices, the Company increased
its lower of cost or market inventory reserve by $98,722, which has
been included in research and development expenses, and recorded a
reserve for contract losses related to future expected losses from
inventory costs in excess of the sale price of $132,071.
F-20
50
TECHNICLONE INTERNATIONAL CORPORATION SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30,1996
- -------------------------------------------------------------------------------
BALANCE CHARGED TO BALANCE
AT BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
Lower of cost or
market inventory
reserve for the
year ended
April 30, 1995 $ - $ 98,722 $ - $ 98,722
Lower of cost or
market inventory
reserve for the
year ended
April 30, 1996 $98,722 $237,931 $(310,131) $ 26,522
Valuation reserve
for accounts
receivable for
the year ended
April 30, 1996 $ - $175,000 $ - $175,000
F-21